Rapidly expanding DeFi becomes a money laundering paradise, regulatory risks are feared to be increasing day by day.

According to a recent research report produced jointly by Boston Consulting Group and Crypto.com, the rapid growth of decentralized finance and liquidity mining may attract more illicit funds, making it a focal point for regulatory authorities.

DeFi Attracts Money Laundering

Boston Consulting Group's BCG Platinion and cryptocurrency asset financial services platform Crypto.com have jointly released a research report titled "The Sudden Rise of DeFi: Opportunities and Risks for Financial Services," which thoroughly analyzes the current development of the decentralized finance (DeFi) sector, its advantages compared to traditional finance, and the challenges it may face in the future.

In the report, BCG Platinion and Crypto.com emphasize that while DeFi experienced rapid growth in 2020, it has also become a haven for money laundering, attracting the attention of regulatory authorities. The design of DeFi is permissionless and decentralized, meaning that DeFi platforms do not require users to undergo KYC verification like centralized exchanges, allowing anyone from any country/region to access them without compliance with regulations. According to data provider DeFi Pulse, the total value locked in major DeFi platforms has grown by 1200% since the beginning of this year, reaching $9 billion, and there is no guarantee that the source of this $9 billion asset is clean.

Money Laundering Attracts Regulation

As the scale of DeFi continues to grow and illicit funds keep flowing in, regulatory authorities are bound to take action. Ultimately, these DeFi platforms may end up following in the footsteps of centralized exchanges like IDEX, being forced to implement account binding and KYC verification for users, or conducting whitelisting checks on user addresses.

BCG Platinion and Crypto.com point out another possibility in their research, suggesting that regulatory authorities may believe that controlling the "fiat-to-cryptocurrency channels" of centralized exchanges is sufficient to prevent illicit funds from entering the DeFi ecosystem, without imposing further restrictions on DeFi. Furthermore, the report also indicates that the current stance of the FATF is that if a DeFi protocol is sufficiently decentralized and the entities behind it do not participate in daily operations, it may not fall within the regulatory scope of Virtual Asset Service Providers (VASPs) and thus may not be subject to relevant regulations.

Completely Decentralized from Head to Toe

The threat posed by regulations has been discussed before, and DeFi platforms or protocols can potentially avoid this by being completely decentralized, making it impossible for regulatory authorities to shut down the platform or protocol even if they become more stringent.

However, there are not many truly fully decentralized DeFi projects in the market at present. Most of the scaled protocols or platforms (such as Uniswap) have physical development teams behind them, and investors are mostly highly centralized venture capital companies like Andreessen Horowitz, Union Square Ventures, Framework Capital, etc. From the current trend, if the scale of DeFi continues to expand, it may still become a thorn in the side of global regulatory authorities.