The Commodity Futures Trading Commission (CFTC) is calling on policymakers to tackle identity issues within Decentralized Finance (DeFi) operations.
A report from the U.S. regulatory body outlines specific actions aimed at enhancing anti-money laundering (AML) measures and digital identity verification in the complex DeFi landscape. This report follows a study by the Department of the Treasury that identified illicit finance risks in DeFi, revealing that entities such as North Korea, cybercriminals, ransomware attackers, and other bad actors are leveraging DeFi services to transfer and launder illegal proceeds. The government has recommended that federal regulators take decisive steps in accordance with AML and counter-terrorism financing (CFT) regulations to prevent misuse of DeFi by criminal actors.
One of the primary concerns regarding DeFi systems is the absence of clear accountability and responsibility, as highlighted by CFTC Commissioner Christy Goldsmith Romero. She notes, “This feature of DeFi systems may present the clearest ways in which DeFi poses risks to consumers and investors, as well as to financial stability, market integrity, and illicit finance. It creates a situation with no clear path for victim recourse, defense against illicit exploitation, or implementing necessary changes and controls during crises.”
The report advocates for evaluating regulatory options that ensure the discoverability and verification of identity information at various levels within the DeFi ecosystem. This could entail regulating centralized identity information and credential repositories, as well as determining the necessary level of identity information that different financial actors must collect at various layers of the DeFi structure.