Self-image is the antidote to DEX's regulatory problems

Self-image is the antidote to DEX’s regulatory problems – Mail Bonus

Regulators from Europe, the United States and beyond are busy hammering out information on how to designate a distributed exchange (DEX) as a “broker”, trading partner or similar entity that affects the transfer and works together. The United States called for international co-operation in its Implementing Constitution on the Responsible Development of Digital Assets, as the European Union did with a recent review of financial stability and integration. And that’s just what’s available to the public.

Behind the scenes, the whisper of regulation is getting louder. Did anyone notice that all Know Your Customer (KYC) requirements have been placed on smaller centralized exchanges in exotic locations over the past two months? It was the canary in the coal mine. With the aforementioned nomination and collaboration, DEX members will soon begin to feel the heat in the regulator.

Yes, regulations are coming and the main reason why DEX companies will hardly survive the coming storm is their declared lack of ability to identify users who use and contribute to liquidity. In traditional financial circles, there is a strong refusal to provide services without appropriate KYC methods. Non-tracing of identities allowed Russian oligarchs to use the Hawala payment service to anonymously transfer millions of dollars in the run-up to the war in Ukraine, so regulators are rightly concerned about DEX. To most DEX enthusiasts, KYC sounds like an insult, or at least something that DEX is basically incapable of doing. Is that still the case?

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DEX are actually rather central

Let’s start with the anatomy of DEX and we will find that they are not even as distributed as humans think. Yes, DEX runs on smart contracts, but the team or entity that uploads the code to the chain usually gets special management privileges and permissions. In addition, a well-known, centralized team usually takes care of the front end. For example, Uniswap Labs recently added the ability to scrub a known hacker wallet and remove icons from the menu. Although DEXs claims to be pure code, in reality, there is still a more or less centralized development team behind this natural whole. This team also takes in all the profits that are generated.

Furthermore, a detailed examination of how users interact with unlicensed chains reveals more central suffocation points. For example, last month, MetaMask was unavailable in some areas. Why? Because Infura, the central service provider that the chain wallet relies on for the Ethereum API, decided to do so. With DEX, things can always play out the same way.

Some say that DEX is more distributed by virtue of being an open source, which means that any society is free to fork out the code and build its own DEX. Sure, you can have as many DEX as you want, but the question is who manages to bring more liquidity to the table and where users actually go to trade their tokens. It is, after all, what matters most in the first place.

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From a regulatory point of view, a party that facilitates such transactions can be considered as a “broker” or “carrier”, regardless of whether it is an open source or not. This is where most regulations go. Once identified as such, DEX devices will catch fire unless they can meet a variety of requirements. This would include obtaining a license, verifying user IDs and reporting transactions, including suspicious ones. In the United States, they would also have to comply with bank secrecy laws and freeze accounts at the request of the authorities. Without all of this, DEX is likely to go down.

The ID-and-KYC issue

As DEXs claim to be distributed, they also claim that they are technically incapable of implementing any authentication or KYC verification. But in truth, KYC and pseudonyms are not reciprocal from a technical point of view. Such an attitude shows, at best, laziness or a relentless pursuit of lower costs and, at worst, a desire to make a profit from the transfer of dirty money.

The argument that DEX can not do KYC without creating a honeymoon of personal information lacks technical merit and imagination. Many teams are already developing authentication solutions based on zero-knowledge evidence, a cryptographic method that allows one party to prove that they have certain data without displaying that information. For example, identity verification may include a green check mark indicating that the person has passed KYC, but does not provide personally identifiable information. Users can share this ID with DEX for verification purposes without the need for centralized information storage.

Since their users do not have to pass KYC, DEX becomes part of the mystery when it comes to solution software: Hackers use them as their main hub to move money. Due to the lack of authentication, DEX teams can not explain the “source of funds”, which means they can not prove that the money does not come from a penitentiary or money laundering. Without this proof, banks will never issue a bank account for DEX. Banks require information on the origin of funds so that they are not fined or deprived of their own license. When easy to use DeFi for criminal activity, it gives a bad name for cryptocurrencies and pushes it further from general adaptation.

DEX also has a unique and disposable suite of software, Automatic Market Watch or AMM, which allows liquidity providers to match buyers and sellers and pull in or set prices for a particular asset. This is not a general-purpose software that can be used for multiple purposes, as is the case with BitTorrent’s P2P protocol, which moves bits quickly and efficiently for Twitter, Facebook, Microsoft and video robbers. AMM has one purpose and produces profit for the team.

Verifying users’ credentials and checking that money and tokens are not illegal helps to ensure some protection against cybercrime. It makes DeFi more secure for users and more feasible for regulators and policy makers. In order to survive, DEX members must eventually acknowledge this and accept identification levels and prevent money laundering.

By implementing some of these solutions, DEX can still live up to its promise of DeFi. They can be open to users to deposit liquidity, earn commissions and avoid relying on banks or other centralized entities while remaining under a pseudonym.

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If DEXs choose to ignore regulatory pressure, it can end up in one of two ways. Either more legitimate platforms can continue to adapt to growing government scrutiny and growing demand for cryptocurrencies, demanding usability and security, killing stubborn DEXs, or alternatively, maladaptive DEXs will enter the gray market in the distance. market. jurisdictions, tax havens and cash-strapped governments.

We have every reason to believe that the former is a much more likely scenario. It’s time for DEX to grow up with the rest of us or risk being ruled to death along with the shady ghosts of the past crypto.