DEFI may face regulatory issues that cannot be ignored and possible solutions

Defi is a good financial tool for most people, and its decentralized characteristics have also attracted the attention of many people in the currency circle. However, most people are often too optimistic and ignore the regulatory issues of Defi.

The source of this problem is mainly about the security and channel of funds.

An important part of the DeFi applications we often use is that they do not require individual users to register an account, nor do they require us to perform real-name authentication and other operations. Instead, a wallet address is directly generated through the software, and then this wallet can be used to log in to various DeFi applications and perform related operations.

This includes coin deposit and financial management, pledge lending, market making, DEX and other aspects, and this prosperous scene may also provide opportunities for criminals.

The most crucial point is that DeFi may cause some money laundering scandals, which many people have never imagined.

We all know that since the Ethereum public chain does not have a blacklist strategy like EOS, the Ethereum platform will appear to be more decentralized, so this process will provide help for people who are not convenient to perform KYC.

Of course , this is not the original purpose of DeFi. DeFi mainly provides an alternative solution for people who cannot receive banking services. For example, some senior officials in Hong Kong, which have recently caused a lot of controversy in international politics, have been sanctioned by the United States and banned from using some banking services.

Such incidents have also led many local digital currency companies in Hong Kong to vigorously publicize the advantages of digital currency in some local media, and encourage these senior officials to pay attention to digital currency and blockchain.

Hong Kong Apple Daily promotes the advantages of Bitcoin on a page

Title: Bank, today it is not you flying me, but I flying you

Note: "飞" can be understood as the meaning of abandoning or getting rid of.

Although digital currency can give people who are subject to financial sanctions a chance to breathe, for more people, digital currency may become a good tool for transferring assets. According to media reports, more than 10% of people in Hong Kong have transferred their gold to other places through various channels. In other words, the current pressure of capital outflow in the country is still quite large.

The flow of funds in the country is still subject to certain controls, and it is often difficult for some black money to escape safely. Even if digital currency is currently used for capital outflow, the probability of card freezing has greatly increased this year due to the crackdown by public security organs. In other words, even if part of the funds are converted into digital currency, they may still be seized during the final cash-out process . This is mainly due to the "recruitment" of exchanges such as Huobi and OK, which is also something the country has spent a lot of effort on.

At this time, DEFI provides a good way to realize cash. Let’s briefly talk about a theoretical case. Since there are no media reports on related cases, everything is hypothetical. We just made a deduction . The title is tentatively set as: A strategy to launder funds through DeFi mining.

First, prepare two wallet accounts, one wallet contains a large amount of black gold USDT, and the other wallet contains a large amount of regular USDT , which can also be called platinum USDT.

To put it simply, it is to find an unknown digital currency, or simply issue a coin yourself, which we call a zero-return coin, and hold a large amount of zero-return coins in your platinum usdt wallet , and then participate in the uniswap market-making speculation process, and then transfer the money from one hand to the other. The details will not be announced. I believe many readers should be able to understand how to operate. To put it bluntly, the black gold usdt wallet took a lot of zero-return coins, and then the platinum wallet made a lot of money, thus completing a fund laundering operation on the DeFi project.

Of course, in the actual operation process, you must use multiple accounts instead of one or two accounts. The time period is basically chosen in the middle of the night, which is more secretive. If you are not sure, do it several times and change several DeFi applications. It should be difficult to track in the end.

If even the author can imagine this process, then it is likely that it has already been used by criminals.

This DeFi model does not actually allow funds to be tracked through transfers, but rather through a method in which one party makes a profit and the other party loses money, which appears to be more secretive.

You can think that the profitable party is so powerful, a mining scientist or something like that, you can also think that the other party is stupid and naive, who will be cut by the sickle immediately if they just play it directly, and their millions or tens of millions will be reduced to zero in an instant. When we may think that they are being taken advantage of and fainting in the toilet, you may not realize that the criminals behind the scenes may have completed the transaction and are opening champagne.

Of course, funds can be laundered not only through Uniswap, but also through many other DeFi methods. We will not delve into this in depth here, but these may all be exploited by criminals.

However, once KYC is carried out , these problems will arise: how to preserve KYC information to prevent it from being used by criminals, and how to ensure that the user data is real and not forged.

DID technology can provide KYC services for DeFi users

Currently, the decentralized identity DID technology in the blockchain field is doing relatively well .

In short, DID technology is a blockchain technology standard developed by W3C. Participating member units include international business giants such as Microsoft. To put it simply, it is to generate a DID data and private key after KYC in the traditional way, which is similar to our digital currency wallet. Personal information is generated through encryption, and only the private key holder can see their own information. Other service providers, such as the defi application we are talking about here, can only verify some of our information through verification to see whether it is authentic and meets the requirements. This is similar to using the private key of a digital wallet to verify information, and finally realizes the application of KYC.

Microsoft's decentralized identity system

If an individual's private key is leaked, all you need to do is regenerate the private key from the service provider that issued the information and confirm on the chain that the previous DID data is invalid, which can perfectly solve similar identity theft problems.

Of course, there are many projects using DID technology now . There are also several public chains in China, and foreign companies like Microsoft have also launched their own products. However, DID is still in an early stage of development and is not fully mature. It will take some time for it to integrate with other projects.

Obviously, DID technology is not used for user authentication in DeFi applications at present , and DID technology is still in the development process. The final entry point for user data is still authenticated by the national identity database, which is more complicated.

In other words, when decentralized identity data is not fully mature, DEFI's identity authentication kyc is actually just empty talk, and this provides a window period for criminals to commit crimes as they please.

However, KYC is definitely a development trend in the future. As far as regulators are concerned, unregulated financial activities are not allowed to occur. Simply put, this damages the interests of traditional vested interests, such as banks. They will inevitably need to use some machines to influence decision makers to deal a certain blow to DeFi. Before this blow comes, at present, DID chain identity is still a relatively perfect solution.