CipherTrace Outlines Regulatory Gray Zones Plaguing Booming DeFi Sector

DeFi has grown from a science project into a $11 billion market, one in which there appears to be almost zero know-your-customer provision and a considerable risk of potential manipulation.

DeFi is such a young space, it's hard to tell whether the sort of money-laundering activities typically associated with cryptocurrency mixing services will migrate there.

Preliminary findings after the recent KuCoin hack suggest this new generation of decentralized exchange could be added to crypto mixers as an attractive service for crooks, said CipherTrace CEO Dave Jevans.

"If I can put my stuff into a DeFi contract, it gets mixed up with other people's money when it comes back out. Because there's no tracing and there's no KYC, it effectively is operating as an old-school crypto money-laundering service."

While these DeFi services are acting as a useful layer to exchange tokens, they are not actually covering the hacker's tracks at this stage, said Elliptic co-founder Tom Robinson.

Speaking hypothetically, there are some other interesting reasons why DeFi could benefit potential money launderers, said Jevans of CipherTrace.

Despite the fact that gas fees on Ethereum-based DeFi apps are becoming ridiculously high, it's still cheaper than using a mixer, Jevans added.

DeFi is undoubtedly on the regulatory radar, as evidenced by recent comments from U.S. Securities and Exchange Commission crypto czar Valerie Szczepanik.

So are DeFi platforms thinking about adding KYC at any point in time? Jevans doesn't think so.

"While the operations of DeFi exchanges are decentralized, the scale of the governance decentralization varies greatly. For instance, Uniswap - located in San Francisco - has received venture investment capital from Andreessen Horowitz and Union Square Ventures," states the CipherTrace report.