Web3 Executive Claims That DeFi Systems May Abide With Laws Without Sacrificing Privacy

Decentralized IDs, zero knowledge proofs, and other tools might assist DeFi protocols in maintaining regulatory compliance without revealing its users.

Source: ccecosystems.news

Although it has seen major legal difficulties, the decentralized finance (DeFi) segment of the bitcoin business has been expanding quickly. DeFi initiatives frequently experience uncertainty due to the inability of authorities to keep up with the rate of innovation.

Alastair Johnson discussed the regulatory difficulties the DeFi sector is now facing with Cointelegraph. Johnson is the CEO of Nuggets, a self-sovereign decentralized identity "super-wallet" that aims to provide users with verified identities. According to him, one of the major regulatory obstacles is the anonymity of DeFi platforms, which makes it challenging to adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.

DeFi is built on privacy, but in order to safeguard users and make sure that DeFi platforms are following the law, regulatory compliance is also crucial. Implementing AML/KYC processes will be necessary for regulatory compliance, Johnson stated. "By utilizing non-correlatable peer Decentralized Identifiers (DIDs) and zero-knowledge proofs, this may be accomplished without jeopardizing user privacy. Moreover, auditable data may be encrypted while still adhering to legal standards in order to safeguard the participant's private keys.’’

He said, "DeFi systems may use privacy-enhancing technologies like homomorphic encryption and zero-knowledge proofs to preserve user privacy while still complying with the law."

Johnson claims that DeFi platforms may preserve their decentralization while taking steps to assure regulatory compliance. In order to authenticate users' identities while yet retaining decentralization, he said, "DeFi systems can embrace decentralized identity solutions. Decentralized Identifiers (DIDs) and Verifiable Credentials (VCs), two blockchain-based identity protocols, may be used by these solutions to enable safe and privacy-preserving user identification, allowing DeFi platforms to develop and flourish while still adhering to current legislation.’’

Johnson remarked that further regulation in the DeFi industry might have both good and bad effects when discussing its effects on the market. While regulation may provide credibility and shield consumers from fraudulent activity, it may also limit innovation and reduce competition, eroding the decentralized and unreliable nature of the DeFi ecosystem.

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