The meteoric rise of the DeFi and accompanying NFT space has been quite spectacular and truly unprecedented. In May 2021, the DeFi market reached an all-time high, with the total amount of digital currency locked surging to around $87 billion.
According to available data, the total value locked or TVL in DeFi almost reached $100 billion before a significant correction recently. This is a major milestone considering that the entire decentralized finance ecosystem was only valued at $1 billion in February 2020.
However, most great breakthroughs or innovations tend to come with some drawbacks. After all, nothing is perfect. This dramatic growth of DeFi along with the fact that these protocols are designed to be permissionless — meaning they can be accessed without ensuring regulatory compliance — makes it abundantly clear that DeFi could be exploited by bad actors or cybercriminals engaging in illicit activities.
Non-Compliance Fines on Financial Firms Surpassed $10 Billion in 2020
One of the main responsibilities for traditional banking institutions and other financial service providers is to ensure the markets’ integrity. Last year, a Fenergo report revealed that sanctions sustained by financial platforms for non-compliance with applicable AML/KYC and various other regulations totaled $10.6 billion internationally.
Updates to financial institutions’ regulatory guidelines to curb criminal activity have fallen short, according to industry analysts. But when comparing the traditional financial space with crypto and DeFi regulations, they’re still considerably more robust.
One of the primary challenges that DeFi and crypto-assets have to deal with is the extremely high profitability of the market to money-launders and those engaging in other forms of financial crime. Updates to crypto trading platforms can be challenging, as this would require costly digital onboarding processes, user-developer friction, and susceptibility to major security breaches.
A 2020 study released by blockchain security company CypherTrace revealed that over 55% of all crypto trading platforms had extremely weak or no AML/KYC checks. This would be a critical building block in sufficiently secure and compliant solutions.
Ensuring Compliance with Innovative Legal Tech
The Astra Protocol enables DeFi platforms to adhere to the “inevitable” regulations “without compromise,” according to its developers.
As the crypto-assets market continues to attract more users, there will definitely be a need for better compliance solutions. The Astra Protocol team writes in a blog post that the route that the community can take is “through embracing appropriately tailored regulation procedures while maintaining its essential decentralized nature.”
The Astra team explains that decentralized financial organizations may use their protocol, as it can serve as the decentralized compliance layer “without requesting and storing KYC information themselves whilst simultaneously reducing the risk of fraud and criminal activity.”
The protocol’s developers claim that their solutions can effectively “unlock the door to institutional adoption.”
Regulators Have Increased Scrutiny of Crypto Firms
Federal regulators in the US such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have begun to seriously investigate the operations of cryptocurrency firms, especially those of digital assets exchanges. Given these developments, ensuring regulatory compliance needs to become a key priority for every financial institution.
Large crypto exchanges such as Binance, ByBit, BitMEX, Huobi, OKEx, among many others, have received multiple warnings from regulators not just in the US, but by regulatory agencies in almost every jurisdiction in the world.
It can be quite challenging to navigate the international regulatory landscape, especially with complicated requirements like the Travel Rule – which has introduced strict requirements that financial institutions must follow. They require service providers to accurately document and share the sender and recipient’s details for all major transactions (and many other guidelines).
Fortunately, the team at Astra Protocol has been developing solutions to help crypto firms remain compliant in this fast-evolving financial industry. Most industry experts agree that regulated platforms will provide sustainable business models, meanwhile, non-compliant service providers may be forced to shut down operations.