BitOoda Regulatory & Geopolitical Analysis, 7/6/2020: Privacy in the age of Global AML Rules & DeFi

As we continue to see an explosion of interest in DeFi (which we plan to examine further in a future regulatory writeup), we were reminded this week that the FATF’s Travel Rule is now the global standard for tightening AML efforts by requiring ‘virtual asset service providers’ (VASPs) to share identifying information for those involved in digital asset transactions. As we continue to monitor trends across the digital asset ecosystem, we asked ourselves how the digital community and global crypto users will reconcile AML requirements like the FATF Travel Rule with the increasing availability of permissionless financial service platforms with no intermediaries involved behind the scenes?

While DeFi apps are not inherently based on privacy or anonymity in transactions, it nonetheless appeals to digital asset users as a slice of crypto’s original vision of a financial system without centralized control by companies or other intermediaries. While DeFi applications and networks are largely based on publicly-available blockchains and largely open source information, the ability to conduct lending, borrowing, and other financial transactions in a secure but controlled way via smart contracts spurs the question of how DeFi developers (who are proliferating rapidly) will ensure their apps meet required AML/KYC protocols.

We find this question particularly relevant given other ongoing trends we are monitoring across the space, including:

· Increasing indications of the growing global adoption of crypto by a range of users and investors, including such as the FCA’s recent survey showing a spike in U.K. crypto adoption.

· Expanding use of crypto for payments, such as the ruling by the DC Bar that attorneys in the nation’s capital can accept cryptocurrency as payment for legal services.

· The push to use digital currencies to ensure “inclusive banking” around the world.

As we continue to advise our clients on market strategies and how to compliantly navigate the maze of regulatory questions that arise when engaging in the space — particularly when new technologies or products come into play — we will continue to explore DeFi from a regulatory perspective and dive deeper into potential opportunities we feel are worth pursuing.

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