Global: CFTC Advocates for Improved Identity Discovery in DeFi Space

he Commodity Futures Trading Commission (CFTC) is calling on policymakers to address identity-related challenges within Decentralized Finance (DeFi) operations.

In a recent report, the US regulatory body puts forth recommendations that specifically target anti-money laundering (AML) and digital identity issues in the often opaque realm of DeFi.

This report comes in the wake of a Department of Treasury study on illicit finance risks in DeFi, revealing that entities such as North Korea, cybercriminals, ransomware attackers, thieves, and scammers are leveraging DeFi services to transfer and launder illicit proceeds. The Government’s response to this highlighted the need for federal regulators to take decisive actions aligned with AML/CFT regulations and sanctions obligations to prevent illicit actors from exploiting DeFi.

A critical concern associated with DeFi systems, as emphasized by CFTC Commissioner Christy Goldsmith Romero, is the absence of clear lines of responsibility and accountability, with some industry designs intentionally avoiding such clarity.

“This feature of DeFi systems may present the clearest ways in which DeFi poses risks to consumers and investors, as well as to financial stability, market integrity, and illicit finance—it implicates no clear route to ensuring victim recourse, defense against illicit exploitation, or the ability to insert necessary changes and controls during periods of crisis and network stress,” states Romero. “Given the potential risks, the report emphasizes the need for government and industry to take timely action, working together across regulatory and other strategic initiatives to better understand DeFi.”

The report proposes evaluating options for regulating and imposing requirements for identity information discoverability and verification across different layers in the DeFi ecosystem. This could involve regulating more centralized identity information and credential repositories and service providers. The report also suggests determining the necessary level of identity information that must be collected by different financial actors at various layers of the DeFi stack.