2023-04-18 07:35:39
Decentralized finance (DeFi) has emerged as a revolutionary force in the financial industry. When some traditional banks lost the trust of their customers and central exchanges crashed spectacularly, DeFi continued to provide people with reliable financial services.
However, as with everything, there have been malicious market players and illegal activities that have caused problems for regulators around the world, infuriating them. Hackers, led by North Korea, stole nearly $4 billion in 2022 alone by exploiting crypto protocols. Because of these and similar cases, some regulatory authorities are increasingly trying to bring DeFi itself under their control.
Due to such problems, most traditional financial institutions have stayed away from the world of DeFi, which, let’s face it, is not conducive to the adoption of crypto. According to some, the internet financial system (IFS) is a solution to this. IFS is a system for creating cryptoprotocols that are suitable for both regulators and consumers.. Although a its exact form is yet to be determinedwould generally involve a more digital version of the traditional financial system, along with DeFi.
IFS preserves the key features of blockchain, such as decentralized settlement, self-custody, transparency, and interoperability. Linking crypto to TradFi would not only bring more users, but also free up trillions of assets that are currently trapped in these financial systems.
To achieve all this, IFS must be built on a decentralized architecture while meeting regulatory requirements. Achieving this requires new technology, standards and laws. The good news, however, is that they are being achieved and are currently progressing on three fronts.
Programmable compliance
Illicit financing is a matter of national security, and lawmakers rightly expect the new IFS to improve TradFi’s compliance sophistication. The IFS needs to find a way to ensure strict anti-money laundering compliance in a programmatic, on-chain environment. This would mean introducing programmable on-chain compliance capable of continuous anti-money laundering controls and distinguishing between different laws in each country.
Regulation
The long-term success of the idea depends on regulatory acceptance. Although the community expresses its displeasure towards the regulators, it is necessary to try to provide new solutions for policy makers to deal with the problems of illegal financing. An example of this could be a technology that keeps actors with bad motives out of the system. The authorities will then develop workable guidelines that strike a balance between investor and consumer protection. This happened, for example, in the Cayman Islands, where decentralized exchanges were included in the law on virtual asset providers. This was done because policy makers felt that laws should be compatible with decentralized finance.
Privacy identity
In IFS, regulatory compliance cannot come at the expense of user privacy. For example, smart contracts cannot record or publish personal information on a blockchain. These contracts easily accept tokens that provide a binary response (yes or no) to the compliance risks that the project needs to address, while keeping the wallet’s anonymity intact. Such standards for identity cards that ensure data protection have been in development for years and are now ready to play a role in the IFS.
Although IFS is still in its infancy, in the future it could be a solution to address regulatory and compliance concerns from a privacy perspective using the traditional financial system and DeFi.
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