DeFi protocols, including Decentralized Exchanges (DEXs) have made a virtue of having minimal AML and KYC procedurs. However many now wonder if DEXs are also obliged to comply with the BSA, even though most projects seek to decentralize ownership and governance throughout their communities.
While many DeFi protocols appear to believe that they can evade regulators simply by becoming fully decentralized, there are increasing doubts as to whether this is true — and in any case, DeFi protocols have come under fire recently for operating with a high degree of centralization, with 12 out of 15 top projects maintaining ‘God Mode’ admin keys.
In a 25-post Twitter-thread, investor and blockchain consultant Adam Cochran examined the potential fall out from the BitMEX charges for DeFi protocols. He argued that while authorities cannot directly shut down a DEX due to its decentralized nature, regulators could target the core developers who hold the admin keys and the domain providers hosting the front-end interfaces of DEXs:
“If that happened to a protocol, a large bulk of users would stop using it and not interact with the contract directly, essentially killing the protocol,” he said. “The takeaway here is that a protocol isn’t outside the reach of the government, there is always pressure points that can be applied.”
But Cochran believes the crypto community should actually want regulations like the BSA to apply to DeFi, adding that “there is a difference between wanting sovereignty and privacy over your funds vs enabling criminal activity.”