Regulators and crypto protocols have been at odds over Know Your Customer (KYC) and Anti-Money Laundering (AML) rules and the enforcement of economic sanctions regimes. Recently, a senior Commodity Futures Trading Commission (CFTC) official suggested that the blockchain and cryptocurrency sector should verify the digital identity of its users. However, forcing compliance risks pushing decentralised finance (DeFi) innovation abroad. In the United States, crypto protocols are required to comply with AML/KYC rules and other aspects of the Bank Secrecy Act (BSA) if they are designated as “money transmitters” or “money services businesses”.
Centralised protocols have the ability to implement AML/KYC compliance, but this risks losing crypto idealists who will only use products that allow permissionless and anonymous access. Decentralised protocols can implement BSA compliance, but the individual steps must be approved by the protocol’s DAO. Regulators are not the only potential challenge for crypto firms looking to set up in the US, they must also comply with the Office of Foreign Assets Control (OFAC) to prevent the use of their platforms by individuals from prohibited jurisdictions.
If crypto firms can resist anonymity-enhanced technology, would that be beneficial? Advocates believe preserving privacy coins and anonymous crypto is important globally as a counterweight to growing government surveillance.
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