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Shyft Network’s Guide To Compliant DeFi

A look into how we’re ensuring compliance without removing the “De” from DeFi.

Decentralized finance is the new frontier of investment and value propagation on the internet. It offers a new, innovative method for investing in assets. It removes the hassle of going through regulated channels and submitting many documents for verification of personal data. On the surface, this seems like an ideal solution for many people since it gives them a way to invest and keep their assets and earnings anonymous to those it doesn’t concern. It also introduces an added element of security for many individuals since they are in complete control of their finances.

Unfortunately, DeFi also opens up a nest of issues, including users bypassing Anti Money-laundering (AML) laws and Countering the Financing of Terrorism (CFT) guidelines. Given the decentralized nature of the sector, however, how can compliance even be implemented? Compliant DeFi, something we’re proud to be pioneering at Shyft Network, would deal with these issues and other regulatory elements such as Know Your Customer (KYC) rules without forcing users and companies to conform to a centralized data store. Recent regulatory constraints such as the FATF Travel Rule and stipulations in the Infrastructure Bill mean that DeFi needs to start taking compliance seriously.

Not As Counter-Intuitive As It First Seems

Compliance in the financial sector helps to bring confidence to the consumer, financial institutions, and regulators. Unfortunately, the side effect of this added consumer confidence is the financial institution’s storage of personal user data, shared at will with governments. Since there’s no decentralized methodology for collecting and storing information in decentralized finance, implementations of KYC, CFT, and AML rules must become more innovative. Luckily, Shyft has been looking into the problem, and we’ve developed several solutions that fit the needs of decentralized finance platforms the world over.

The biggest issue we’ve seen with compliance is that it tries to impede the very soul of decentralization. Regulators are afraid that decentralized applications (DApps) don’t have a central body responsible for their function. The FATF Travel Rule (among others) underlines the reasoning behind regulators’ insistence on establishing a compliance framework for cryptocurrencies.

In essence, the most significant concern regulators have boils down to accountability. If someone does something illegal within the realm of DeFi, who is responsible for the fallout? Is it the decentralized autonomous organization’s (DAO’s) members? Is it the DApp that facilitated the illegal action or collected the proceeds on behalf of the perpetrators? Is it the stakeholders of the blockchain where the illegal proceeds were stored? There exists a need for this sort of accountability in the cryptoverse, but the implementation cannot go against the core foundation of why decentralized finance exists. We cannot create a decentralized platform and then centralize its data for compliance purposes. The solution, therefore, is to find a way to decentralize this data collection and verification process.

A Way Forward

Shyft Network has spent a considerable amount of time assessing, analyzing and researching these challenges, developing a solution that works well with current compliance regulation, and marrying it to an approach that maintains the spirit of decentralization. The solutions we are developing examine the existing framework of decentralization and use those as a base for creating a network that exists in harmony with current implementations. The Shyft Network doesn’t force any users to make fundamental changes to how their underlying systems work. Instead, it’s a modular implementation that allows for secure financial transactions with minimal risk to users. Solutions we’ve developed to deal with the compliance problem in DeFi include:

  1. Veriscope GDPR/AML Compliant Discovery Mechanism: Veriscope is one of Shyft Network’s most recent innovations to offer Virtual Asset Service Providers (VASPs) like crypto exchanges a way to deal with the FATF Travel Rule and reach compliance. Veriscope is a decentralized solution (in holding with Shyft’s focus on keeping the decentralization in DeFi) that helps VASPs deal with the regulatory requirements instituted by authorities.
  2. Proof of Identity and Whitelisted Addresses: The Shyft Network can work with both centralized and decentralized entities to bring about equality in verifying user information. DeFi participants can submit their data to a verifying oracle which will be used to safelist their address for transactions. Once the address has been whitelisted and linked with the user’s identification, they can participate in DeFi transactions freely. Recently, Shyft Network partnered with Kylin to develop these decentralized oracles in keeping with their goal to provide a safe, secure way for financial institutions to interact with the DeFi space.
  3. Risk Assessment Mechanisms for DeFi Projects: To ensure that bad actors don’t abuse the system or take advantage of users, wallet transactions with smart contracts will be continually monitored for signs of untoward behavior. DeFi platforms that want to know more about their users can easily access this information to ensure that they have a more trustworthy network.

Expanding Markets Mean More Compliance is Necessary

DeFi is a space that will see exponential growth in the coming years. Early adopters already have their hands full, trying to keep abreast of the burgeoning growth and development of decentralized applications. However, as the popularity of DeFi grows, the threat of regulation will always linger, and facing it head on is the best way to deal with it. Compliance allows decentralized platforms to stay one step ahead of regulators, giving users the peace of mind they want. Shyft Network will be continuing to lead this charge to create proactive, innovative compliance in its network. Stay tuned to find out more!

Shyft Network aggregates trust and contextualizes data to build an authentic reputation, identity, and creditability framework for individuals and enterprises.

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