DeFi
Artificial Intelligence Could Make DeFi Compliance Less Complicated
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The crypto industry has rebounded from a brutal period defined by scams, scandals, massive price drops, and persistent gaps in real-world utility.
As the industry stabilizes and innovation flourishes once again, advances in decentralized finance (DeFi) have become a symbol of the growth and maturation of an industry. some have predicted would evaporate as it sank deeper into a bear market.
However, as the crypto industry seeks greater legitimacy amid increased ties to the traditional financial world, DeFi’s compliance issues will eventually come to light.
Centralized Web 3.0 organizations operating in major markets like the US, UK, and EU have a general understanding of what is expected of them to comply with security laws, anti-money laundering, and other consumer protection measures.
Due to its unclear status, DeFi does not have the same luxury, which could harm its acceptance among institutions and the public, thus halting its growth.
Therefore, the growing DeFi ecosystem should adopt certain measures and standards in anticipation and preparation for future regulatory actions.
DeFi Can’t Sustain Progress Without Compliance
From KuCoin has Binance and now UniswapMany of the industry’s largest exchanges have come under scrutiny – fair or unfair – from regulators and the public over concerns about fraud and money laundering.
The recent involvement of the SEC in parallel with the development of an EU manifesto (Mica) focusing on digital assets, has laid the foundation for an ever-changing regulatory landscape that aims to disrupt the industry.
U.S. efforts to bring the sector into compliance have focused on better risk mitigation, while the EU has prioritized transparent governance.
We have yet to see how this will impact DeFi and, to a lesser extent, Bitcoin – but major changes affecting user anonymity and more are expected.
While DeFi is naturally more difficult to regulate due to the lack of a centralized body, internal debates about whether DeFi should do more to ensure that criminals and terrorist organizations do not exploit its protocols and applications continue.
Traditional approaches to financial regulation are not fully compatible with today’s automated and intelligent contract-based protocols, and imposing old frameworks on a new and innovative asset class risks derailing its development.
Regulating decentralized systems will always come with its share of challenges, not to mention opposition from some in the crypto community.
While regulations can potentially hamper innovation, a complete lack of compliance and safeguards leaves DeFi users at the mercy of hackers and protocols at risk of being used to launder dirty money.
As bad actors lurk around DeFi protocols, we have already seen the SEC move to strengthen its enforcement efforts.
In February 2024, the The SEC has proposed an amendment to the definition of a securities broker to address these same issues, suggesting that it could subject AMMs (automated market makers) and other “DeFi participants” to registration.
As recently reported According to Forbes, an imminent showdown between the two sides is on the way. The SEC’s increased role in cryptocurrency matters means that DeFi’s progress is likely to stall unless it self-regulates.
This is where an overlooked potential intersection between crypto and artificial intelligence (AI) can significantly improve DeFi and crypto.
AI for Blockchain Compliance and Security
In a quiet and somewhat surprising development in November 2023, the Federal Reserve set a generative AI incubation program to explore ways to use AI to analyze payment system data and data related to supervisory and regulatory activities.
A similar approach could be used in Web 3.0 environments to take preventative measures to secure DeFi protocols and their users.
While cybercriminals and bad actors are always looking for – and usually find – a method or vector to exploit, DeFi offers them cover via anonymity.
Whether fair or unfair, this distorts DeFi’s image to the outside world, overshadowing its innovative nature and unique approach to digital assets and blockchain technology.
AI can make Web 3.0 compliance and risk mitigation more efficient, making the space more accessible to financial institutions and non-crypto retail investors.
Applying advanced AI algorithms in a blockchain environment will enable decentralized protocols, applications, and platforms to predict and identify security vulnerabilities by analyzing transaction patterns and reporting anomalies.
AI capabilities provide DeFi with the best and most responsible way to remain decentralized, adhere to any regulatory actions, and protect users’ assets.
Additionally, AI can enable DeFi systems to simplify compliance processes by automating and facilitating audits while maintaining and respecting transparency.
As KYC and AML regulations become more relevant within DeFi, businesses and customers can feel comfortable using AI-powered compliance solutions to protect user assets while staying out of the SEC’s crosshairs.
Navigating DeFi’s decentralized, community-driven governance systems could be a hurdle.
It is therefore up to the loudest voices in the industry to communicate the need for compliance standards and to highlight that AI offers this sector the ideal solution to maintain its momentum.
Combining the secure and trusted environment of blockchain with the advanced analytics capabilities of AI will significantly reduce fraud attempts, enable compliance, and allow DeFi users and protocols to interact in a more secure ecosystem.
It’s only a matter of time before advances in blockchain and AI disrupt DeFi and the broader Web 3.0 sector.
But without a plan to address current and future regulatory frameworks and provide users with safe interactions, institutional interest will begin to wane – and with it, hope for widespread adoption.
Ilan Rakhmanov is the CEO and Founder of GPT Chainthe AI-powered Web 3.0 infrastructure that provides a diverse suite of tools and services. Under his leadership, ChainGPT has seen significant growth in the Web 3.0 industry in 2023, supported by a community of over 500,000 members. Ilan’s successful track record in leadership roles for multiple seven- and eight-figure companies across various industries is largely due to a diverse skill set ranging from coding and compliance to business, legal, design, and marketing.
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