A DeFi enabled future: Exploring the compliance barrier
The benefits of Decentralized Finance (DeFi) solutions are clear, and their adoption continues to move forward. Goldman Sachs, Morgan Stanley, Blackrock, and several Government institutions are among those noticing the benefits and are beginning to adapt to the future with a strong interest in DeFi protocols. Although their involvement will undoubtedly significantly boost the widespread adoption of DeFi protocols, compliance laws remain a big entry barrier into the current ecosystem. Institutions and institutional clients interested in the DeFi scene have become aware that compliance is not as mature as it is in Traditional Finance (TradFi). It has become more critical than ever that regulatory frameworks are in place to make sure transactions adhere to international Know Your Customer (KYC) and Anti Money Laundering (AML) standards. DeFi is evolving quickly, innovation is moving towards an interoperable future, but rather than being more inclusive, these constant changes bring about regulatory uncertainty. These regulations must encompass the transfer of information across chains, layers, and borders that translates over to local and international frameworks.
Advanced Blockchain has partnered with Tgrade to support their solution for a more adoptable DeFi future. We are exploring several avenues to ensure consumer protection and transparency and believe this partnership will help us achieve these goals in the case of a more regulated DeFi environment.
Complications in today’s DeFi compliance solutions
TradFi institutions can not really participate in any DeFi protocol within the current landscape, given they need to adhere to certain levels of KYC and AML not readily available in DeFi. Compliance becomes complicated as institutional investors show increased interest in participating in DeFi protocols. For instance, institutions such as banks that want to join in lending pools could, in the absolute worst-case scenario, indirectly participate in money laundering. These scenarios are highly unlikely — only about 2% of defi transactions in 2020, for example, were used for money laundering, which jumped to 17% in 2021, according to Chainalysis — but present concerns that institutions are keeping in mind as they enter the space. The challenge thus becomes finding the right solution that keeps DeFi’s intricate ideology intact. By the perfect solution, we mean having no central authority at its core while still facilitating the involvement of TradFi institutions and adhering to international and local AML laws through identity verification and anti-fraud measures.
It is important to note that KYC in the context of DeFi is also a bit different from the traditional KYC process. In the DeFi and crypto frameworks, the term KYC is often thought of as onboarding requirements that involve checking addresses to ensure that the user is not restricted from services for reasons such as being from a restricted jurisdiction. KYC in TradFi is more involved, it assesses the person’s investment timeframes, appetite for risk, and understanding of financial products. The question thus becomes, if we have no intermediaries then who will facilitate this process and these checks? We should also explore if all DeFi protocols are suitable for retail investors or if some should be specifically developed for their involvement.
Advanced Blockchain is aware of the potential and is exploring growth opportunities with portfolio companies
As innovators, we explore, develop, collaborate, and test technologies to enable a seamless user experience that is built to drive forward the true adoption of blockchain technology. At Advanced Blockchain, we are continuously conducting research and collaborating with the most promising disruptors and future frontrunners of the industry to identify and solve pressing issues that get in the way of our vision for true adoption. That being said, we have deemed it necessary to address the lack of solutions that add a layer and access to AML regulated frameworks for DeFi protocols that maintain blockchain technology's anonymity, decentralization, and security benefits. We do believe that blockchain technology - at its core - provides us with the framework to craft a solution to these pressing regulatory issues and are in the process of deploying support to several synergistic teams, projects, and protocols that share our joint vision of solving these issues. These ideas range in scope from ideation to ready-to-scale.
Introducing our partnership with Tgrade: a regulated blockchain solution for global financial institutions
Advanced Blockchain AG has partnered with Tgrade to discover transparent solutions surrounding the topics of heightened compliance and regulation in DeFi. We have conducted joint research in consumer protection and DeFi compliance. Advanced Blockchain is supporting Tgrade in exploring how we can develop, deploy, and support an ecosystem that is built for the global adoption of blockchain whilst adhering to global and local compliance laws and regulations. An ecosystem that allows even the bigger institutions to participate in DeFi.
Tgrade has built a self-sovereign framework that ensures the principle of decentralization while allowing Institutions within a given jurisdiction to comply with their local regulations through a self-sovereign group. The key solution being on-chain financial instruments are controlled by self-sovereign groups and on-chain governance complies with the corresponding off-chain regulations. At Advanced Blockchain, we support their approach and are committing resources towards their efforts through the products and services of our venture studio. For a more robust overview and introduction to Tgrade we encourage our followers to check out their social channels, Twitter, Discord.
Composable Finance: Blockchain Agnostic Compliance
In the spirit of this article, it is important to note our continued research and development efforts as they align with Composable Finance’s continuous contribution to the global adoption of DeFi. We are supporting Composable Finance in researching and developing a solution to address these compliance issues currently hindering the involvement of TradFi intuitions in the DeFi ecosystem. This solution is in the alpha stages but is expected to synergize with our other portfolio companies in bridging the gap between both worlds further, ultimately expanding the horizon of DeFi.
“As we are still early in our ideation and development of a flagship solution for blockchain agnostic compliance we are exploring several paths such as the possibility of different levels of AML protection. Suppose we are heading towards varying levels of AML protection. In that case, it could lead to a future with open and closed pools, where the closed pools require whitelisting of addresses to allow institutions to participate in DeFi while ensuring that the funds are clean.”- 0xbrainjar, Founder & Head of Product at Composable
“Another possible solution we are exploring is ways to leverage the routing layer of the Composable tech stack, which assesses all possible routes across all potential layers and chains for any given action. The routing layer would evaluate and suggest KYC-enabled routes or routes compliant with local and international AML regulations, thereby granting institutional investors an entry point to explore opportunities in DeFi. Also, developers and users would leverage this pathway execution layer solution as an API offering to further tap into the Web 3.0 ecosystem.” - Karel, CTO of Composable Finance
Building the future to enable seamless adoption
Advanced Blockchain is an early supporter of DeFi applications and their continued development. We will continue to innovate and support DeFi and are positioning ourselves to best support a future that may require an increase in regulations. We see the compliance barriers not as concrete roadblocks to adoption but as problems that can be solved through innovation. The assets available in DeFi to date are minuscule in comparison to the vast amount of assets available in TradFi. Especially when considering all of the real-world assets (RWA) that have not been fully digitized but exemplify an enormous opportunity. As such, we believe that this is an enormous opportunity for us to play a big role in designing the future of financial services and applications. We know that TradFi institutions are interested in participating in DeFi and we aim to utilize our expertise and network to build and support projects that can legally enable their involvement.
Further information about Advanced Blockchain AG and our various projects and investments can be found at https://www.advancedblockchain.com/.