Regulations are not typically the first thing to come to mind when thinking of DeFi. However, it is becoming increasingly clear that even the permissionless “Wild West” will have to find ways to integrate itself into existing financial infrastructure and regulatory frameworks. Compliance will not be a choice but a requirement.
Polimec provides a solution to this — all while avoiding centralized pitfalls that would introduce intermediaries or counterparty risk.
How Can This Be Achieved?
Regulatory compliant DeFi incorporates compliance elements into advanced DeFi architecture. A system based on credentials issued by a trusted third-party provider allows for modern variations of KYC and AML checks while preserving privacy — no personal information is stored on-chain directly. This adds another layer of transparency to DeFi without sacrificing data sovereignty: The user still decides what to share and when to share it. The key benefits of DeFi that attracted millions of users over the past years, such as the permissionless nature of DeFi giving direct access to all, thus avoiding expensive intermediaries or its high degree of privacy, remain in place.
A Simple Process
Polimec’s design enables compliance with existing regulations while maintaining data privacy, and the users remain independent. The process is straightforward: All the user needs to do is claim pseudonymous KYC/AML credentials from a trusted and regulated third party of choice. The provider of credentials is the only party holding the actual personal data. The provider is also the initial point of contact for regulators in case of an investigation into potentially illegal activities.
These reusable credentials are flexible, and allow storing information about jurisdiction, information relevant to a certain funding round, or participant category-specific criteria (e.g., criteria for institutional investors).
Advantages Of “Regulation By Code”
This way of achieving compliance unlocks the full power of DeFi and comes with several advantages:
· Pseudonymity: Users can remain pseudonymous on-chain as is the case today — no personal information is stored directly on-chain, yet all transactions and network participants can be processed in a regulatory compliant manner.
· Security: Users benefit from higher security and accountability in cases where code, in fact, turns out to not actually be law (see, for example, the recent case of Mango Markets and the CFTC vs. Eisenberg).
· Accessibility: Incorporating such essential compliance features bridges the gap to the mainstream by bringing clarity regarding legal matters, making DeFi more appealing to traditional and institutional investors around the globe.
What Can We Expect Going Forward?
Regulatory compliant DeFi requires open discussions between all involved parties in search of the best possible solutions — solutions that work for everyone, regulators and end users alike. Polimec’s approach provides such a solution while preserving core crypto principles, like trustlessness and transparency.
