“ShapeShift’s vision is the establishment of an immutable, borderless financial system,” Voorhees wrote on Twitter, where he has nearly 525,000 followers. “Let’s be direct: money and finance shall not be operated by coercive government among free people. They shall — like language, mathematics, and love — emerge voluntarily and without central rule.”
Of particular concern is the fate of a key pillar of the anti-money laundering regime — the requirement on financial companies to “know your customer.” The KYC obligation means intermediaries are supposed to know their users’ names, monitor their transactions and report activities that raise money-laundering suspicions to the authorities.
“DeFi is using loopholes in regulation because they don’t actually hold the customer’s money, unlike a broker,” says David Jevans, chief executive of CipherTrace, a cryptocurrency intelligence company started in 2015 with funding from the U.S. Department of Homeland Security to help prevent financial crime. “This has allowed a nice wave of innovation, which is great. But it also allows a wave of innovation by people trying to launder money through the system.
These watchdogs take advantage of the fact that blockchain transactions are public and gather data to identify suspicious patterns of activity or addresses. Focusing on this kind of “cryptocurrency native” crime — meaning it is “practically dependent on cryptocurrency or inherently intertwined with it” — Chainalysis, a leading crypto forensics firm, estimates illicit activity represented 0.34 per cent of cryptocurrency transaction volume in 2020, down from 2.
Adding to the challenge for law enforcement is that some developers are working to make it harder to spot illicit activity. One example involves difficult to trace privacy coins — such as Monero, Zcash and Dash. The U.S. justice department last year called their use an example of “a high-risk activity that is indicative of possible criminal conduct.”