DeFi platforms can be compliant with regulations without compromising privacy — Web3 executives

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Zero knowledge proofs, DIDs and other tools could help DeFi protocols keep in compliance with regulatory requirements without exposing their users. Interview Own this piece in history. Although Decentralized finance (NFTDecentralized Finance) has seen a rapid growth, it has also faced significant regulatory hurdles. With regulators struggling to keep up with the pace of innovation, the lack of clarity around regulations tends to create uncertainty for DeFi projects.Cointelegraph spoke to Alastair Johnson about regulatory challenges facing the DeFi industry. Johnson is the CEO and founder of Nuggets, an identity “superwallet” that provides verified self-sovereign, decentralized identities to users. Johnson stated that the biggest regulatory challenge facing DeFi is its anonymity, which makes compliance with Anti-Money Laundering and Know Your Customer (KYC), regulations difficult. Privacy is an integral part of DeFi. However, regulatory compliance is crucial to ensure users are protected and that DeFi platforms comply with the law. Johnson spoke out about how DeFi platforms can balance privacy and regulatory requirements. He said that “Regulatory compliance will include implementing AML/KYC procedures.” This can be done with zero-knowledge proofs and non-correlatable peers decentralized Identifiers. Auditable data can also be encrypted to protect participants’ private keys, but still in compliance with regulatory requirements.” Johnson said that DeFi platforms can implement privacy-enhancing technologies such as homomorphic encryption and zero-knowledge proofs to protect users privacy while adhering to regulations. Johnson explained that DeFi platforms can use decentralized identity solutions to verify users’ identities while maintaining decentralization. These solutions can use blockchain-based identity protocols, such as Decentralized Identifiers (DIDs) and Verifiable Credentials (VCs), to provide secure and privacy-preserving user identification — enabling DeFi platforms to continue to innovate and grow while still complying with applicable regulations.”Speaking on the impact of regulation within the space, Johnson noted that increasing regulation in the DeFi sector could have both positive and negative impacts. Johnson said that regulation can provide legitimacy and protect users against fraudulent activities. However, excessive and burdensome regulations could stifle innovation, decrease competition, and undermine the DeFi ecosystem’s trustlessness and decentralization. Johnson stated that he hopes that DeFi platforms will embrace privacy-preserving technologies, implement self-regulatory measures and collaborate with regulators to find ways to balance regulatory compliance with the principles and privacy that underpin the DeFi environment.