Decentralized Financial images are proving attractive due to the growth and evolution of blockchain technology. However it's users are losing a lot of money to criminal activity. How can they make their assets more secure?
According to a report from London-based firm Elliptic, DeFi users and investors have suffered more than $12 billion in losses in 2021. Of this figure, $10.5 billion has been lost to fraud and theft. This equates to a sevenfold increase from last year.
Known as the “Wild West” of cryptocurrencies, DeFi products aim to replicate traditional financial services using blockchain technology. Users are attracted to DeFi services because they’re offered huge returns. High-interest rate savings and lending products are a common sight in the space, and middlemen like banks are not involved.
Speaking about the company’s report, chief scientist at Elliptic Tom Robinson said: “The DeFi ecosystem is an incredibly exciting and fast-moving space, with financial services innovation happening at light speed… This is attracting large amounts of capital to projects that are not always robust or well-tested. Criminal actors have seen the opportunity to exploit this.”
Over the last two years, the total amount of money deposited at DeFi services has spiked from just $500 million to $247 billion. During the same period, the price of cryptocurrencies such as bitcoin and ethereum have rallied. Ethereum, the network behind the world’s second-biggest digital coin, is considered the backbone of many DeFi applications.
However, as the market has grown in size, so has the level of illicit activity associated with the sector. For example, earlier this year, DeFi platform Poly Network lost more than $600 million. At the time, this was the biggest cryptocurrency theft ever recorded.
In response to the rise in crime in an unregulated sector, the Securities and Exchange Commission is seeking information from Uniswap Labs, the start-up behind a decentralized crypto exchange of the same name. The commission is primarily interested in learning more about how investors use the platform and the way in which it is marketed.
Currently, experts are concerned that though many DeFi businesses are marketing themselves as decentralized, this may not actually be the case. As a result, the Financial Action Task Force, a global anti-money laundering watchdog, recently released revised guidance on cryptocurrencies. The watchdog is now calling on countries to identify individuals with “control or sufficient influence” over DeFi programs.
For their part, Uniswap Labs say that the firm is committed to complying with the law and assisting regulators with their enquiries.
It’s widely thought that once the Securities and Exchange Commission has managed to get to grips with the market, greater regulation will be introduced in the space. However, because many DeFi platforms are not companies, regulators are still finding it difficult to know exactly how, what, and whom to regulate.
Our AML and KYC compliance solution helps DeFi companies fight scams and fraud. Our verification platform helps prevent bad actors from exploiting your services and ensures that your customers are exactly who they say they are. To learn more about how our solution can help you, book a consultation today.