The Commodity Futures Trading Commission (CFTC) is urging policymakers to address identity-related challenges within the realm of Decentralized Finance (DeFi) operations.

A recently released report by the US regulatory body puts forth specific recommendations to tackle issues surrounding anti-money laundering (AML) and digital identity in the often opaque landscape of DeFi.

The report's publication comes on the heels of a study conducted by the Department of Treasury on the risks of illicit finance in DeFi. The study revealed that entities such as North Korea, cybercriminals, ransomware attackers, thieves, and scammers are utilizing DeFi services for the transfer and laundering of their illicit proceeds. In response, the government has advocated for federal regulators to take decisive steps aligned with Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regulations and sanctions obligations to curb the misuse of DeFi by illicit actors.

CFTC Commissioner Christy Goldsmith Romero highlights a central concern related to DeFi systems, emphasizing the lack of clear lines of responsibility and accountability, with some industry designs deliberately avoiding these elements.

"This aspect of DeFi systems represents a significant risk to consumers, investors, financial stability, market integrity, and the fight against illicit finance. It lacks a clear mechanism for victim recourse, defense against illicit exploitation, or the ability to implement necessary changes and controls during crises and periods of network stress," she states.

In light of these potential risks, the report underscores the need for collaborative action between government and industry. It urges timely efforts across regulatory and strategic initiatives to enhance the understanding of DeFi.

The report specifically recommends a thorough evaluation of options for regulating and imposing requirements for identity information discoverability and verification across different layers within the DeFi ecosystem. This could entail regulating more centralized identity information repositories and service providers, determining the necessary level of identity information to be collected by various financial actors at different layers of the DeFi stack.