The decentralized finance (DeFi) market cap crossed the US$140 billion mark for the first time today, an increase of over 500% since the start of 2021, and there is now more than US$128 billion in total value locked in DeFi, according to CoinGecko data.
DeFi, which exploded in popularity during the DeFi summer of 2020, has continued to grow in terms of total value locked in DeFi protocols and number of users. Last week, blockchain software technology company ConsenSys said that the number of monthly active users for its MetaMask crypto wallet — a gateway to accessing DeFi — had grown five times over the past six months and now surpassed five million.
DeFi refers to peer-to-peer financial services that are built on top of distributed networks with no central intermediaries. DeFi applications include stablecoins, blockchain-based lending and borrowing, margin trading, payments, insurance, gaming and non-fungible tokens (NFTs).
As the DeFi market matures, the industry is seeing a wave of regulatory focus on know-your-customer/ anti-money laundering (KYC/AML) requirements, in particular related to self-hosted wallets, according to a recent ConsenSys Q1 2021 DeFi report. Regulators are trying to keep pace with developments and provide clarity to users and companies, the report noted.
See related article: What’s in DeFi’s future — and what does it mean for traditional banks?
What is FATF and why what it does matters
In March, the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, released its Draft Guidance on a “risk-based approach to virtual assets and virtual asset service providers”. The guidance, which could be approved later this year, may pose an existential threat to the booming DeFi industry, some analysts say.
The FATF guidance, first released in 2019, placed anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on virtual assets and virtual asset service providers — similar to the requirements typically required by banks and financial institutions. The 2019 guidance also extended FATF’s Recommendation 16 — commonly known as the “travel rule” — to VASPs. The travel rule requires financial institutions to pass on certain information to the next financial institution, in certain funds transfers involving more than one financial institution.
According to FATF, the changes to its pre-existing guidance aim to maintain a level playing field for VASPs, based on the financial services they provide in line with existing standards applicable to financial institutions, as well as minimizing the opportunity for regulatory arbitrage between sectors and countries.
What FATF recommends matters because it sets out the global AML/CFT standards for regulators to implement, and countries are assessed every few years for their compliance with FATF’s AML/CFT standards.
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