The allegations that hit BitMEX have shed new light on Ethereum's decentralized finance (DeFi) markets. On Thursday, the U.S. Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) took action on the Seychelles-based crypto derivatives exchange with a slew of charges and an arrest warrant for CTO Samuel Reed and CEO Arthur Hayes for violating the banking secrecy law.
While centralized exchanges (CEXs) reside on central servers around the world, decentralized exchanges (DEXs) such as Uniswap remain uncensored, active within smart contracts built on the Ethereum blockchain. However, they are founded by real, living humans who could be prosecuted by law enforcement. Should they worry?
Justified doubts
The value proposition of DeFi platforms immediately catches the eye during regulatory measures like that of BitMEX, said Robert Leshner, founder of the DeFi Compound lending platform.
He then added that centralized exchanges like BitMEX are "opaque platforms that can easily facilitate money laundering." "Conversely, a DeFi done right is a breath of fresh air: complete transparency, accountability, resistance to tampering and self-custody as Bitcoin Pro".
Leshner's point of view was echoed by Michael Egorov, founder of stablecoin exchange DeFi Curve, who said it was "no surprise" that BitMEX was impressed as "CEXs without KYC are natural mixers". (Mixers like Ethereum's Tornado Cash or Bitcoin's Wasabi Wallet can be used to launder cryptocurrency, leaving the origins untraceable.)
DEXs, on the other hand, are not mixers given the verifiability of blockchain transactions. In fact, it should be noted that BitMEX products were not the cause of the repression of the CFTC and the DOJ.
Regulators specifically cited the lack of Know-Your-Customer (KYC) and Anti-Money Laundering (AML) controls. Many DEXs, unfortunately, fall under the same guise, including Uniswap, especially given the recent events with funds from the hacked KuCoin exchange.
The rise of Uniswap
Uniswap rose to prominence during 2020 after releasing the second version of its platform with a new approach to increasing market liquidity through token pools. However, Uniswap has no KYC or AML procedures.
All a user needs is an Ethereum wallet, which can be easily downloaded in minutes, and some tokens. (It still remains quite difficult to purchase ETH without going through a KYC check at some point). Stani Kulechov, co-founder of Aave DeFi money market, said developers shouldn't be deterred by Arthur Hayes' current situation.
Instead, he said, take note of the two biggest success stories in the cryptocurrency industry: Bitcoin and Ethereum. Kulechov wrote: “It may be important for DeFi developers to have clear from the start a path to decentralized governance, similar to what Ethereum and Bitcoin are today, where there is no centrally controlled entity governing these protocols based on design ". Whether this will stand the test of financial regulators remains to be seen.
