Decentralised finance (DeFi) has seen explosive growth in recent years, with millions of dollars’ worth of digital assets being locked in DeFi protocols. While the decentralised nature of DeFi offers several benefits, it also brings unique challenges for compliance with regulations.
Here are some key ways how DeFi wallet providers can comply with key regulatory requirements and how wallet users can spot regulated Defi wallets:
Regulatory considerations for DeFi wallets
Most DeFi wallets must submit to the SEC (Securities and Exchange Commission), CFTC (Commodities Futures and Trading Corporation), and FPC (The Bank Of England’s Financial Policy Committee) either directly—if they are in the USA or the United Kingdom—or indirectly if the company’s location falls under a jurisdiction with legal/financial ties with the US.
Equally, though the UK is less strict with its cryptocurrency laws, UK DeFi wallets with crypto trading features might have to implement capital gains tax in their smart contracts.
Why Should You Get a Regulatory License Before Developing a DeFi Wallet?
Obtaining a regulatory license before developing a DeFi wallet can help ensure that you are operating in a compliant manner and reduce the risk of regulatory action. Depending on the jurisdiction in which you operate, you may be required to get a license or register with financial regulators in order to offer DeFi wallet services.
It can also help to establish credibility and build trust with users of your wallet, whether that be an Xdefi DeFi wallet or any other ones.. Users may be more likely to entrust their digital assets to a wallet that has taken the steps to receive regulatory approval, as it shows a commitment to compliance and legal responsibility.
Additionally, a regulatory license can help to protect your business and users in the event of any legal or regulatory issues. By operating in a compliant manner, you can minimise the risk of regulatory fines or other legal consequences.
How to stay compliant with DeFi wallet regulations
There are several steps that DeFi wallet developers and users can take to ensure compliance with regulations:
- Stay informed: It’s important to stay up-to-date on the latest regulatory developments affecting DeFi. This will help you understand the requirements you need to meet and ensure that your wallet complies.
- Understand your regulatory obligations: Different countries and jurisdictions have different regulations surrounding DeFi, so it’s important to understand your specific obligations. This may include registering with financial regulators, getting necessary licenses, and implementing certain controls to prevent money laundering and terrorist financing.
- Implement strong KYC/AML controls: Know Your Customer (KYC) and Anti-Money Laundering (AML) controls are important for ensuring compliance with regulations. DeFi wallet developers should implement robust KYC/AML procedures to verify the identity of users and monitor for suspicious activity.
- Work with legal counsel: It’s always a good idea to work with legal counsel to ensure that you are complying with all relevant regulations. They can help you understand your obligations and provide guidance on how to meet them.
- Consider implementing an independent compliance officer: Having an independent compliance officer can help ensure that your DeFi wallet is meeting all regulatory requirements. They can review your processes and procedures and identify any areas that need improvement.
How can users spot regulated DeFi wallets?
Although there are ways DeFi wallet users can determine a DeFi wallet’s financial compliance certificate legality, it might be too much stress for a complete beginner. You could instead first read the wallet’s terms & conditions and privacy policy to check the locations in which it offers services and the respective regulatory bodies of such areas.
After which, visit the respective regulatory bodies’ official sites and search for the DeFi wallet’s name in their registered archive. If the DeFi wallet name pops up, you’re good. If it doesn’t, try contacting the wallet directly for valid proof of their regulatory compliance with the respective third party.
Conclusion
Developing a DeFi wallet is hard enough with the insane technology, skill power and money investment it requires. With this hefty investment, the thought of the SEC, CFTC, or any other DeFi regulatory body hitting you with lawsuits or worse, barring users from using your wallet, is unbearable.
So, you must understand the regulations required in your jurisdiction and set things in motion to conform to them before you even begin developing your wallet. As a DeFi wallet user, you must also recognise licensed DeFi wallets by hunting for their compliance proofs data within the respective third-party records.
