Should DEXs Be Worried After BitMEX? DeFi Founders Weigh In

Uniswap has change into Ethereum’s most prominent DEX.
(Marlon Garcia/Creative Commons, modified by CoinDesk)

Would possibly additionally nonetheless DEXs Be Skittish After BitMEX? DeFi Founders Weigh In

The surprising takedown of BitMEX has cast a brand recent mild on Ethereum’s decentralized finance (DeFi) markets.


On Thursday, the U.S. Commodity Futures Trading Rate (CFTC) and Division of Justice (DOJ) served the Seychelles-primarily based crypto derivatives substitute with a slew of costs, engrossing CTO Samuel Reed and trying for out CEO (and admitted DeFi degen) Arthur Hayes for violating the Financial institution Secrecy Act. 

While centralized exchanges (CEXs) stay on central servers in comparatively about a municipalities across the globe, decentralized exchanges (DEXs) like Uniswap remain uncensorable, present inside neat contracts on high of the Ethereum blockchain. Nonetheless, they are based by right, are dwelling humans who’re subject to the whims of law enforcement businesses. Are they next?

The cost proposition of DeFi platforms turns into readily obvious one day of regulatory crackdowns equivalent to with BitMEX, Robert Leshner, founder of DeFi lending platform Compound, informed CoinDesk in an electronic mail.

He labeled centralized exchanges equivalent to BitMEX as “opaque platforms that can effortlessly facilitate money laundering.”

“In distinction, DeFi carried out factual is a breath of unique air – entire transparency, accountability, tamper-resistance, and self-custody,” he acknowledged, relating to the undeniable truth that DeFi transactions exist for all to see on Etherscan. “Within the arrival months and years, regulators will likely embrace the virtues and advantages of DeFi.”

Leshner’s gape used to be echoed by Michael Egorov, founder of DeFi stablecoin substitute Curve, who informed CoinDesk that it used to be “no shock” BitMEX used to be taken down provided that “CEXs with out KYC are pure mixers.” (Coin mixers like Ethereum’s Twister Cash or Bitcoin’s Wasabi Wallet will also be faded to launder cryptocurrency, leaving its origins untraceable.)

DEXs, alternatively, are no longer mixers given the auditability of blockchain transactions.

“ETH exchanged to USDT on Uniswap retains USDT as ‘dirty’ and traceable to the supply as ETH used to be (and the the same applies to Curve, or Balancer, or the relaxation identical),” Egorov acknowledged. “It would possibly perhaps perhaps employ time for regulators to cherish doubtlessly, however I contain their job would were great simpler if the entire exchanges were DEXs.”

Lingering doubts

In spite of DeFi’s obvious virtues, the $11 billion DeFi market pales in comparison with the upper CEX market. Furthermore, DeFi is in total left copying the final notice CEXs wish to present.

Lately, BitMEX’s most neatly-most traditional product found its procedure into DeFi markets with cryptocurrency derivatives substitute dYdX. The Andreessen Horowitz-backed firm launched its Bitcoin Perpetual Contract in Would possibly additionally, followed by a perpetual contract denominated in ether in August.

Adore BitMEX, dYdX blocks users from a few jurisdictions including the United States. “We imagine we are in compliance with all applicable guidelines in the markets we serve,” dYdX founder Antonio Juliano informed CoinDesk in a Telegram message.

BitMEX’s products themselves were no longer the cause for the CFTC and DOJ clampdown, on the opposite hand. Regulators namely cited lack of formal know-your-customer (KYC) and anti-money laundering (AML) checks.

According to the DOJ criticism:

“As an instance, in or about Would possibly additionally 2018, Arthur Hayes, the defendant, used to be notified of claims that BitMEX used to be being faded to launder the proceeds of a cryptocurrency hack. BitMEX didn’t put in force a formal AML policy primarily based on this notification.”

Many DEXs fall under the the same guise, including Uniswap, especially given most modern events with funds from the hacked KuCoin substitute.

Uniswap’s upward thrust

Uniswap rose to prominence over the route of 2020 after releasing the second version of its platform with a unusual employ on rising market liquidity thru token swimming pools.

Yet Uniswap doesn’t have KYC or AML procedures. All a user wants is an Ethereum wallet – effortlessly downloadable in minutes – and some tokens. (Nonetheless, it stays comparatively subtle to take ETH with out going thru a KYC test one day.) Traders that faded the platform earlier than September were even rewarded with a profitable airdrop of Uniswap’s recent UNI governance token.

Uniswap founder Hayden Adams declined to comment for this memoir.

Stani Kulechov, co-founder of the Aave DeFi money market, informed CoinDesk that builders shouldn’t be daunted by Arthur Hayes’ present scrape. As a replacement, he acknowledged, employ into consideration the crypto industry’s two finest success reports: Bitcoin and Ethereum.

Wrote Kulechov:

“For DeFi builders it will also merely be relevant to have from the originate a clear course in direction of decentralized governance similarly what Ethereum and Bitcoin is recently, where there’ll not be this sort of thing as a centrally controlled entity governing these protocols by have. Within the discontinue also take into accout who you are building for and build apt products for all stakeholders.”

Whether that can stand the take a look at of U.S. monetary regulators stays to be viewed.

Brady Dale contributed reporting.

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