If you have basic knowledge of Defi means, you might wonder what Defi KYC is. In this article, we will discuss the importance of Defi KYC. Let us start with the concept of Defi in brief.
What does Defi mean?
Decentralized finance, or Defi, is a public decentralized blockchain network where financial products are available for investors. Blockchain-based Defi software enables peer-to-peer transactions for lenders, borrowers, buyers, and sellers. It eliminates the need for a middle for performing transactions.KYC mean Know Your Customer, Which is the process of authentication.
Why is Defi KYC necessary?
The universe of Defi is rapidly expanding, with new projects revealed every month. When the world was first introduced with decentralized finance, it aimed to open up new doors in the financial sector by providing banking services to 1.7 billion unbanked people.
However, despite its rapid growth, the investor acceptance rate in Defi is low due to fraud and a lack of protection. In the financial sector, the protection of investments and investors is critical. The Defi introduces new solutions such as project audits and “know your customer” (KYC) initiatives to protect projects and typical investors.
Know-Your-Customer (KYC) ensures that Defi providers collect and record as much information about their investors to stop money laundering and other fraudulent financial activity.The project auditing procedure examines the smart contracts and assesses the project’s risk. The combination of these methods provides investors and Defi projects with security.
Importance of Defi KYC and why it is necessary
1. Trust Building on Defi: The audit and KYC combination is critical in establishing trust in the Defi system and current and future Defi projects. The Defi system is still in its early stages of development. In contrast to client trust in the old financial framework, it must build investor trust. A project audit is conducted before the project’s debut to assure investors of the project’s trustworthiness. For simple accessibility and openness in Defi, the audit reports are usually placed on the upcoming project website. When investors’ faith in Defi projects and the Defi space grows, it will eventually encourage them to invest in Defi projects and the Defi space.
2. Auditing: In the crypto realm, auditing ongoing and forthcoming projects is critical. In the case of all new computer programs, the risks of coding issues are higher. If the project’s coding contains an error, it will directly influence the investor’s security and project financing. If the code is not correctly secured, hackers will be more likely to steal funds from investors. There’s also the possibility of assets being accidentally locked in smart contracts. It’s expected that the assets or tokens will never be recovered, resulting in a loss for the typical investor. Auditing the projects is required to assure complete safety for the investors.
3. Protection from Financial Fraud: In recent years, the fraud related to crypto-assets has increased. Due to the KYC procedure, it would be an easier task to trace the malicious intentions of the investors. KYC gathers the investor data and can stop the individuals from committing fraudulent acts like scamming other users’ accounts.
Importance of the Defi KYC:
1. Restrict the chances of money laundering
2. Protect the Defi project from legal issues related to financial fraud, like money laundering issues, tax, etc
3. Minimizes the participation of scammers in the token offerings, thereby protecting the project from the first stage
4. It covers the project, existing or upcoming, with a negative reputation.
Regulatory Authority for Defi KYC
FATF’s (Global Money Laundering and Terrorist Financing Watchdog) attention has been drawn to the popularity and application of Defi use cases due to the surge in Defi platforms and solutions. Even though FATF is not a regulatory body, it has established standards for using Defi solutions with KYC.The FATF rules are intended to serve as examples for national governments regarding legislation. It highlights the use of Defi in conjunction with KYC to combat the use of Defi instruments for money laundering and other criminal activities.
In conclusion, weak KYC could impact the safety norms of the Defi projects, and investors could fall prey to the spammer’s attacks. Defi KYC is essential for raising funds using the Defi platform and increasing investors’ trust in this platform.
Team Blockchain Shiksha.©
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