DeFi, or Decentralized Finance, is an alternative to conventional financial services. They are based on the use of smart contracts on blockchain platforms such as Ethereum. According to financial technology expert Sergey Kondratenko, this platform opens up the possibility of decentralized access to various financial services.
The specialist notes that today DeFi protocols offer the following financial services that are provided without government supervision:
● Providing loans using digital assets as collateral, such as in the MakerDAO system.
● Trading cryptocurrencies without centralized control, an example of which is the PancakeSwap platform.
● Carrying out decentralized exchange operations of ERC-20 tokens (Ethereum standard) on the DeFi Swap platform.
● Implementation of exchange between various platforms within the DeFi ecosystem, for example, through the InstaDApp service.
● Creation of investment deposits using the Convex Finance platform.
On the one hand, the absence of a regulator creates freedom for financial transactions. But on the other hand, it makes the DeFi system unstable and vulnerable to network attacks.
Sergey Kondratenko is a recognized specialist in a wide range of e-commerce services with experience for many years. Now, Sergey is the owner and leader of a group of companies engaged not only in different segments of e-commerce, but also successfully operating in different jurisdictions, represented on all continents of the world. The main goal is to drive new traffic, create and deliver an online experience that will endear users to the brand, and turn visitors into customers while maximizing overall profitability of the online business.
Sergey Kondratenko: global problems of DeFi
The expert states that open data indicates a constant increase in the total volume of funds placed in DeFi protocols (TVL, Total Value Locked). In May 2018, this figure was $150 million. Each subsequent year, until 2021 inclusive, the amount changed in the following range: $500 million, $950 million, $236 billion.
Sergey Kondratenko notes that 2022 turned out to be a difficult year for the crypto industry. During that period, there was a significant decrease in the volume of funds in DeFi protocols (TVL). This was followed by long-term economic stagnation in the decentralized finance segment.
As of January 1, 2023, the total DeFi market size was $43.7 billion, representing a drop of approximately 80% from the all-time high (ATH). In April, this figure reached $60 billion. And six months later, TVL dropped below the initial level.
In November, as the broader cryptocurrency market recovered, liquidity in the DeFi sector began to rise again. However, by the end of 2023, the total TVL of the segment was estimated at $60 billion.
Along with price stagnation, 2023 was constantly accompanied by news of hacker attacks on DeFi platforms. Sergey Kondratenko, citing reports from DeFi Llama, reports that the total damage suffered by users of decentralized applications due to hacker attacks reached more than $5.69 billion. The specialist adds to the fact that cross-chain bridges became one of the main targets of the attackers. total losses in this subsegment exceeded $2.7 billion.
Recently, there was also a high-profile incident with the hacking of Heco Bridge and the disclosure of the HTX exchange hot wallet. Damage is estimated at $110 million.
In the fall of 2023, surges in hacker activity were also recorded. They successfully carried out attacks on DeFi protocols. The result of such illegal actions was financial losses of $308 million in September and $331 million in November.
Sergey Kondratenko: the role of DeFi in potential money laundering and terrorism financing
The threat of the use of cryptocurrencies by terrorist organizations highlights the serious vulnerability of the current financial system. According to Sergey Kondratenko, such criminal groups successfully use digital assets to raise significant funds. At the same time, they bypass traditional banking systems, avoid international sanctions, and measures to combat money laundering and the financing of terrorism.
This method of financing poses a direct threat to global security and stability.
The expert reports that in the two years before the specific attack, cryptocurrency wallets associated with Hamas and Palestinian Islamic Jihad received more than $130 million in digital currency. These funds include significant amounts received shortly before the attack took place.
Sergey Kondratenko notes that such alarming facts indicate that cryptocurrency has become a suitable source for financing terrorist groups. At the same time, the expert assumes that the known figures represent only a part of the real amount of funding. This situation demonstrates how uncontrolled trading of cryptocurrencies is carried out through DeFi protocols. This leads to global problems and even financial crimes, which makes the financial world think about regulating the flow of digital payments and DeFi services.
A balanced approach to DeFi regulation: innovations, challenges, and international cooperation – Sergey Kondratenko
DeFi is distinguished by the absence of a central governing body, which fundamentally distinguishes it from traditional financial systems. Sergey Kondratenko emphasizes that decentralization poses significant challenges to compliance with anti-money laundering (AML) laws within the DeFi market. The specialist suggests considering the most basic of them:
The technical and operational side of DeFi is characterized by decentralization and anonymity. This creates challenges for traditional anti-money laundering (AML) systems. The absence of a central authority makes it difficult to implement standard procedures.
DeFi-specific innovations that are in their early stages may be hampered by over-regulation. The specialist expresses concern that too strict regulations could slow down the growth and development of innovative financial technologies.
The global nature of cryptocurrencies and DeFi poses regulatory challenges in individual countries. Effective international efforts are needed to regulate this area.
- There is also a concern that applying traditional banking rules to DeFi could cause market disruption, pushing some operations into the shadows. This is contrary to the purpose of introducing rules and can lead to the opposite effect,- Sergey Kondratenko comments on one of the scenarios for the development of the situation.
The expert is confident that to effectively regulate the activities of DeFi organizations, taking into account the problems and risks that have arisen, a balanced and detailed approach is required. This approach, according to Sergey Kondratenko, includes the following elements:
- The international cooperation:
● Development of global standards and practices for effective regulation of DeFi.
● Cooperation between countries to resolve cross-border transactions and jurisdictional issues.
- Normative base:
● Creating unique regulations that will take into account the specifics of DeFi and promote innovation.
● Support flexible and adaptive rules to facilitate the development of innovative financial technologies.
- Public-private partnership:
● A collaborative effort between government agencies, regulators, and DeFi representatives to develop effective AML strategies.
● Assist in creating an environment that will promote cooperation between parties.
- Information policy:
● Conducting training seminars for consumers and DeFi market participants on the risks and need for AML compliance.
● Awareness of legal requirements and responsibilities in the field of decentralized finance.
- Technology-based solutions:
● Leveraging cutting-edge technologies to create sophisticated DeFi monitoring and analysis tools.
● Developing technology solutions that help identify suspicious activity without compromising privacy or interfering with legitimate transactions.
Discussions about implementing traditional AML standards in the DeFi space include issues of security, regulatory fairness, and the balance between innovation and oversight. Sergey Kondratenko is convinced that despite the relevance of regulating DeFi to counter the use of cryptocurrencies by terrorist groups, it is also necessary to dive deeply into the features of the decentralized structure of these financial platforms. He is confident that only an integrated approach will make it possible to find a compromise between regulation and support for innovation and guarantee security and stability in DeFi.
