Regulators from Europe, the United States and elsewhere are busily hammering out details on how to designate decentralized exchanges (DEXs) as “brokers,” transaction agents or similar entities that affect a transfer and cooperate with each other. The U.S. called for multinational cooperation in its executive order on responsible digital asset development, as did the European Union with its recent Financial Stability and Integration Review. And that is just what’s publicly accessible.
Behind the scenes, the whisper of regulation is getting louder. Did anyone notice that all the Know Your Customer (KYC) requirements have been laid on smaller centralized exchanges in exotic locations over the past two months? That was the canary in the coal mine. With the aforementioned designation and cooperation, DEXs will start to feel regulator heat soon.
Yes, regulations are coming, and the main reason why DEXs will hardly survive the coming storm is their proclaimed lack of ability to identify the users using and contributing to liquidity pools. In conventional financial circles, rendering services without proper KYC procedures is a big no-no. Not tracking identity allowed Russian oligarchs to use the Hawala payment service to anonymously move millions of dollars leading up to the war in Ukraine, so regulators are justifiably concerned about DEXs. For most DEX enthusiasts, KYC sounds like an insult, or at least, something that a DEX is fundamentally incapable of doing. Is that really the case, though?
Related: Crypto’s impact on sanctions: Are regulators’ concerns justified?
DEXs are actually pretty central
Let’s start with the anatomy of a DEX, and we’ll find that they aren’t even as decentralized as one may think. Yes, DEXs run on smart contracts, but the team or person that uploads the code on-chain usually gets special admin-level privileges and permissions. Additionally, a known, centralized team usually takes care of the front end. For example, Uniswap…
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