The problem of DEX regulation and how to solve it

Want to know what problems are facing the regulation of decentralized exchanges? In what ways could they be solved?

We tackle it in this article, but first, we break down what an exchange is:

What is a cryptocurrency exchange?

Cryptocurrency exchanges are online tools and platforms that allow you to buy bitcoin or other cryptocurrencies quickly and easily. They are digital spaces similar to trading platforms, but focused on cryptocurrencies.

Since 2009, numerous exchanges have appeared for the purchase, sale and exchange of cryptocurrencies. An accumulation of platforms accessible to an increasingly wide audience of all ages.

The most delicate part of the process occurs when users make deposits, withdrawals or purchase cryptocurrencies with FIAT money (such as, for example, the Euro). This is where the need to control and manage the verification of the identity of users comes in, with the aim of avoiding money laundering or terrorist financing, among others.

This is why it is important to know the differences between a decentralized exchange vs. a traditional exchange.

Centralized Exchange

It is the trading platform where cryptocurrencies are bought and sold in a regulated manner. Therefore, it requires identity verification of its users.

Decentralized Exchanges (DEX)

It is an automated and autonomous platform, in many cases only with programming. The problem is that they can be somewhat insecure if they do not meet the required compliance standards.

Why is DEX regulation a problem?

In recent months, centralized exchanges have been adding KYC to their platforms.

This is because regulation is becoming more demanding than ever. For their part, DEXs are debating whether to preempt identity verification or not. After all, much of the appeal of DEXs is that users are anonymous.

The problem of anonymity in decentralized exchanges can be solved with identity verification and KYC.

The reality is that banks or financial institutions are currently obliged to know and verify the identity of their clients. Due to this need, Know Your Client (KYC) measures have emerged; a mechanism that allows complying with the obligation of due diligence in customer identification. 

KYC consists of collecting a series of user data such as full name, address or date of birth. But it is not enough to provide this data, because it is also important to prove that you are who you say you are. This is where documentary proof, such as an ID card, must be presented.

KYC also involves risk analysis of each client, as well as possible monitoring of suspicious transactions. Behind it are organizations such as the European Central Bank or the FATF, which follow instructions to monitor possible fraudulent transactions. Therefore, as the market grows, KYC is being applied more and more in the cryptocurrency sector.

Currently, a good part of the most secure cryptocurrency exchanges or trading platforms already ask their customers for personal data or even restrict the operations they can perform if they do not verify their digital identity. 

The latter is something that clashes with the freedom that existed previously, with the anonymity, decentralization and deregulation of the cryptocurrency market. After all, these digital currencies emerged to be independent of financial authorities.  

But the regulation is for the safety of investors, to prevent the illicit use of this market and to trace transactions that may be the result of a crime. 

In spite of everything, there are users who are still attracted by the use of DEXs. In fact, the best decentralized exchange to date is MDEX (BSC), as it is the largest decentralized exchange in the world. 

Despite the fact that the best decentralized exchanges are still fighting the battle, regulation is near and the solution is to incorporate KYC in the cryptocurrency sector. What do you think?