Can a Truly Decentralized Stablecoin Comply with AML/KYC Regulations?
Full compliance is challenging for truly decentralized stablecoins because they lack a central authority to enforce KYC/AML checks on users. Regulations typically require an identifiable entity responsible for monitoring transactions and reporting suspicious activity.
Some stablecoins employ "hybrid" models with on-ramps/off-ramps that are centralized and perform checks, but the core protocol remains permissionless. The regulatory landscape is evolving, with some proposals suggesting that decentralized autonomous organizations (DAOs) or protocol developers could be held accountable, though this is legally complex.
Glossar
AML/KYC
Due Diligence ⎊ Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols within cryptocurrency, options trading, and financial derivatives represent a tiered system of verification designed to mitigate systemic risk and ensure regulatory compliance.
KYC/AML
Compliance ⎊ The mandatory adherence to Know Your Customer and Anti-Money Laundering regulations imposed upon centralized exchanges and regulated derivative platforms.
Decentralized Stablecoins
Collateralization ⎊ Decentralized stablecoins mitigate systemic risk inherent in centralized models through varied collateralization mechanisms, often employing over-collateralization to maintain peg stability.
Regulations
Oversight ⎊ Regulations governing cryptocurrency, options trading, and financial derivatives initially emerged from existing securities laws, adapted to address novel technological and structural characteristics.