What Is the Regulatory Challenge of Enforcing KYC/AML within a Decentralized Derivatives Exchange (DEX)?

The primary challenge of enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) on a Decentralized Derivatives Exchange (DEX) stems from its lack of a central authority or intermediary. Traditional regulation mandates that centralized entities collect and verify user identity.

Since DEXs operate through smart contracts and allow peer-to-peer trading using pseudonymous blockchain addresses, there is no single party responsible for collecting this data, making compliance with global KYC/AML mandates virtually impossible without significant protocol changes.