Blockchain by HIPTHER meetup covers regulated DeFi

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Regulated decentralized finance (DeFi) is the talk of the town, and the latest edition of the “Blockchain by HIPTHER” virtual quarterly meetup jumped straight into it. Questions such as how to achieve privacy without compromising anonymity, how to navigate the complex regulatory landscape, and what is required for enterprise adoption were all addressed during the interactive discussion.

• Blockchain by HIPTHER meetup
• DeFi no longer just a playground for coders
• Next agenda: Zero Knowledge Proofs
• Growing modularization approach in DeFi
• Making DeFi enterprise and regulator-ready

The meetup featured three speakers from the blockchain world: Dr. Dean Rakic, CEO and Chief Scientist at Blockcontrol; Thomas Giacomo, Lead Payment Solutions at Teranode Group; and Andrei Cosma, Partner at Baciu Partners. Rakic brought technical insights to the table while Giacomo contributed from an enterprise adoption perspective, and Cosma from a legal point of view.

Defi regulations

The first topic raised by moderator Maria Arnidou, Events Marketing Director at HIPTHER, was regulations. She pointed out that DeFi is no longer just a playground for coders and cypherpunks, and asked how infrastructure is being built to meet compliance expectations without compromising core benefits.

“Indeed, DeFi I think, is evolving from experimentation to becoming a critical financial infrastructure,” said Giacomo to kick off the discussion.

He went on to highlight how compliance requirements stemming from the Markets in Crypto-Assets (MiCA) regulation require the underlying infrastructure to be real-time, auditable, and compliant, as opposed to periodic reporting.

“We are highly scalable to be sure all the transactions are auditable and verifiable,” he said.

“We make sure we embed core compliance capabilities to ensure compliance at scale,” Giacomo added.

Cosma broke down the two main frameworks relevant to the discussion, MiCA and the AML regime, which, combined, are literally hundreds of pages.

He confirmed that the anti-money laundering (AML) laws allow DeFi users to be identified at the point of entry, which aligns with what DeFi proposes.

From a more technical perspective, Rakic focused on data custodian layers and shifting to layer zero. He stated that interoperability between the various services and stakeholders is essential. We need clear, immutable records of who controls which data and how it moves across the chains and legacy systems, as well as how it is verified and audited.

“We can now use on-chain rails but keep a consolidated view of player identity, affordability, and source of funds on a compliance backbone,” he said.

“We need to keep the data and business logic where it belongs…without losing some automation and data control,” he added.

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Zero-Knowledge Proofs

The next topic on the agenda was Zero-Knowledge Proofs (ZKPs).

“ZKPs have already graduated from an academic curiosity to a compliance and partnership tool,” said Rakic.

He emphasized the importance of having ZKPs on the zero layer for regulators and confirmed that ZKPs can provide mathematically verifiable answers to yes-or-no questions, such as, “Is this customer KYC’d?” Is this wallet linked to a sanctioned party? Is this player over 18 and within their limits?

ZKPs provide “an immutable audit trail at layer zero without needing to see raw data itself,” he explained.

For banks, Rakic said, we can open DeFi-based products or embed crypto features to onboard clients without broadcasting their private data that is on-chain. With ZKPs, we can view the proof and risk score without sharing the data. We can unlock cross-border DeFi without blowing privacy or compliance.

He confirmed that they are entirely in line with GDPR, but there is a bit of a challenge on the AML side and other areas of law, as the requirements may vary from one jurisdiction to another. For example, this may involve having certified or original documents versus pure data in the case of a trial.

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Modularization

Next up for discussion was the growing modularization approach in DeFi and whether this is helping or complicating DeFi efforts.

From a legal perspective, Cosma said a modular approach makes sense for scalability, but the entity holding the MiCA license could be liable for something that’s not held by itself. Also, if a module is outside the EU, this could pose complications as MiCA is an EU framework.

From an enterprise perspective, Giacomo confirmed that modules are more flexible and costs are lower, plus enterprises can choose modules that are already aligned with regulatory requirements vs. having to build from scratch.

“The challenge that we see is interoperability,” he said, either within a specific chain or in between chains.

Rakic said the modularity trend is powerful, but only if the entire system shares a common data custody and interoperability substrate.

“Different systems should talk the same language of the data transactional layer, that’s the point of this plug and play,” he said.

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Enterprise, regulator ready

To wrap up the panel, the final topic was how to make the DeFi stack enterprise and regulator-ready. Arnidou asked where to start—identity, scalability, governance, or somewhere else?

Giacomo said all of the above are key.

“This tech is about exchanging value, and to exchange value you need to identify who is exchanging value,” he said.

“If you really want to have real-time interoperability and if you want to have adoption, the scalability component is very important,” he added. We want to decrease dependency on additional layers, he said.

In terms of governance, Giacomo said we need more transparency in the foundation and “we need to bring more credibility to the underlying blockchains.”

From a legal standpoint, Cosma pointed out that laws are often outdated in relation to technology; therefore, it is best to establish principles rather than detailing how the technology works. Don’t put down too many rules, or else it will delay tech or stop it altogether, he warned.

If Rakic could redesign just one part of the DeFi stack to make it truly enterprise- and regulator-ready, he said he would not start at the application layer; instead, he would start with data custody and interoperability.

“Today, identity, governance, and compliance sit on the top of the foundation that was never designed for long-term regulator audit or cross-jurisdiction data control,” he said.

Rakic’s redesign would create a standard layer, or a zero-layer, where we can build identity, a standard data custody, and interoperability layer.

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Watch: Decentralized Finance Isn’t About Anonymity Anymore