This paper analyses the blockchain and crypto-asset techniques used for money laundering and terrorist financing in order to evaluate how effective the current policies and measures are in intercepting anomalous transactions. Moreover, it discusses the applicability of the current AML regulatory framework to decentralized finance (DeFi), in which there are no obliged entities.
Some significant complexities need to be resolved in order to build an effective system for monitoring money laundering risks in DeFi. The technological solutions based on smart contracts and zero-knowledge proofs that are currently being developed by the market could make it possible to extend the identification requirements to the entities involved in the transactions in DeFi. However, they would not allow ongoing monitoring of the overall operations (customer due diligence), making it at least difficult to detect potentially suspicious transactions.
