Decentralized finance (Defi) has been a growing unit in the field of digital money, but it is facing a major regulatory test. As regulators diligently follow the pace of indigenous innovation, a lack of clarity at the regulatory level often leads to variability in new Defi projects.

Cointelegraph visited Alastair Johnson and mentioned the regulatory challenges facing the Defi sector. Johnson is a CEO called Nuggets identity Super Wallet, which is looking to provide users with tested territorial decentralized identities. One of the main regulatory tests, he says, is the group polarization of the Defi platform, which makes it harder and harder to comply with compliance management (AML) and know your customers (KYC).

While privacy is the cornerstone of Defi, regulatory compliance management is particularly important for safeguarding consumers and ensuring that the Defi platform operates within the scope of policy. "Regulatory compliance management will involve implementing the AML/KYC process," Johnson said. This can be done without compromising the security of personal information based on the use of non-associative DID and zero-knowledge proof. In addition, data encryption of auditable data can be carried out to protect the public key of participants, but it still complies with regulatory regulations.

He added: "the Defi platform needs to improve the technicality of personal privacy by combining zero-knowledge proof and homomorphic encryption, and still comply with regulatory requirements while maintaining the security of personal information."

According to Johnson, the Defi platform can take effective measures to ensure compliance with policies and regulations while maintaining its government procurement process. "the Defi platform can include decentralized identity solutions to authenticate customers while still maintaining blockchain technology," he explained. This solution can use distributed account identity agreements, such as decentralized identifiers (DID) and verifiable credentials (VC), for secure and privacy-guaranteed customer identification-so that the Defi platform can continue to innovate and improve while still complying with applicable policies and regulations.

When talking about the harm of regulation in this field, Johnson stressed that strengthening the supervision of DEFI units may produce positive and negative harm. While regulation can provide reasonable and legal protection against fraudulent thematic activities, too much and cumbersome regulation can obliterate indigenous innovation and reduce market competition, destroying the fragmentation and lack of trust of the DEFI ecosystem.

In the future, balancing personal privacy, regulation and government procurement processes will continue to be a constant test for Defi interior space. However, Johnson expressed the hope that by adopting privacy protection technology, implementing its own regulatory responses and working with regulatory companies, the Defi platform can find a way to find a balance between the privacy and blockchain technical standards of the regulatory compliance management needs and supporting points of the Defi ecosystem.