In October 2023, rumors began circulating on Crypto Twitter that Uniswap, the world’s leading decentralized exchange (DEX), was considering implementing a Know Your Customer (KYC) hook in its upcoming update. While the intent behind KYC is to combat financial crimes, its implementation in Uniswap could pose a significant threat to cryptocurrency’s promise of financial inclusion.
KYC is a standard practice in traditional finance, requiring businesses, particularly financial service providers, to verify the identity of their customers to assess their risk and compliance levels. While KYC can be effective in curbing money laundering, terrorism financing, and tax evasion, it often excludes high-risk populations as a whole.
For instance, Syrians who are not residents in developed countries often face difficulties in completing KYC processes due to sanctions imposed on their country. This is why decentralized finance (DeFi) has emerged as a preferred option for many unbanked and underbanked populations worldwide who are excluded from traditional financial systems.
The implementation of KYC in Uniswap could mean that vulnerable populations, like Syrians, would be unable to provide liquidity on the platform and potentially even be restricted from trading using Uniswap. If this practice is adopted by the broader DeFi ecosystem, it could effectively shut the doors of DeFi to Syrians, pushing them out of the financial system that was once hailed as their savior.
While the desire of DeFi protocols to adhere to regulations and achieve high levels of compliance is commendable, it should not come at the expense of vulnerable populations or the core principles of cryptocurrency, which include financial inclusion and economic integration. DeFi’s promise lies in its ability to provide access to financial services for those who are traditionally excluded from the traditional financial system. Implementing KYC measures that disproportionately affect high-risk groups would undermine this very promise.
To strike a balance between compliance and inclusivity, DeFi protocols like Uniswap should consider alternative approaches to KYC that do not unduly exclude vulnerable populations. These could include risk-based KYC, a tiered KYC system that assesses the risk of each transaction and applies KYC requirements accordingly. Or lobbying, as the DeFi sector proved it capability of lobbying and effectively working with regulators, it should direct these efforts to develop KYC frameworks that are tailored to the unique characteristics of DeFi, and do not create unnecessary barriers to access for marginalized groups.
