Galaxy Digital is building a KYC/AML system to let institutions use DeFi without breaking compliance. The framework may split pools into permissioned and permissionless.
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Galaxy Digital is building a KYC/AML framework designed to let institutional investors trade on decentralized protocols without running afoul of anti-money laundering rules, the firm said.
DeFi was built for permissionless access. Anyone with a wallet can swap tokens and lend. For a pension fund or an asset manager, that openness creates a compliance headache. Traditional finance requires every counterparty to be vetted and every transaction monitored. DeFi does none of that.
Galaxy, which has operated at the intersection of crypto and traditional finance for years, said compliance challenges are the main barrier keeping institutional capital out of DeFi. The Financial Action Task Force has issued guidance that extends due diligence requirements into the DeFi space, and most protocols are not built to meet those obligations.
The specifics of Galaxy's system are not public. No technical details or launch timeline have been disclosed. The firm's research team has discussed the need for hybrid models that blend centralized and decentralized finance, sometimes called CeDeFi.
Other firms are also working on compliance tools. Mastercard recently tested a single-audit stablecoin compliance system with Borderless.xyz.
A KYC/AML layer would create tiered access. Some liquidity pools might be limited to verified participants while others stay open to anyone. That could fragment liquidity rather than consolidate it, producing a two-speed DeFi ecosystem.
Galaxy's initiative is a sign the industry is moving toward accommodation with regulators, not confrontation. The direction is clear even if the details are not.
No launch date has been set.
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