Many people may think that decentralized finance (DeFi) and know-your-customer (KYC) standards are not compatible. They would be mistaken. Protocols must include the capability to run as DeFi but also potentially with KYC along with know-your-transaction (KYT) included. Adam Vaziri, CEO of Blockpass, and Ankitt Gaur, founder and CEO of EasyFi, joined host Alex Batlin, Founder & CEO, Trustology, to discuss the intersection of compliance and DeFi.
Blockpass is a digital identity and identity verification platform, which the startup does in both an off-chain and on-chain environment. Adam came into the bitcoin space in 2013, which is when the idea for a company to mitigate the impact of regulation on the cryptocurrency industry was formed. It was also created to ensure that when regulation does kick in, it doesn’t result in total consolidation in the industry where there are only one or two players.
Users create self-sovereign identities: They create an account that is managed by them and give permission to share data with other vendors and service providers. So Blockpass is not just a KYC vendor. They’re an ID company first and foremost. On the KYC side, Blockpass enables verification in a more comprehensive manner so users who reverify with them can build their reputation and strengthen their ID over time.
EasyFi’s Ankitt has an engineering background. (6:58) At the end of 2019, when Compound began to gain popularity, he watched as DeFi ballooned from a couple of million dollars to a couple of hundred million dollars. He and his partner initially thought it was a fad but eventually went deeper and “got their hands dirty” to realize that this DeFi thing can really be one important industry for solving a bigger capital problem — the idle capital problem.
EasyFi started as a lending platform but the vision has since been expanded.
(7:32) “There is an enormous supply of capital available in the world but the correct deployment of capital for creating decent yield is a big problem to be solved. And that’s where we started with EasyFi. So the idea was EasyFi finances the proper deployment of idle capital with that vision…The vision we’re working toward is there is an enormous amount of supply capital available, even in the DeFi space itself, but we are trying to create avenues for its correct deployment, which means working with the consumption side of the capital. So all our initiatives, all our steps, are aligned toward that bigger vision,” said Ankitt.
So it’s a lending protocol working with the adoption side of capital rather than just facilitating the supply part. EasyFi provides uncollateralized lending for microloans.
EasyFi and Blockpass Collaboration
Blockpass offers a KYC protocol that enables on-chain KYC business. Considering that EasyFi works in uncollateralized loans, they needed to know the customer to whom they were lending to. Rather than capturing this information themselves, they turned to Blockpass. The KYC information doesn’t come into play unless the borrower defaults on the loan, at which time they bring in the lawyers.
(11:30) Considering that EasyFi issues microloans, there is not a great deal of risk for the supply. And the risk of default gets spread across 20 different lenders rather than just one lender bearing all the loans. In the future, they will be working with credit default swaps and various partner companies for insurance on these microloans that are being issued. It’s a typical trade-finance lending model but on-chain, Ankitt explained.
There are a few partnerships involved. BlockPass creates the ID, Chainlink feeds the ID information on-chain, Matic Network is the blockchain enabling it, and EasyFi is the protocol enabling the adoption of it. Blockpass originally approached Chainlink to provide the on-chain KYC. It was something had nothing been done before.
(13:43) “Obviously this is something that is a completely greenfield, so to speak. So we will see where it leads from here,” said Adam.
Through the interdependence of these systems in the ecosystem, someone can probably get an uncollateralized loan at a better rate than they could get in other markets with the transparency that comes with DeFi. This includes some level of KYC that gives assurance to the lender that in the event of a default, there will be some sort of recovery. And there is no hoovering up of user data by the providers, considering that data is not provided at the onset; it’s provided on a contingency, stressed Adam.
Onchain ID & Fees
If EasyFi had chosen Ethereum to facilitate the loans, the fees across the process — from providing collateral, to depositing it, to taking the loan, to repaying it, to withdrawing collateral — was close to USD 135. And that was when ETH was trading at around USD 450. On Matic, it’s closer to USD 0.10. Even if the Matic price goes up, the difference between the costs you face on Ethereum vs. here is enormous, noted Ankitt.
That’s not to say that working on Layer 2 and the Matic product doesn’t come without its own set of challenges.
(18:36) “Even today, when we are nine months into DeFi and things are Layer 2 solutions are coming up, there’s a small challenge in onboard and offboarding from one chain to another. So the industry still requires an efficient bridge, an efficient mechanism for moving their assets cross-chain,” said Ankitt.
The target audience of this lending solution may not be very educated. They might be in the Philippines or in India and have neither the appetite nor the intellect to move assets from Ethereum through a bridge to Matic. As a result, it needs to be a click of a button, said Ankitt, adding that they are working with the Matic team to automate the process as much as possible and as fast as possible.
Regulation and DeFi
Another component to regulation is know-your-transaction, or KYT, to make sure that the funds are not being directed toward some nefarious activities. The culture of DeFi is about defiance, Adam noted. So it’s difficult in that environment that has captured the DeFi movement to introduce the notion of compliance.
23:29 “To an extent, you could argue that DeFi is a reaction to compliance. If you listen to the numerous podcasts about it, the sound of KYC sends shivers down everyone’s spine. They almost put it as the antithesis of DeFi,” said Adam.
What they are introducing is traditional finance on DeFi rails to an extent. They are improving upon traditional finance with DeFi rails, and whether users like it or not, that involves some element of regulation and accountability. The KYC is a facilitator of something that would otherwise not exist. You don’t have Compound doing collateralized loans because they don’t do KYC. EasyFi, on the other hand, makes it possible, but there are certain conditions attached.
(25:00) “But the way that you enforce those conditions needs to be proportionate and as mentioned before, the fact that the vendor is not hoovering up the data. But it’s done in a nuanced way that people don’t feel that they’re being abused like on Facebook,” said Adam.
This offering is also about introducing the notion of extendability. To do that, you need compliance, which should appeal to a certain culture if there is an interest there. By doing so, you invite other people into your ecosystem that were not necessarily interested in contracts for difference before, for example, but were more interested in the nuts and bolts of trade finance. It becomes a bigger market in terms of individual participants.
The next phase, said Ankitt, will be about some degree of gatekeeping the money in and money out components to give assurance to institutional players who are worried about black and white money in the same pool.