IDEX, the world’s leading decentralized exchange, is set to switch operations to include restrictions for trading in certain jurisdictions and enforce know-your-customer (KYC) requirements.
The ‘unpopular’ development comes only days after IDEX allegedly began to exclude residents of the state of New York in what appears as part of its efforts to become compliant.
The platform describes the move as merely “pragmatic decentralization,” through its dominant position in the decentralized exchange market means every step may attract a little more scrutiny.
IDEX’s move towards regulatory compliance
IDEX’s operator, Panama-based Aurora Labs, announced its intention to transition to KYC/AML compliant platform on November 1.
It stated that its decision was informed by increased regulatory oversight and recent statements attributed to a CFTC commissioner. That meant it needed to have in place a robust KYC and AML framework, though it would ensure there is “as little friction as possible for users.”
Before the announcement, reports alleged that IDEX had already restricted access to its platform to users from Iran and North Korea.
And after announcing that it would block New York IP addresses, the company has said that the restrictions will encompass more regions like Washington State, Cuba, Syria, and the Crimea region.
But it appears it’s not only users in these regions that need to worry about IP address blocking. The decentralized exchange will now require its users to complete a verification process and undergo KYC and AML checks, similar to what most traditional exchanges like Coinbase and Binance do.
IDEX was never really decentralized
Explaining the new shift, Aurora Labs CEO Alex Wearn wrote that there is a spectrum between decentralization and centralization and that user-friendly offering services meant the system or application could be “subject to regulation.”
He argued that Aurora (IDEX)’s aim is to create a financial system that is fully-decentralized, though that meant it needs to have more control through centralized approaches.
As such, he said that “IDEX will be implementing KYC/AML policies to comply with sanctions and money laundering laws.”
IDEX has emphasized that users on its platform have far much control over their funds than with a conventional exchange and that this will continue to be the case through the use of off-chain order-books for transactions and on-chain smart contract when settling trades.
Aurora Labs oversees the transactions and on-chain settlement, enhancing user experience. However, this means the company is legally responsible for all that transpires on the exchange.
That, according to Wearn, means that people need to “call a spade a spade,” conceding that IDEX isn’t really decentralized, to begin with.
“So, we’ll call a spade a spade and address the semantics… IDEX is not a ‘DEX’ in its current state. At this point, the best way to describe IDEX is as a ‘non-custodial’ or ‘hybrid-decentralized’ exchange.”
Explaining further, Wearn said that it is conceivable to say that there’s no DEX that is truly decentralized. He added that any project that has “a website, off-chain order book, or known team,” cannot claim to be ‘fully decentralized.’
He also referenced CFTC Commissioner Brian Quintenz’s statement that developers of smart contract should be held responsible for their usage, maintaining that no decentralized exchange could claim to be censorship resistant.
Most traders who use decentralized exchanges do so for three reasons, with one of them primarily overshadowing the other two. Users go for DEXs because it allows them to retain control of funds which mitigates against potential theft.
They also prefer a DEX because it offers them access to the desired range of tokens that haven’t made it to a top exchange. Thirdly, and more importantly, it’s for privacy – no KYC check is a big puller for traders that don’t fancy disclosing their identity to authorities or risks of identity theft.
With IDEX turning to full KYC/AML compliance, the element of privacy would be out of the equation.