Volume 59

Decentralized Finance: Identity Protection and Economic Opportunity for Both Good and Bad Actors

by Alyssa Rose Domino

Imagine a world in which a person could take out and then pay off millions of dollars of loans without providing their personal identification. This world exists for anyone who has an internet connection. Anyone with internet access can reach the decentralized finance (DeFi) ecosystem, an online network of financial products and services that allows people to lend, borrow, buy, and sell directly with others. The network of transactions on a DeFi platform are visible in real time, but each user transacts under a pseudonym. As such, two key features of the DeFi ecosystem are that 1) it promises user pseudonymity and 2) there are no central authorities or institutions that can deny exchanges or user access to a transaction. DeFi removes the middlemen from transactions, allowing any individual to exchange with any other individual anywhere in the world. DeFi countervails widespread trends toward a data-centric economy. In traditional finance where banks are the intermediaries, customers must provide personal data before opening an account or applying for a loan. Even beyond the banks, personal information is widely available. That information may dictate other aspects of a person’s economic reality, such as their performance on an employment screening test, how much they pay for a seat on an airplane, and the types of products advertised to them on their social media platform of choice. While our data drives an increasingly large amount of our personal and collective economic activity—contributing to discrimination11 and information silos—pseudonymous DeFi transactions make it harder to discriminate against certain users on DeFi platforms. But this comes at a potentially high cost. When anyone in the world can invest and exchange on DeFi platforms, the networks become vulnerable to malicious actors ranging from attackers who short currency to terrorist groups that use DeFi for crowdfunding and idea proliferation. This demands tighter regulation of DeFi and strategies for patrol and prosecution of national security threats enabled through these networks. This Essay argues that while there are many advantages to the extensive adoption of the DeFi ecosystem, it is necessary to consider national security threats that arise as people around the world increasingly transact on this market. The existence of DeFi threatens national security because bad actors can illicitly finance weapon sales and use the identity-free globalized network to expand their influence. While certain elements of DeFi improve law enforcement’s ability to track, predict and prepare for attacks, other elements of the digitized financial system help bad actors evade detection by law enforcement domestically and internationally. Part I of this essay will provide a brief introduction to decentralized finance. Part II will demonstrate the relationship between DeFi and U.S. national security interests. Part III will discuss the strategies to mitigate national security risks that accompany DeFi, with an emphasis on how access to, and accountability over, personally identifiable information shapes threats of criminal activity.

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