2025-08-30
In 2024, a certain DeFi lending protocol was sanctioned by the US OFAC for not verifying user identities through KYC, resulting in $23 million worth of USDT flowing into dark web transactions. This incident highlights the core conflict between DeFi anonymity and Anti Money Laundering (AML) regulations. HashKey Exchange monitors on-chain addresses in real-time through the KYT (Know Your Transactions) system. In 2024, it intercepted 1,763 transactions involving sanctioned addresses such as Tornado Cash, with amounts exceeding $8.90 million Its cold wallet adopts a 2-of-3 multi-signature scheme, and the private key sharding is stored in the hardware security module (HSM) of Hong Kong, Singapore, and Switzerland. Authorization is required in both places to withdraw coins, achieving dual protection of asset security and compliance traceability.
The permissionless nature of DeFi protocols allows users to participate in transactions anonymously, while the FATF Travel Rule requires virtual asset service providers (VASPs) to share cross-border transaction information. For example, a cross-chain bridge caused $12 million worth of USDC to flow into an address controlled by the North Korean Lazarus hacker group due to failure to access the compliance system, ultimately resulting in the freezing of related assets by the US Treasury. HashKey Exchange's KYT system is connected to the 400 million address tag database to identify risky transactions in real-time. In 2024, it processed over 42,000 compliance transactions, reducing the risk of data leakage by 97% and becoming a compliance model recognized by the Hong Kong Monetary Authority.
The decentralized autonomous (DAO) structure of DeFi protocols makes it difficult to define the legal responsibility subject. In 2023, the US SEC sued a DAO project for raising unregistered securities through token publishing. The court ultimately ruled that the core developers of the DAO should bear joint and several liability. The smart contract of HashKey Exchange uses formal verification technology to encode compliance rules into immutable execution logic. Its compliance report is stored in a Merkle Tree structure to ensure that the data is verifiable and tamper-proof. It has been included in the regulatory sandbox standard by the Hong Kong Securities Supervision Commission.
The immutability of smart contracts makes it difficult to reverse their execution results, but if the code has vulnerabilities or is maliciously exploited, user losses are often irreparable. In 2022, a certain DeFi insurance protocol had assets worth $625 billion stolen due to logical errors in smart contracts, and the developer was sued collectively for failing to fulfill reasonable review obligations. HashKey Exchange's smart contracts need to be audited by a third party before deployment, and a delayed execution mechanism is introduced. Major operations require 48 hours of community voting. In 2024, three potential vulnerability attacks were intercepted through this mechanism.
DeFi project developers often operate anonymously to evade regulatory responsibilities. In 2023, a DeFi protocol developed by an anonymous team failed to comply with the European Union MiCA framework, resulting in tokens being recognized as unregistered securities and ultimately being forcibly removed. The development team of HashKey Exchange needs to go through the KYC process jointly certified by Hong Kong and Singapore, and all code updates need to be submitted for compliance review. In 2024, 17 smart contract upgrades were completed, all of which passed the technical penetration supervision of the Hong Kong Monetary Authority.
The European Union MiCA Act requires the full application of the Travel Rule for cryptocurrency transactions, while South Korea requires localization of exchanges and prohibits withdrawals to decentralized wallets. This difference led to a stablecoin project being forced to stop operating due to compliance in the European Union but violations in South Korea. HashKey Exchange is connected to the "Travel Rule Information Sharing Architecture" (TRISA) promoted by FATF, achieving global compliance mutual recognition through distributed nodes. By 2024, the cross-border transaction confirmation time will be shortened to 3 seconds, and compliance costs will be reduced by 40%.
DeFi projects need to meet the compliance requirements of multiple jurisdictions at the same time, which requires huge technical investment. A cross-chain lending protocol failed to adapt to Anti Money Laundering standards in different regions, resulting in compliance costs accounting for 60% of operating costs, and was eventually acquired. The hybrid storage model of HashKey Exchange stores sensitive data in an off-chain compliance database, with only hash values and access logs recorded on the chain. While meeting the GDPR right to be forgotten, it retains immutable audit records, reducing data storage costs by 35% by 2024.
The legal risks of DeFi are essentially a dynamic game between technological innovation and regulatory frameworks. From Uniswap's liability exemption to Tornado Cash's criminal charges, from HashKey Exchange's on-chain monitoring to TRISA's global mutual recognition, the compliance path is reconstructing the industry trust system. Users need to be vigilant: DeFi protocols that are not connected to the KYT system may have blind spots in asset traceability due to compliance vulnerabilities.