By Jeff Owens, co-founder of Haven1, 23 January 2024

The report on the risks and opportunities in decentralized finance (DeFi) recently released by the US Commodity Futures Trading Commission (CFTC) highlighted concerns around the “unique threats posed by DeFi”, which include fraud, market manipulation, data breaches and oracle exploitations. At Haven1, we’re fully aligned with the CFTC on the risks posed by DeFi and the burning need to solve them and we believe there are several solutions that can significantly mitigate many of the threats that plague this space.

When it comes to consumer protection, the CFTC highlights digital identity and the “calibration of privacy in DeFi” as a solution to the rampant fraud risk. However, digital identity has been a contentious topic in the DeFi space, with many arguing that it goes against the very ethos of decentralization. We believe there is a way to combine identity verification with privacy and this is the framework that sits at the heart of Haven1.

Users perform identity verification with a licensed and regulated third-party compliance partner that adheres to local data protection and privacy laws. Then, the compliance partners mint a soulbound NFT associated with the user's wallet containing anonymized pieces of metadata about the user while ensuring that all funds deposited to the user's wallet address are sanction-screened and follow proper anti-money laundering procedures. Because each wallet has an identity associated with it, this acts as a deterrent to would-be fraudsters – stealing assets on Haven1 would be akin to robbing a bank without a mask or gloves – while also allowing us to return stolen funds in the event fraud does occur.

Ours is just one solution, though. Digital identity verification can be facilitated by decentralized identifiers (DIDs) and other innovative solutions that remain true to the ethos of DeFi. However, without some form of identity verification, DeFi will never meet the high standards of regulators like the CFTC and will fail to attract mainstream users. We agree with the CFTC that, “as DeFi grows and becomes more integrated with the broader financial system”, it’s more important than ever to focus our efforts on making it a safe environment for all actors involved. This is the only way to support the exciting innovations DeFi promises.

But we have a long way to go. The first week of 2024 saw nearly $100 million lost in DeFi hacks across three protocols, on top of $1.8 billion lost in 2023. The risks outlined by the CFTC are real and the security solutions must be implemented urgently. It’s time to bring safe DeFi to the masses.