KYC Uniswap integration deployed by PureFi, but not everyone is convinced

Zero-knowledge proof (ZK-proof)-based compliance protocol PureFi has launched its Know Your Customer (KYC) and Anti-Money Laundering (AML) integration for the Uniswap decentralized exchange (DEX).

According to a recent announcement shared with Cointelegraph, PureFi claims that its ZK-proof-based KYC and AML integration for Uniswap helps address security and compliance concerns at the protocol level. While the integration can be implemented as part of any Uniswap v4 pool, it was deployed as part of the PureFi DEX Uniswap implementation, replacing standard interfaces with custom compliance routers.

The new decentralized finance (DeFi) platform also introduces level-based verification that scales checks based on transaction volume. Checks go from basic identity and sanctions verification at low volumes to comprehensive KYC with risk-based wallet scoring and real-time monitoring at high volumes.

Related: Know Your Peer: The pros and cons of KYC

Not everyone is on board

Hedi Navazan, the chief compliance officer at DEX aggregator developer 1inch Labs, told Cointelegraph that “relying on transaction volume thresholds for progressive compliance enforcement is not, in my view, the right approach.” She shared concerns that such thresholds “fail to capture the broader, more complex risk profile that DeFi and financial ecosystems demand.” She explained:

“Risk assessment should be holistic, considering a variety of factors, not just a singular indicator like transaction volume.”

PureFi CEO Slava Demchuk said that compliance is usually implemented on the front-end (the user interface) and not in the underlying smart contracts on the back-end. The implementation leaves protocols “vulnerable to interface bypass” by bad actors interacting with smart contracts directly. He explained the advantages of the latest PureFi implementation:

“Through the Uniswap v4 hook, we address a long-standing industry-wide blind spot. DeFi needs a middle ground to preserve privacy but align with regulatory standards.”

So far, the exchange is fully operational for the UFI/BNB trading pair; this implementation is meant to be a blueprint on which to build. The modular design allows offchain updates to compliance rules, centralizing the part that must be changed as regulations evolve to allow easier adaptation.

Related: Abracadabra.Money’s GMX pools hacked, $13M lost

DeFi’s long battle with compliance

Navazan said, “in DeFi, we need a more tailored approach.” According to her, solutions developed for centralized finance are not suitable for its decentralized counterpart due to different priorities:

“Mechanisms that function in centralized finance do not work in the decentralized space, which prioritizes privacy and autonomy,” she added.

Navazan explained that this contrast is “a critical aspect for the crypto and DeFi compliance issue.” She raised concerns that while mixers and privacy coins are on regulators’ watchlists, the use of ZK-proofs might help:

“If zero-knowledge proofs can provide compliant-friendly privacy, regulators might be more likely to allow for privacy-preserving financial instruments.”

She further highlighted that regulatory adoption is “the biggest challenge so far” for DeFi, with regulators equating “financial transparency to seeing every transaction and identity.” She noted that ZK-proofs changed that model and asked if regulators would adopt proofs instead of raw data.

ZK-proofs are a family of advanced cryptographic protocols that allow mathematically proving an aspect of some piece of data without revealing the underlying data. For example, they can show that an entity is not sanctioned and is allowed to use a financial service — without providing the full documentation and private data and while remaining anonymous.

A correct ZK-proof implementation ensures that no additional data is leaked beyond the fact that the proven claim is valid. Those proofs are also efficient data-wise since they can be significantly smaller than the considered data, making them better suited for onchain storage if necessary, as happens with ZK-rollups.

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