Crypto Intelligence Firm CipherTrace Is Using Chainlink to Help DeFi Apps Follow OFAC Sanctions Requirements

Cryptocurrency intelligence firm CipherTrace is reportedly using Chainlink to release CipherTrace DeFi Compli: a compliance solution enabling decentralized or non-custodial exchanges (DEXs) and other DeFi apps to adhere to the Office of Foreign Assets Control (OFAC) sanctions requirements.

As part of its decentralized finance (DeFi) solution, CipherTrace has introduced a DeFi compliance Oracle service on Chainlink in order to make “relevant” compliance data accessible “directly on-chain for easy integration with existing DeFi frameworks.”

As mentioned in a release:

“Given half of all crypto hacks in 2020 were from DeFi protocols and exchanges, the regulatory spotlight is shining brighter on DeFi. Additionally, funds stolen from centralized exchanges are increasingly being laundered through DeFi, as was the case in the $281M KuCoin hack.”

CipherTrace CEO Dave Jevans noted that the $40 billion locked in DeFi protocols places an even larger target on DeFi exchanges and protocols. Jevans added that ensuring that “sanctioned” crypto addresses can’t use DeFi to fund weapons of mass destruction programs “should be among DEXs’ chief concerns right now.”

He explained that CipherTrace’s DeFi Compli regulatory compliance oracle on Chainlink “can support DeFi protocols in achieving the compliance needed to ensure crypto’s long-term viability.”

Head of Partnerships at Chainlink Labs Daniel Kochis, said that even though there’s been considerable  growth that DeFi has experienced during the past year, many DeFi protocols are still “limited in their ability to leverage compliance tools.” Kochis added that by introducing their own Chainlink node, CipherTrace aims to bring a compliance Oracle solution to DeFi, “making integrating compliance data as simple as possible for DEX and other protocols.”

As Valerie Szczepanik, Head of the Strategic Hub for Innovation and Financial Technology at the U.S. Securities and Exchange Commission (SEC), cautioned at the September 18 Parallel Summit:

“We’ve seen structures that purport to enable users to lend money, earn interest, borrow money, exchange, take positions; these are all financial activities, and they are likely subject to various laws already, including securities law, potentially banking and lending laws—definitely AML/CTF laws.”

Jevans added:

“Szczepanik’s statements suggest imminent enforcement of sanctions as well as AML and CTF laws. The time for DeFi to adopt compliance solutions is now, or risk facing the consequences.”

The CipherTrace Chainlink node will be able to transmit CipherTrace’s API data onto any blockchain or distributed ledger tech (DLT) network and it can “digitally sign” CipherTrace’s data on-chain to “generate strong cryptographic assurances that it came from CipherTrace and has not been tampered,” the release noted.

As stated in the announcement, CipherTrace’s “highly-refined” AML data will be “ported directly to smart contracts.” With this data on-chain through Chainlink, smart contract developers everywhere can “build more advanced and data-driven products that are suitable for users, institutions, and governments alike,” the release explained while adding that this is “a major step towards bringing DeFi applications to the masses.”

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