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Crypto analytics firm CipherTrace has released a new compliance tool for DeFi projects and DEXs, which will help them follow the OFAC sanctions list, the firm said in a press release on 9 April.

According to the announcement, CipherTrace developed its DeFi Compli tool to help DeFi projects and decentralized exchanges (DEXs) be compliant with the Office of Foreign Assets Control’s (OFAC) sanctions list. The new compliance tool was developed on Chainlink, a decentralized oracle network that connects real-world data with blockchains, which allows CipherTrace to run an oracle node and provide relevant data to projects. The crypto analytics firm said in its press 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.”

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By setting up an API call to the oracle, developers of DeFi smart contracts and DEXs can create a function on their platforms that prevents OFAC-sanctioned addresses from sending funds. OFAC is a U.S. financial intelligence agency that enforces economic sanctions, often for drug smuggling, terrorism or nuclear weapon proliferation.

CipherTrace also said that DeFi activities such as swapping tokens, borrowing and lending still fall within existing regulations. To defend its statement, the firm and pointed to a 2020 speech by the SEC’s digital asset head Valerie Szczepanik, where he said that securities, banking, lending and AML laws apply to these activities. The CEO of CipherTrace, Dave Jevans, said in the press release:

“Ensuring that sanctioned addresses cannot use DeFi to fund weapons of mass destruction programs should be among DEXs’ chief concerns right now. The time for DeFi to adopt compliance solutions is now, or risk facing the consequences.”

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