DeFi Risks and Regulation Amid Growing Global Adoption
Decentralised Finance (DeFi) has seen rapid global growth by 2025. It offers innovative financial services without traditional banks. However, concerns have risen about its misuse for illicit activities, especially terrorist financing. This calls for urgent regulatory attention and risk management.
DeFi Growth and Global Adoption
By mid-2025, DeFi users reached 14.2 million wallets worldwide. The market is projected to grow from $30.07 billion in 2024 to $178.63 billion by 2029 at a 43% annual rate. India ranks third in DeFi value according to the 2024 Global Crypto Adoption Index. DeFi platforms use blockchain technology to offer services such as savings, lending, remittances, and insurance via smart contracts and decentralised applications.
How DeFi Works
DeFi operates without intermediaries like banks. Transactions happen peer-to-peer through smart contracts on blockchains. Users access DeFi via digital wallets that often require minimal or no identity verification. Multiple wallets can be created easily without providing personal details such as phone numbers or emails. This anonymity facilitates fast access but also creates vulnerabilities.
Risks and Vulnerabilities
The absence of traditional financial institutions and regulators makes DeFi prone to criminal misuse. Smart contracts are susceptible to hacking. Decentralised Autonomous Organisations (DAOs) govern DeFi projects, causing regulatory uncertainty and accountability issues. The borderless nature and anonymity of participants complicate the tracking and recovery of stolen funds. Illicit actors use multiple blockchains, crypto-mixers, and different wallets to mask their activities.
Regulatory Assessments and Challenges
Several jurisdictions have evaluated DeFi risks. The US Treasury states DeFi services must comply with anti-money laundering (AML) and counter-terror financing (CTF) laws but notes participant ignorance worsens risks. European authorities show money laundering and terror financing threats due to user anonymity. The UK’s 2025 National Risk Assessment also flags DeFi’s vulnerabilities. The Financial Action Task Force (FATF) reports ongoing struggles worldwide to apply AML/CTF standards to DeFi.
India’s Position and Future Strategy
India faces unique risks given its terrorism threats. Despite DeFi’s financial inclusion benefits, its borderless nature poses challenges beyond existing systems like JAM and UPI. Banning DeFi is impractical. Instead, India could adopt technology-driven, risk-based mitigation strategies. A sector-specific National Risk Assessment on DeFi, updated and publicly shared, would raise awareness and guide policy. Collaboration with industry stakeholders is essential to prevent DeFi misuse.
| Related | |
|---|---|
