GS 3 – Economy / Financial Technology
Context:
Decentralised Finance (DeFi) has witnessed rapid global adoption, offering financial services without traditional intermediaries. While it promotes innovation and financial inclusion, concerns about misuse for illicit activities, especially terrorist financing, call for urgent regulatory attention and risk management.
DeFi Growth and Adoption:
- Global Users: 14.2 million wallets by mid-2025.
- Market Size: $30.07 billion in 2024 → projected $178.63 billion by 2029 (43% CAGR).
- India’s Position: Third globally in DeFi value per 2024 Global Crypto Adoption Index.
- Services Offered: Savings, lending, remittances, insurance via smart contracts and decentralised applications (dApps).
How DeFi Works:
- No Intermediaries: Peer-to-peer transactions on blockchains.
- Access: Digital wallets, often with minimal or no identity verification.
- Anonymity Risks: Multiple wallets can be created without personal data, facilitating fast access but also creating vulnerabilities.
Risks and Vulnerabilities:
- Security: Smart contracts prone to hacking.
- Governance: DAOs governing projects create regulatory uncertainty and accountability issues.
- Anonymity & Borderless Nature: Difficulties in tracking, recovering stolen funds.
- Misuse: Illicit actors exploit multiple blockchains, crypto-mixers, and wallets to hide activities.
Global Regulatory Assessments:
- US: AML/CTF compliance required; user ignorance increases risk.
- Europe & UK: Highlight risks of money laundering and terrorist financing due to anonymity.
- FATF: Worldwide struggle to enforce AML/CTF standards on DeFi.
India’s Position and Strategy:
- Risks: High due to domestic terrorism threats.
- Challenges: Borderless DeFi operates beyond JAM and UPI frameworks.
- Policy Approach:
- Banning impractical; focus on risk-based mitigation.
- Conduct sector-specific National Risk Assessment on DeFi, updated and publicized.
- Collaborate with industry stakeholders to prevent misuse.
Significance for India:
- Balances financial inclusion and innovation with national security.
- Provides guidance for technology-driven regulatory frameworks.
- Enhances awareness among users, regulators, and industry for safer DeFi adoption.