When most people in the crypto universe imagine what a crypto trader looks like, they imagine a high-flying, government-fearing, algorithm-loving fanatic trading on a cutting edge DeFi platform. The trader wants to swap three ETH for some BAT to maximize investment yield based on an algorithm he believes is impervious to market trends. Unbeknownst to the trader, the major source of liquidity to the pool comes from the proceeds of the Mt. Gox hack, the sale of blood diamonds or heroin. Otherwise stated, the trader has accidentally stepped into a money laundering cesspool by accident.
Flash forward one year. The same trader, conducting the same transaction, has maximized his yield and now seeks to deposit his gains into a traditional bank that has started accepting crypto, or even, G-d forbid, a centralized exchange. Ultimately, the goal was always and continues to be to cash out into fiat.
Sadly, the trader finds out that all of his accounts are frozen.
In this hypothetical scenario, law enforcement and regulatory authorities have collaborated and filed a lawsuit alleging money laundering. Exchanging crypto on the DeFi platform that the trader used for the transaction has been blacklisted, and all wallets that have interacted with it have been red-flagged.
A question for another day is whether a fully DeFi exchange (DEX) actually exists or whether – despite the name – all exchanges have some form of centralization. For this hypothetical, we’ll concede that a centralized exchange has a Board of Directors and/or responsible shareholders, while a DEX has users who purchase governance tokens, run nodes, and vote on protocol changes.
The example above is a potential road that might become a simple realty in the future. Or is it? The nature of both centralized and decentralized exchanges, or virtual asset