Technological and Legal Barriers to Anti- Money Laundering and Compliance Enforcement in Decentralized Finance: Case Studies from the European Union

Abstract

DeFi is revolutionizing the financial world by providing open, approval-free, peer-to-peer ways to transact, thanks to blockchain. DeFi allows more financial opportunities and difference, but it also presents problems for AML and compliance due to how it is decentralized, uses pseudonyms and is available in different countries. It describes in detail the barriers faced in DeFi within the EU due to technology and regulations. It discusses why traditional laws are often unsuitable for DeFi, leading to questions about regulations, regulatory boundaries and any gaps in enforcing them. Studying specific cases in the EU, the article explores the journey of AML regulations and points out some of the obstacles inside the regulatory sphere due to swift changes in decentralized technology. Moving on, it highlights that it is difficult to enforce the law in decentralized networks. The study puts forward a group of guidelines in policy, law and technology to improve AML compliance in DeFi without hindering its advancements. For example, EU regulators may align their rules for member states, create better frameworks for liability of decentralized market actors, utilize regtech and encourage teamwork between regulators, technologists and industry members. Based on the findings, rigid and uncooperative regulations will not only fail to tackle issues in DeFi but also slow down innovation. Thus, this article offers ideas for future discussions and rules on safeguarding money matters in the growing world of decentralized finance.

Keywords; Decentralized Finance, Anti-Money Laundering, Compliance Enforcement, European Union, Regulatory Challenges, Legal Barriers, Blockchain Technology, Financial Regulation, Regtech, Cross-border Cooperation