KYC integration in Uniswap v4 sparks community controversy

Community Controversy Arises over KYC Integration in Uniswap v4

Author: Ana LianGuaiula Pereira, Cointelegraph; Translation: Song Xue, LianGuai

The newly introduced hook provided in the open-source directory of Uniswap V4 has caused controversy within the crypto community. This hook allows users to undergo Know Your Customer (KYC) checks before trading on the pool.

A user from X (formerly Twitter) criticized the hook, pointing out the possibility of decentralized finance protocols being whitelisted by regulatory authorities:

“As I have explained in all my posts in the past year: it started with providing ‘KYC options’ for liquidity providers. Then it eventually evolved into a ‘whitelist’ database approved by regulatory agencies, stored off-chain. Then, transactions without ‘KYC’ verification will be flagged as illegal terrorist financing.”

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Basically, a “hook” is a tool that allows developers to add custom code without changing the program’s main structure. In Uniswap V4, this hook will enable developers to utilize KYC (Know Your Customer) verification in decentralized finance protocols.

Financial institutions use KYC programs to verify customer identities and assess associated risks. One of the main objectives of KYC is to detect money laundering and terrorist financing activities.

The code for the KYC hook can be found on GitHub. Source: GitHub.

The KYC hook is an optional feature launched by community developers of Uniswap V4 in its directory. KYC verification is done through non-fungible tokens (NFTs). According to another user (User X), the hook is specifically designed for liquidity providers and could be useful for projects that must comply with specific regulatory requirements in certain jurisdictions:

“It seems you don’t quite understand how it works. Firstly, it is specific to liquidity providers. Some projects may want to operate within the legal framework. Secondly, hooks can be created by community developers. You’re attacking something that contributes more to the ‘true decentralized finance’.”

Governments worldwide are closely monitoring decentralized finance (DeFi) protocols and transactions. Recently, the Group of Twenty (G20), composed of the world’s major economies, accepted a roadmap proposed by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) to strengthen cryptocurrency regulations.

Uniswap V4 introduces customizable hook functionality, expected to be launched in early 2024 but limited to entities approved by governance bodies only.

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