Compliance Risks in BRC-20 Decentralized Exchanges

Compliance Challenges in BRC-20 DEX

The primary risk facing the BRC-20 decentralized exchange (DEX) is compliance, specifically concerning Know Your Customer (KYC) and Anti-Money Laundering (AML) controls. OKX CEO highlighted that the DEX's current model, which lacks these controls, poses significant compliance challenges.

Operational Model and Risks

BRC-20 DEX operates differently from other systems because the Bitcoin network does not support smart contracts. Instead, it requires users to deposit tokens into a centralized wallet for swapping, which are then sent to users’ wallets. This model mirrors centralized exchanges and introduces compliance risk due to its reliance on centralized wallet management.

Need for KYC Implementation

Acknowledging the compliance risks, the BRC-20 team recognized the necessity of KYC to foster trust among users. Implementing KYC measures would align the DEX with industry standards and help mitigate potential regulatory issues.

BRC-20 Token Standard

BRC-20 represents a new token standard on the Bitcoin network, enabled by the Taproot upgrade. It serves as Bitcoin’s version of the Ethereum ERC-20 standard, allowing for the inscription of Ordinals. Despite its potential, the number of BRC-20 tokens remains limited compared to the vast array of Ordinals available.

Recent Updates and User Guidance

The BRC-20 team announced the ability for users to check their AirDrop eligibility using OG wallets. The team continues to work on expanding wallet registration, currently limited to certain categories. Users are advised to submit only wallet addresses used in initial purchase offerings to ensure proper eligibility tracking.

By addressing compliance risks and implementing KYC measures, BRC-20 DEX can enhance user trust and align more closely with regulatory expectations.