DeFi Staking Protocols Exposed to Illicit Funds, Posing Challenges for Institutional Investors

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DeFi Staking Protocols Exposed to Illicit Funds, Posing Challenges for Institutional Investors

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A recent report from digital asset infrastructure provider Northstake, shared with DL News, reveals that decentralized finance (DeFi) protocols, which pool users' Ether for staking, are at risk of being connected to funds involved in money laundering, scams, sanctioned addresses, and malicious actors. While the proportion of these illicit funds is small, it still poses challenges for institutional investors who must comply with strict regulations. The study examined three of the top Ether liquid staking protocols and found that each had encountered funds directly tied to illicit activities, as well as those linked to high-risk crypto exchanges and gambling sites that do not require users to undergo know-your-customer checks. Sebastian Heine, Northstake's chief of risk and compliance, believes that the exposure may be underestimated. Although the report does not disclose the protocols analyzed, Lido and Rocket Pool, the two largest liquid staking protocols, did not provide immediate comment. These protocols stake depositors' Ether and offer liquid staking tokens in return, which collect staking rewards and can be used as collateral for DeFi loans. The Ether liquid staking market has seen significant growth this year, with an increase from $5.8 billion to $14.5 billion in deposits held by Lido, the leading Ether liquid staking provider. While institutional stakers must carefully consider the associated risks, retail investors, who are not affected by potential exposure to illicit funds, have shown great interest in these protocols.