DeFi Risks and Regulation Amid Growing Global Adoption

Decentralised Finance (DeFi) has become a disruptive phenomenon in the international banking system, providing banking services to lend, save, remit, and insure without banks. In 2025, DeFi wallets had 14.2 million users globally and the market was expected to grow by 178.63 billion in 2029 compared to 30.07 billion in 2024. India is the third most popular DeFi country in the world, which means that it is becoming highly relevant.

How DeFi Functions

DeFi is based on the blockchain and smart contracts to get peer-to-peer transactions. Services are accessed using the digital wallets by the users, and they are not always identity-checked. This is not only ensuring accessibility and speed, but it also opens anonymity that may be abused.

Major Risks and weaknesses.

• Money laundering and terrorist funding can be misused using anonymity.
• Smart contract hacks place the users at risk of financial loss.
• Government by Decentralised Autonomous Organisations (DAOs) creates regulatory uncertainty.
• The cross-border complexity complicates the process of tracking an illegal activity, notably crypto-mixers and multi-wallet arrangements.

Global Regulatory Concerns

The authorities of the world underline the risks of DeFi:

• AML/CTF compliance by US Treasury is necessary, but on the other hand, users are not alert.
• Regulators in Europe emphasize vulnerability based on anonymity.
• The 2025 National Risk Assessment of UK includes DeFi as one of the threats to money laundering.
• FATF recognises onward global efforts in the implementation of AML/CTF standards to decentralised platforms.

India's Strategic Approach

India is at increased risks because of the terrorism issue. Although DeFi can include everybody in the finance sector, it is impossible to prohibit it. A better approach involves:

• The National Risk Assessment of DeFi.
• Application of technical based monitoring and risk based regulation.
• The stakeholders in the industry will be consulted to develop compliance structures.

Conclusion

The fast development of DeFi provides innovation opportunities but is a major threat of criminal abuse. There must be a balanced control that will maintain innovation but overcome weaknesses. In the case of India, active risk testing and cooperation with the industry will be the most important factor in making sure that DeFi enhances, not weakens the financial system.