The 1inch Network Identifies Hundreds of High-risk Addresses

The 1inch Network is a DeFi platform and liquidity aggregator that optimizes cryptocurrency trades across multiple liquidity sources. Known for its deep liquidity, multi-chain support and competitive exchange rates, 1inch boasts more than 11 million users and overall trading volume exceeding $400 billion.

Undefined but evolving regulatory landscape

Until recently, the focus from regulators has been on how to regulate the centralized cryptocurrency space—exchanges, custodians, brokers and other crypto businesses. However, as we move into a truly decentralized space, where more transactions occur peer-to-peer and entirely on blockchains, the challenge for regulators, policy makers and builders alike is how to ensure that lawful users are able to transact in a secure and private manner while, at the same time, mitigating the risks from illicit actors who seek to take advantage of the promise of disintermediated software. 

While some regulators have suggested that DeFi platforms that engage in financial services have anti-money laundering obligations today, with a few exceptions, there is very little regulation or guidance for DeFi platforms. This means that many DeFi platforms today are left to decide how best to address compliance.

Overcoming uncertainty through proactive compliance

1inch is among a cohort of DeFi protocols proactively adopting compliance measures and partnering with blockchain intelligence providers such as TRM to comply with sanctions, limit the ability of threat actors to use DeFi for illicit activities and help shape the future DeFi regulatory environment.

Since many users interact with DeFi protocols anonymously, one of 1inch’s top priorities is to identify AML and sanctions risks around its users so that it can limit its exposure to risky actors and funds of potentially illicit origin. To that end, in August 2022, 1inch integrated TRM Wallet Screening—TRM Labs’ on-chain AML and sanctions risk-detecting tool—into 1inch dApp and 1inch Wallet to routinely screen user wallets. The dynamic list created as a result of the integration is then used to cross-check the end-users interacting with 1inch API to the list of high-risk actors previously documented by 1inch dApp or 1inch Wallet.

TRM’s API allows 1inch to query data about an address or transaction’s on-chain exposure to illicit or illegal activity, including categories such as: sanctions, terrorist financing, hacked or stolen funds, known hacker groups, ransomware, scams, human trafficking, and child sexual abuse material (CSAM). Based on the query, TRM’s API returns a risk score to indicate:

• If an address is owned, controlled by, or associated with a sanctioned entity or other form of illegal activity (“ownership risk”)
• If an address has transacted with a sanctioned address or one that is associated with other forms of illegal activity (“counterparty risk”)

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Based on the risk factors detected by TRM’s API around any specific wallet address, 1inch systematically restricts the user from connecting to 1inch dApp, 1inch Wallet or 1inch’s API or conducting any transactions via these services. If a user believes their address has been restricted by mistake they can then request to go through a manual review.

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In 1inch’s Fusion mode, the interface’s compliance measures go further. Unlike with legacy swaps, in Fusion mode, swap transactions are executed by resolvers or professional market makers. As automated third party applications, resolvers execute swaps automatically via a decentralized process.

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Because of this, 1inch obliges resolvers to undergo a verification process consisting of customer identification, as well as wallet screening checks, in order to obtain the right to resolve Fusion mode swaps. TRM’s API screens wallets while KYC/KYB on resolvers is performed by a third-party service—a web3-focused identity verification and KYC/KYB/AML processes provider.

1inch reinforces financial security: TRM's API screens millions of wallets, blocks hundreds of high-risk addresses, and leads the way to a safer DeFi system

1inch’s implementation of compliance tools across its products and services is transforming its visibility of financial crime risks associated with its users and their funds as well as the overall security of its platform.

Since August 2022, TRM’s API has screened wallets across various 1inch products, which resulted in the interface restricting certain addresses from accessing its services. The volume of wallets screened by TRM’s API on a monthly basis is steadily rising. 

TRM Wallet Screening has sharpened 1inch’s understanding of the types of risks associated with funds and users connecting to its products. Among the various risks detected by TRM’s API, those linked to child sex abuse material vendors, scams, and hacked and stolen funds were the most prevalent among the addresses that 1inch ultimately decided to be barred from accessing its products. 

1inch is currently exploring additional ways to uplift its compliance program to protect its business from processing tainted funds and contribute to a safer DeFi system as the regulatory environment takes shape. 

As more entities contemplate their response to increased scrutiny and evolving regulatory obligations in DeFi, 1inch’s proactive approach is a reminder of how industry can lead the way to help define its future operating context and pave a path of continued compliance improvement.