Harnessing AI for DeFi compliance: Navigating the future of regulatory integrity

Jaco Janse van Rensburg and Kobus Southon explore how AI can open doors to the future of decentralised finance.

As we know, decentralised finance (DeFi) has transformed how financial services operate, enabling borderless, automated, and disintermediated transactions. Built on blockchain technology, DeFi protocols allow users to borrow, lend, trade, and invest without traditional intermediaries. This change of access brings opportunities for innovation and financial inclusion, but as with all opportunities, it also introduces some heightened risks for compliance officers.

The very attributes that make DeFi attractive – pseudonymous participants, high transaction volumes, global reach, and the absence of centralised oversight – complicate efforts to meet global anti money laundering (AML), countering the financing of terrorism (CFT), sanctions, and consumer protection obligations. For regulators and compliance professionals, the challenge is not only to monitor these new systems, but to do so in ways that are verifiable, proportionate, and adaptable to evolving rules.

AI, when responsibly deployed, has the potential to serve as a valuable ally to compliance professionals and regulators around the world. By enhancing monitoring, automating reporting, and interpreting complex regulatory requirements, AI can support compliance teams in building trust with regulators while ensuring that DeFi continues to evolve responsibly.

Smarter regulatory reporting

Regulatory reporting in traditional finance already demands significant resources. Institutions must aggregate transaction data, identify suspicious patterns, and produce reports that meet the expectations of multiple supervisory authorities. In DeFi, these challenges have drastically multiplied. Transaction flows occur continuously across multiple jurisdictions, often involving pseudonymous wallets, and manual oversight quickly becomes unsustainable.

AI can alleviate this burden by:

• Automating data collection and reporting: AI systems can integrate directly with blockchain ledgers, extracting relevant data and compiling regulator-ready reports with speed and accuracy.
• Detecting suspicious activity in real time: Algorithms can identify red flags such as layering, use of mixing services, or sudden spikes in transaction volumes. These insights enable compliance teams to act quickly rather than reactively.
• Adapting to evolving requirements: As regulators introduce new obligations, such as the Financial Action Task Force (FATF) Travel Rule or regional frameworks like the EU’s Markets in Crypto-Assets (MiCA) regulation, AI systems can dynamically adjust reporting structures, reducing the need for burdensome manual updates.

For compliance officers, these capabilities translate into reduced reporting delays, stronger defences against regulatory penalties, and increased confidence that disclosures will withstand scrutiny. Importantly, they also demonstrate to regulators that DeFi platforms are taking proactive steps to embed compliance into their operations.

By enhancing monitoring, automating reporting and interpreting complex regulatory requirements, AI can support compliance teams in building trust with regulators while ensuring that DeFi continues to evolve responsibly.

Oversight of smart contracts

At the heart of DeFi are smart contracts, which are self-executing code structures that automate financial activities. However, while their transparency and efficiency are key to DeFi’s appeal, the caveat is that their autonomy also creates compliance risks. Once deployed, smart contracts may interact in unforeseen ways, or in the worst-case scenario, even enable illicit transactions without the knowledge of the platform’s developers or users.

However, AI-driven monitoring offers compliance teams new tools to address these challenges:

• Continuous assessment: AI can track smart contract interactions against internal compliance frameworks and regulatory expectations, flagging activities that could indicate misuse.
• Risk-based escalation: When high-risk addresses – such as sanctioned wallets or darknet-linked entities – attempt to interact with a protocol, AI can automatically escalate the incident to compliance teams or even trigger temporary restrictions.
• Strengthened governance: By maintaining a verifiable audit trail of all flagged incidents and compliance interventions, AI helps demonstrate to regulators that protocols have adequate oversight mechanisms.

This type of monitoring does not – and would not – replace human oversight, but instead acts as an enhancement to it. Compliance teams remain the ultimate decision-makers, while AI ensures that they are alerted to risks quickly and with sufficient context to act decisively. For regulators, the presence of these safeguards shows that even autonomous systems are not left unchecked.

Once deployed, smart contracts may interact in unforeseen ways, or in the worst-case scenario, even enable illicit transactions without the knowledge of the platform's developers or users.

Regulatory interpretation across jurisdictions

Compliance, as we know it, is further complicated by the sheer global nature of DeFi. Platforms often serve users across dozens of jurisdictions, each with its own evolving regulatory framework. From FATF recommendations to MiCA in Europe, FinCEN guidance in the United States, as well as the many country-specific licensing regimes, keeping pace with obligations is a formidable challenge.

AI-powered natural language processing (NLP) tools can support compliance professionals by:

• Extracting obligations from complex texts: AI can scan dense regulatory documents, highlight relevant requirements, and summarise their implications for DeFi operations.
• Mapping cross-border requirements: By comparing rules across jurisdictions, AI can help organisations identify commonalities and conflicts, enabling the creation of unified compliance frameworks.
• Detecting regulatory updates in real time: Continuous monitoring of official sources, which ensures that compliance teams are alerted to changes swiftly, reducing the risk of falling out of compliance due to outdated practices.

This capability is particularly valuable for organisations seeking to expand internationally. Demonstrating to regulators that compliance teams have robust processes for monitoring and implementing regulatory changes not only reduces legal risk, but also strengthens credibility in the eyes of stakeholders.

Benefits and compliance considerations

The integration of AI into compliance functions brings clear benefits:

• Scalability: AI systems can process massive transaction volumes without proportional increases in human resources.
• Accuracy: Automated analysis reduces the risk of human error, enhancing the reliability of compliance processes.
• Proactivity: Real-time detection and alerts allow for quicker responses to potential breaches.
• Cross-border support: AI’s ability to interpret regulations across jurisdictions makes it easier for organisations to manage global operations responsibly.

Yet, compliance professionals must also approach AI adoption with caution and appropriate care and diligence. Several considerations are particularly important.

• Accountability and auditability: Regulators will expect AI-driven outputs to be explainable and verifiable. Compliance teams must be able to demonstrate how decisions were reached.
• Regulatory acceptance: Supervisory authorities may be cautious in recognising AI-driven compliance models. Clear communication, transparency, and pilot programmes can help build trust.
• Ethical safeguards: AI must be calibrated to avoid excessive false positives or discriminatory outcomes that could unduly restrict legitimate activity.
• Human oversight: AI should complement, not replace, professional judgment. The compliance officer’s role in interpreting context and exercising discretion remains essential.

AI as an enabler, not a substitute

DeFi is evolving rapidly, and compliance will remain a cornerstone of its legitimacy and acceptance within the broader financial system and human adoption. AI offers powerful tools to help compliance professionals keep pace with these changes, from automating regulatory reporting to overseeing smart contracts and interpreting global obligations.

However, AI should be seen as an enabler rather than a substitute within the procession. It cannot – and should not – replace the judgment, ethical responsibility, and contextual understanding that compliance professionals bring to their work and the industry. Instead, it enhances their capacity to respond quickly, accurately, and credibly to emerging risks.

The future of DeFi compliance will depend on collaboration: between regulators, technology experts, and compliance officers. By integrating AI responsibly, the industry can build systems that are not only innovative, but also resilient, transparent, and aligned with global regulatory standards. In doing so, DeFi can continue to mature balancing innovation with integrity and paving the way for a more inclusive financial future.

The future of DeFi compliance will depend on collaboration: between regulators, technology experts and compliance officers.