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Decentralised finance and data privacy: what’s the story?​​​​​

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Decentralised finance (DeFi) is  gaining traction in the fintech landscape, leveraging blockchain technology to create a more open, transparent, and accessible financial system. So, what is DeFi? DeFi refers to a financial system that operates without traditional banks or intermediaries. Instead, it uses blockchain technology and smart contracts to enable peer-to-peer transactions and financial services like lending, borrowing, and trading. This system aims to be more open, transparent, and accessible to everyone.

In South Africa, DeFi platforms offer a range of services, including lending, borrowing, trading, and investing, all facilitated through smart contracts[1​][2​]. These self-executing agreements ensure transparency and reduce the need for trust in a central authority. However, the rise of DeFi brings significant challenges, particularly in the realm of data privacy.

One of the key concerns in DeFi is the balance between transparency and privacy. Blockchain's inherent transparency means that all transactions are publicly recorded and accessible, ensuring accountability but also posing risks to user privacy. Sensitive financial data can be traced back to individuals, potentially exposing them to identity theft or financial profiling. While many DeFi platforms operate on a pseudonymous basis, where users are identified by their wallet addresses rather than personal information, this is not foolproof. Advanced analytics and linking techniques can de-anonymize users, revealing their identities and transaction histories. The primary privacy issue stems from the significant responsibility DeFi users have to protect their own privacy[3​].

The decentralised nature of DeFi also complicates regulatory oversight. Traditional financial regulations designed to protect consumer data may not apply or be enforceable in the DeFi space, potentially leaving users vulnerable to data breaches and misuse[4​]. In South Africa, the Protection of Personal Information Act (POPIA)[5​​] governs data privacy, but its application to DeFi is still to be determined. POPIA introduces several key requirements for data privacy that are also applicable to DeFi platforms. These include ensuring that users' personal information is collected, processed, and stored in compliance with the law, obtaining explicit consent from users, and providing them with the right to access, correct, and delete their information. DeFi platforms must also be transparent about their data processing activities, implement appropriate security measures to protect personal information, and notify the Information Regulator and affected individuals in the event of a data breach.

To address privacy concerns, several strategies and technologies are being explored. Zero-knowledge proofs[6], a cryptographic technique, allow one party to prove to another that a statement is true without revealing any additional information. In DeFi, zero-knowledge proofs can enhance privacy by enabling transactions to be verified without exposing the underlying data[7​​]. Institutions such as Binance, Kraken and ByBit have implemented zero-knowledge proofs on their platforms[8​]. Furthermore, privacy coins, such as Monero and Zcash, are designed with enhanced privacy features, obfuscating transaction details and using advanced cryptographic techniques to protect user identities. Additionally, international policymakers and regulators who have made progress in DeFi regulation are now working directly with DeFi platforms to ensure proper disclosure of data privacy risks to users​[9​].

Decentralised identity solutions have been developed, aimed at giving users control over their personal information by allowing them to manage and share their data selectively. Integrating these solutions with DeFi platforms can help maintain greater privacy and security. Additionally, developing and implementing regulatory frameworks tailored to the unique characteristics of DeFi can help protect user data while fostering innovation. Collaboration between regulators, developers, and the DeFi community is essential to create balanced and effective regulations.

Another important aspect to consider is the role of education and awareness in enhancing data privacy within the DeFi ecosystem. Users must be informed about the potential risks and best practices for safeguarding their personal information. Educational initiatives can empower users to make informed decisions about their participation in DeFi platforms, helping them understand the importance of privacy-preserving technologies and how to use them effectively. By fostering a culture of privacy awareness, the DeFi community in South Africa can collectively work towards a more secure environment.

Moreover, the integration of artificial intelligence (AI) and machine learning (ML) in DeFi platforms presents both opportunities and challenges for data privacy. AI and ML can enhance the efficiency and security of DeFi services by detecting fraudulent activities and optimizing transaction processes. However, these technologies also require access to large amounts of data, raising concerns about data privacy and the potential for misuse. Ensuring that AI and ML applications in DeFi adhere to strict privacy standards and ethical guidelines is crucial for maintaining user trust and protecting sensitive information.

Decentralised finance holds the potential to reshape the financial landscape in South Africa, offering greater accessibility, transparency, and efficiency. However, the success of DeFi hinges on addressing the critical issue of data privacy. By leveraging advanced cryptographic techniques, privacy-focused solutions, and thoughtful regulatory frameworks, the DeFi ecosystem can strike a balance between innovation and privacy, ensuring a secure and inclusive financial future.

[1​​] Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute the contract when certain conditions are met, without needing intermediaries. Think of them as digital agreements that run on blockchain technology, ensuring transparency and trust.

[2​​] FSCA (2025), “Market Study: Decentralised Finance in South Africa", forthcoming.

[3​​] Harvard Technology Review (2021), “Privacy in Decentralised Finance: Should We Be Concerned?", available here.

[4​] CFPB (2025), “CFPB Seeks Input on Digital Payment Privacy and Consumer Protections", available here.

[5​] South African Government (2020), “Protection of Personal Information Act (POPI Act)", available here.

[6​] A zero-knowledge proof (ZKP) is a cryptographic method that allows one party (the prover) to demonstrate to another party (the verifier) that they know a specific piece of information without revealing the information itself. This is achieved through a process where the prover convinces the verifier of their knowledge by performing certain computations that can only be done if the prover indeed knows the secret. The key properties of ZKPs are completeness (if the statement is true, an honest verifier will be convinced), soundness (if the statement is false, no dishonest prover can convince the verifier), and zero-knowledge (the verifier learns nothing about the secret other than its validity). ZKPs are widely used in privacy-focused applications, such as secure data sharing and blockchain transactions, to ensure data integrity and confidentiality.

[7​​] BitDegree (2024), “How Zero-Knowledge Proof is Revolutionizing Data Security in Web3", available here.

[​8] BitDegree (2024), “How Zero-Knowledge Proof is Revolutionizing Data Security in Web3", available here.

[9​] World Economic Forum (2024), “Digital Assets Regulation: Insights from Jurisdictional Approaches", available here.​

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Discla​imer: As the IFWG we are enthusiastic to include diverse voices through our media content. The opinions of participants do not necessarily represent the views of the IFWG and their respective organisations.