U.S. Treasury Takes Aim At DeFi, Warns Of Illicit Use By Criminals

• The U.S. Department of Treasury has released a report highlighting the role of decentralized finance in illicit finance.
• The Department has warned that some DeFi services aren’t complying with AML and terrorist financing rules. 
• The compliance gap is reportedly being exploited by thieves, scammers, and cybercriminals. 
• The Treasury Department’s report found that bad actors in North Korea are using DeFi for money laundering. 

The United States Department of Treasury recently released a report that took a closer look at decentralized finance and its role in illicit finance around the world. The 42-page report, which was commissioned by the Biden administration, found that certain DeFi services are not complying with anti-money laundering (AML) and countering the financing of terrorism (CFT) rules, creating a significant illicit finance risk.

North Korean cyber criminals are laundering money through DeFi

According to the report titled “Illicit Finance Risk Assessment of Decentralized Finance”, found that decentralized finance was being used by illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, to transfer and launder the proceeds of their illegal activities. This is reportedly being done by exploiting the gaps in DeFi services’ compliance with AML and CFT regulatory regimes. 

The Treasury Department believes that businesses operating in the DeFi space lack an understanding of the obligation that is owed to maintain the integrity of AML and CFT rules. The report alleged that certain industry participants willingly decentralized a virtual asset service in a bid to avoid triggering said obligations. The report did acknowledge the relatively small portion that DeFi accounted for when it came to illicit finance risk. 

“Capturing the potential benefits associated with DeFi services requires addressing these risks. The private sector should use the findings of this assessment to inform their own risk mitigation strategies and to take clear steps, in line with AML/CFT regulations and sanctions obligations, to prevent illicit actors from abusing DeFi services.”

Brian Nelson, the Treasury Undersecretary for Terrorism and Financial Intelligence. 

Former Treasury Department official Alex Zerden told Bloomberg that the department has been trying to provide some clarity to the decentralized finance sector through reports such as the one published today. Reports like these will pave the way for regulatory clarity and ultimately a safer and more compliant crypto industry.