WASHINGTON — The U.S. Treasury Department has published the 2023 DeFi Illicit Finance Risk Assessment, the first illicit finance risk assessment conducted on decentralized finance (DeFi) in the world.
“The assessment considers risks associated with what are commonly called DeFi services,” Treasury said. “While there is currently no generally accepted definition of DeFi, the term broadly refers to virtual asset protocols and services that purport to allow some form of automated peer-to-peer transactions, often through use of self-executing code known as ‘smart contracts’ based on blockchain technology. This term is frequently used loosely by the private sector, often for services that are not functionally decentralized.”
What DPRK, Cyberthieves Are Doing
According to Treasury, actors like the Democratic People’s Republic of Korea (DPRK), cybercriminals, ransomware attackers, thieves, and scammers are using DeFi services to transfer and launder their illicit proceeds. They are able to exploit vulnerabilities, including the fact that many DeFi services that have anti-money laundering and countering the financing of terrorism (AML/CFT) obligations fail to implement them, Treasury added.
“The primary vulnerability that illicit actors exploit stems from non-compliance by DeFi services with AML/CFT and sanctions obligations,” Treasury said. “DeFi services engaged in covered activity under the Bank Secrecy Act have AML/CFT obligations regardless of whether the services claim that they currently are or plan to be decentralized. Other vulnerabilities include the potential for some DeFi services to be out of scope for existing AML/CFT obligations, weak or non-existent AML/CFT controls for DeFi services in other jurisdictions, and poor cybersecurity controls by DeFi services, which enable the theft of funds.”
The Recommendations
While risk assessments are primarily designed to identify the scope of an issue, the study also includes recommendations for U.S. government actions to mitigate the illicit finance risks associated with DeFi services. These include:
- Strengthening U.S. AML/CFT regulatory supervision
- Considering additional guidance for the private sector on DeFi services’ AML/CFT obligations
- Assessing enhancement to address any AML/CFT regulatory gaps related to DeFi services
Click here to read “Illicit Finance Risk Assessment of Decentralized Finance”
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