The US Treasury Department has issued a press release regarding the illegal finance risk assessment for 2023 DeFi. The report was released following a thorough examination of the decentralized finance sector. The report also discusses how the Democratic People’s Republic of Korea (DPRK), cybercriminals, thieves, scammers, and ransomware attackers use DeFi services to launder and move illicit proceeds.
US Treasury warns of the dark side of crypto adoption
The US Treasury stated in its ‘Illicit Finance Risk Assessment of Decentralized Finance’ report released on April 6 that many groups engaged in illicit activity from North Korea benefited from some DeFi platforms’ non-compliance with certain anti-money laundering (AML) and counter-terrorism financing (CFT) regulations. According to the US Treasury, insufficient AML/CFT controls and other shortcomings in DeFi services “enable the theft of funds.”
Illicit actors, including criminals, scammers, and North Korean cyber actors, are using DeFi services in the process of laundering illicit funds; capturing the potential benefits associated with DeFi services requires addressing these risks.
Brian Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence
The report noted that some projects had explicitly touted a lack of AML/CFT controls as one of the primary goals of decentralization. The US Treasury noted that actors were frequently able to circumvent U.S. and United Nations sanctions. However, the US Treasury reaffirmed that the vast majority of money laundering, terrorist financing, and proliferation financing involved fiat currency or occurred outside the ecosystem of digital assets.
The 40-page report warns that DeFi services at the moment frequently do not implement AML/CFT controls or other processes to identify customers. This allows instantaneous and pseudonymous layering of proceeds.
According to the report, several DeFi projects have affirmatively touted a lack of AML/CFT controls as one of the primary goals of decentralization. A footnote in the document mentions ShapeShift’s 2021 transition to a decentralized exchange to cease collecting customer information for AML/CFT compliance.
When these entities fail to register with the appropriate regulator, fail to establish and maintain sufficient AML/CFT controls or do not comply with sanctions obligations, criminals are more likely to exploit their services successfully, including to circumvent U.S. and [United Nations] sanctions.
US Treasury Department
US Treasury calls for tighter oversight
Based on its findings, the department recommends an assessment of possible enhancements to US anti-money laundering (AML) requirements and counter-terrorism financing (CFT) rules as they apply to DeFi services. It also requests input from the private sector to help guide the next steps.
DeFi services at present often do not implement AML/CFT controls or other processes to identify customers, allowing layering of proceeds to take place instantaneously and pseudonymously, using long strings of alphanumeric characters rather than names or other personally identifying information.
US Treasury Department
The assessment was conducted in accordance with President Joe Biden’s executive order on digital assets, which was signed in March 2022. Many US government agencies have begun investigating the potential impact of aspects of the digital asset space on the country’s financial system and existing payment infrastructure since the EO’s implementation.
Nelson observed that DeFi could frequently present difficulties determining the individuals behind the business activities. However, he stated that it makes no difference whether the services are centralized or decentralized when determining whether they are subject to the Bank Secrecy Act.
He states that even those who claim complete decentralization can engage in a wide range of activities that are closer to traditional finance than they claim. “In some ways, they’re really decentralized in name only,” he said.
Also, the US Treasury released a report in September 2022 that included countering illicit finance risks from crypto assets.
