Why the US Treasury’s New DeFi Financial Risk Assessment Matters

The US Department of the Treasury has published its first risk assessment of the illicit financing of decentralized finance (DeFi).

This is a major development in the area of ​​financial crime, as it clarifies important points about the US government’s view of what the biggest risks in DeFi are and what anti-financial crime responses are needed to address them.

Here are some of the key findings from the assessment:

• It names illegal activities from cyber theft, ransomware and fraud as among the types of criminal activities that can be committed in the DeFi space or that can use DeFi services to launder money.
• The Treasury points out that: “The primary vulnerability exploited by illegal actors stems from the non-compliance of DeFi services with anti-money laundering/countering the financing of terrorism (AML/CFT) obligations and sanctions.” In this case, the Treasury warns that even decentralized services engaged in regulated activity could fall within the scope of AML/CFT regulations and face compliance obligations.
• The Department indicates that it is undertaking a review to close loopholes within the US SPN/FT framework that allow certain DeFi services to operate outside the regulatory perimeter.
• It also calls for poor cybersecurity controls among DeFI services, making them vulnerable to hacks.
• Treasury warns of money laundering risks posed by DEX and DeFi bridges in terms of enabling cross money laundering.
• It also warns of the risks of financing proliferation, given that North Korea uses DeFi services – both to raise funds through hacking and theft, and to launder funds through the DeFi ecosystem.
• The department highlights blockchain transparency as a critical tool in the fight against financial crime in DeFi, noting that “a wallet address publicly identified with a hack can be subject to intense public scrutiny, making it difficult to launder proceeds in that wallet, even if its owner remains unknown “.

Treasury also cites recent Ellipticals “The state of inter-chain crime” report, noting that ransomware actors laundered more than $50 million through DeFi services in the first half of 2022.

See the full Treasury assessment here.

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