The US Treasury Department has released a 42-page report assessing the risks of decentralized finance (defi). The report states that certain state adversaries, cyber criminals, ransomware attackers, thieves, and fraudsters are using defi to “transfer and launder illicit proceeds.” The Treasury report warns that defi could threaten national security and urges policymakers to increase oversight.
U.S. Treasury report assesses risks associated with decentralized finance
On April 6, 2023, the U.S. Treasury Department released a reportassessing what it considers to be defi risks.” The National Treasury and Treasury Department stated that the “risk assessment explores how fraudsters exploit defi services and vulnerabilities specific to defi services in order to inform efforts to identify and address potential gaps in the U.S. AML/CFT regulatory, oversight, and enforcement regime. The report was authored by Treasury officials, including Brian Nelson, Treasury’s Under Secretary for Terrorism and Financial Intelligence.
“Current Defi services often do not have AML/CFT controls or other processes in place to identify customers, and revenue is accumulated instantaneously and pseudonymously using long strings of alphanumeric characters rather than names or other personally identifying information,” the report It adds. It also acknowledges that some firms offer AML/CFT management and that on-chain monitoring firms exist. However, Nelson and the report’s authors argue that these management and monitoring practices “by themselves do not adequately address the vulnerabilities identified.”
The defi report also discusses how the Treasury Department intends to strengthen federal oversight and regulatory policies. The authors emphasize that “centralized virtual asset service providers (VASPs) and industry solutions can partially mitigate some of these vulnerabilities.” The Treasury Department says that regulations covering traditional finance should also apply to decentralized finance, and that regulators must fill certain gaps that cybercriminals, money launderers, and fraudsters are currently exploiting. Interestingly, despite the report’s 42-page length, the Treasury report authors conclude by stating that illicit finance “remains a small part of the overall virtual asset ecosystem.”
On page 36 of this report (Conclusions, Recommended Actions, Questions Raised), the researchers emphasize that most nation-state adversaries and cybercriminals do not typically use crypto assets or Defy for illicit financing. The report’s authors conclude, “Moreover, money laundering, proliferation financing, and terrorist financing are most commonly conducted using fiat and other traditional assets, not virtual assets.”
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