The growing criminal activities in the decentralized finance (DeFi) sector have been a source of significant concern. In a recent move, the authorities in the United States published a report assessing the associated risks.
On Thursday, the US Treasury Department published its first report assessing the risks involved in the DeFi space. The report vividly covered the elements of the DeFi space and raised concerns over the potential threats.
According to the report, criminals are efficiently leveraging the DeFi services to launder money and transfer funds across borders in a secure manner. It also states that many DeFi services covered by the Bank Secrecy Act (BSA) are failing to comply with anti-money laundering and countering the financing of terrorism (AML/CFT) obligations.
The Bank Secrecy Act is a 1970 law in the United States that requires banks and other financial institutions to help the government prevent money laundering and other illegal activities. This law makes it mandatory for financial institutions to keep records of cash buys of negotiable instruments. It also requires that institutions report cash transactions over $10,000 and any suspicious activity. Congress has beefed up the law several times since.
In its report, the government claims that criminals are exploiting this gap in conducting their malicious activities. The report also names North Korea for using DeFi technology to accomplish its illicit activities. Quoting the report:
Illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK)… are using DeFi services in the process of transferring and laundering their illicit proceeds. [And] exploiting vulnerabilities in the U.S. and foreign AML/CFT regulatory, supervisory, and enforcement regimes as well as the technology underpinning DeFi services.
The treasury’s report also highlights a few recommendations to be implemented. It recommends increasing the AML/CFT supervision of virtual asset activities, including DeFi services in the country. In addition, it suggests increasing compliance by virtual asset firms with BSA obligations.
In its report, the US government also highlights certain vulnerabilities such as the lack of implementation of international AML/CFT standards by foreign nations as well as poor cybersecurity practices on the part of DeFi services.
The report concludes by highlighting the US government’s increasing concerns regarding the DeFi industry’s record in the context of money laundering and terrorism financing. It also acknowledges that “several entities… are developing AML/CFT and sanctions compliance solutions for DeFi services.”
However, criminals are getting more and more technologically advanced and are trying to find and adopt new ways to exploit these tools. The US government believes that the DeFi industry has a lot of improvements to do to meet compliance requirements. Notably, the US Treasury is working with the industry to improve these tools and promote responsible innovation in the DeFi space.
With the increasing interest of financial institutions in the DeFi space, the department’s report highlights the vulnerabilities in the DeFi that could lead to most inhuman activities. Terrorism financing and money laundering have been labeled as one of the biggest crimes by a lot of regulating agencies. The Financial Action Task Force also has a list of countries that have poor AML/CFT implementation.
In February, Senator Elizabeth Warren, Democrat from Massachusetts, and Senator Roger Marshall, a Republican from Kansas, announced their plans to reintroduce legislation that would extend anti-money laundering laws to a broad array of cryptocurrency ecosystems. That would include digital asset wallet providers, miners, validators, and other blockchain network participants.
The importance of AML/CFT standards has been to an extent that a country like Hong Kong which envisions itself to be a crypto hub to attract investment, has prioritized these conditions in its licensing process for crypto firms.
In December, the legislative council of Hong Kong approved an amendment to its AML/CFT laws to include providers of virtual asset services. The new amendment creates a new licensing system for service providers of virtual assets and will regulate crypto exchange service providers by the same laws as conventional financial institutions.