US Treasury Warns of DeFi Service Risks

Cybercriminals, including those from North Korea, and scammers are using DeFi protocols to transfer and launder money. The Treasury Department’s report assessing illicit-financing risk as applied to the sector states this.

The document says that DeFi services do not provide compliance with the obligations imposed on them under the Bank Secrecy Act.

«The lack of understanding among industry participants about how AML/CFT rules are applied exacerbates this risk. In some cases, providers may seek to decentralize the service in an attempt to avoid obligations, without acknowledging that the latter persist while the service operates», — the report notes.

The authors of the report acknowledged that the volume of wrongdoing using cryptocurrency and DeFi in particular remains modest compared with similar activity in fiat.

«The majority of money laundering and financing of terrorism […] by volume and value of transactions occurs outside the digital-asset ecosystem using TradFi», — the experts noted.

Officials noted the underdevelopment of industry services like blockchain analytics, which do not fully address the vulnerabilities identified.

«The U.S. government should pursue further responsible innovation in compliance tools for the industry», — the experts concluded.

As noted in March, President Joe Biden, in the economic report to Congress, said that digital assets do not conform to the claimed use-case scenarios and pose risks to investors and financial stability more broadly.

Earlier, the White House urged lawmakers to step up efforts regarding oversight of the digital-asset market.

In February, the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency warned banks about liquidity risks associated with crypto firms.

In the same month, SEC Chair Gary Gensler named regulation of the sector a priority for 2023. Previously, the official described the digital-asset market as centralized.