U.S. Treasury assesses DeFi financial fraud risk: report


Pointing out fraudulent use of DeFi

The US Treasury Department released a report on the 6th that analyzed and evaluated the risk of fraudulent finance related to decentralized finance (DeFi).

The assessment, which is said to be the first of its kind in the world, builds on the work set out in an Executive Order on Crypto Assets (virtual currencies) issued by President Joe Biden last year.

“Those like the Democratic People’s Republic of Korea, cybercriminals, ransomware attackers, thieves and fraudsters are using DeFi services to transfer and launder illicit earnings,” the report said. . He argued that the main vulnerability exploited by such fraudsters stems from DeFi services’ failure to comply with anti-money laundering/combating the financing of terrorism (AML/CFT) and sanctions obligations.

Bryan Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence, said such risks need to be addressed if the potential benefits associated with DeFi services are to be realized.

The private sector should use the findings of this report to inform their own risk mitigation strategies and take explicit steps to prevent abuse of DeFi services by fraudsters, in line with AML/CFT regulations and sanctions obligations. should take

AML/CFT obligations and decentralization

According to a Treasury Department study, the “currently most significant financial fraud risk in the DeFi space” comes from DeFi services that do not comply with existing AML/CFT obligations.

The report cites a lack of common understanding within the industry as to how AML/CFT obligations apply to DeFi service providers. “Some operators intentionally seek to decentralize their cryptocurrency services to avoid potential AML/CFT obligations,” he said.

However, “DeFi service providers acting as financial institutions as defined by the Bank Secrecy Act (BSA) are required to comply with AML/CFT obligations, regardless of whether their services are centralized or decentralized.” , warned that service providers need to change their minds.

On the other hand, it is possible that “certain DeFi services” may not be subject to existing AML/CFT obligations, as eligibility for BSA coverage is determined by the specific facts and circumstances of their financial activities. suggesting.

That could create gaps among service providers in their efforts to identify and stop illegal activity and report suspicious activity to regulators, he said. He said he recommended strengthening the US AML/CFT regulatory regime by closing this gap.

Recommendations to Government

While the risk assessment is intended to help develop an understanding of the illicit funds risk environment and primarily identify the extent of the problem, the report does include actions the U.S. government should take to mitigate risk, including: Contains recommendations.

  • Strengthening US AML/CFT regulatory oversight
  • Considering additional guidance for the private sector on AML/CFT obligations for DeFi services
  • Evaluates enhancements to address AML/CFT regulatory gaps related to DeFi services

Scale of illicit finance and effectiveness of industry services

The report acknowledges that DeFi and cryptocurrency-related illicit finance remains small compared to activity using fiat currencies and traditional financial systems.

In this risk assessment, most of the money laundering, terrorist financing, and dissemination of funds, in terms of transaction volume and value, is through fiat currency or other more traditional methods and occurs outside the cryptocurrency ecosystem. I recognize that there are

The report also noted that, to a lesser extent, the development of industry-led compliance solutions for DeFi services and data analytics on public blockchains can help mitigate financial fraud risks.

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