DeFi Doesn’t Comply With Anti-Money Laundering Rules – US Treasury
With the increasing rate of hacking and scamming incidents involving decentralized finance (DeFi) platforms, a shocking report has emerged about the risks of the technology. The US Department of Treasury revealed that DeFi platforms pose the most significant risks to the crypto industry based on illicit financial activities.
Treasury’s Risk Assessment Report
In its analysis of the hazard of DeFi, the Treasury Department’s report stated that scammers, thieves, and other entities are using the technology to launder their proceeds of crimes. The report specifically mentioned actors from the Democratic People’s Republic of Korea (DPRK) as some notorious state-backed entities using DeFi to move funds.
Based on its findings, the Treasury Department suggests an evaluation of a “possible enhancement” to the United States anti-money laundering (AML) requirements and guidelines for countering the financing of terrorism (CFT) be applied to the DeFi space. It also seeks feedback from the private sector to help shape its next move.
According to the Treasury Undersecretary for Terrorism and Financial Intelligence, Brian Nelson, the agency cannot do it alone. During a Thursday webcast with the global organization for curbing financial crimes (ACAMS), Nelson said that the private sector needs to utilize risk assessment to design its risk prevention plan.
Furthermore, the document, a 40-page risk assessment report, cautioned that current DeFi services do not comply with the AML/CFT guidelines, allowing illicit transactions to occur instantly and anonymously.
No AML/CFT Controls
The report cites numerous examples of DeFi projects which lacked AML/CFT compliance. Moreover, the document showed the 2021 transformation of ShapeShift into a decentralized entity, stating that the purpose is to stop collecting user information for AML/CFT use.
The report noted that when these firms failed to register with the regulator to establish their AML/CFT control status, they confirmed their compliance with the US federal government sanctions and its obligation on financial services providers to follow suit. As a result, criminal entities are more likely to exploit the loophole by evading US and United Nations sanctions, the report added.
The report recommends that the US government consider strengthening its AML/CFT regulatory requirements. In addition, the report recommends that government should provide guidelines for the private sector to ensure compliance checks for decentralized finance services.
Meanwhile, the assessment also adds some insights to President Joe Biden’s 2022 executive order on cryptocurrency, with Nelson commending the move by the US government.
Other financial watchdogs like the European Union keenly observe the trends of using DeFi to launder money. Nelson stressed that DeFi is always a challenging technology, given that it does not disclose the identity of individuals behind a particular transaction.
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