US warns of illicit transfers via decentralized finance (DeFi) services

The US Treasury Department has issued a report warning that decentralized finance (DeFi) services are increasingly used for illicit funds transfers, such as money laundering, terrorist financing, and sanctions evasion.

DeFi is a term that refers to a range of financial applications that operate without intermediaries, such as banks or brokers, using blockchain technology and smart contracts. DeFi platforms allow users to lend, borrow, trade, and invest in various assets and currencies, often with high returns and low fees.

DeFi poses challenges for regulators.

The report, released on Thursday as part of the Treasury’s annual National Strategy for Combating Terrorist and Other Illicit Financing, said that DeFi poses significant challenges for regulators and law enforcement agencies, as it operates outside the traditional financial system and often lacks transparency and accountability, reports MalayMail.

“DeFi platforms may enable the movement of funds across jurisdictions and between virtual and fiat currencies with greater speed and efficiency than traditional mechanisms,” the report said. “However, these platforms also create significant vulnerabilities for illicit finance.”

The report cited several examples of how DeFi services have been used for illicit purposes, such as facilitating ransomware payments, laundering proceeds from cybercrime and darknet markets, and circumventing sanctions and anti-money laundering (AML) regulations.

DeFi needs to comply with existing laws

The report urged DeFi service providers and users to comply with existing laws and regulations, such as the Bank Secrecy Act (BSA), which requires financial institutions to report suspicious transactions and maintain customer identity and activity records.

“The Treasury Department expects all entities that transact in US dollars or that serve US customers to comply with US sanctions requirements and AML/CFT obligations under the BSA,” the report said. “This includes entities involved in DeFi.”

The report also called for greater international cooperation and coordination among regulators, law enforcement agencies, and the private sector to address the risks posed by DeFi and other emerging technologies.