US Treasury Raises Illicit Finance Concerns Over DeFi Industry

Treasury Department

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North Korea, one of the world's most isolated nations, is among the worst offenders in illegally laundering money through the decentralized finance (DeFi) industry, the U.S. said in a report.

Key Takeaways

  • The treasury report explores how ‘illicit actors’ are abusing the DeFi industry.
  • Money laundering regulations could tighten for decentralized exchanges.
  • The latest industry crackdown could spell more trouble for Binance.

The risk assessment includes recommendations for the U.S. government to address illicit finance risks in the DeFi industry. The guidance aims to extend the United States' anti-money laundering (AML) and countering the financing of terrorism (CFT) supervision to address gaps related to the nascent blockchain finance sector.

"Our assessment finds that illicit actors, including criminals, scammers, and North Korean cyber actors are using DeFi services in the process of laundering illicit funds. Capturing the potential benefits associated with DeFi services requires addressing these risks," said Brian E. Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence.

One of the key areas highlighted in the report is the work of decentralized exchanges (DEXs) with treasury stating that 649 separate DEXs had a combined $15.8 billion in reported total value locked (TVL) as of Dec. 19, 2022. The report goes on to say illicit actors are more likely to use a DEX, rather than centralized exchanges such as Coinbase (COIN) due to the reduced likelihood of AML/CFT measures.

However, allegations of money laundering in the cryptocurrency industry are not limited to DeFi. Binance, the world's largest cryptocurrency exchange and a centralized platform is under regulatory scrutiny for the very same reasons.

In December 2022, U.S. prosecutors were reportedly nearing the end of a two-year-long investigation and the Department of Justice officials were considering charges against Binance and its executives. This was followed in the last week by civil enforcement from the Commodity and Futures Trading Commission (CFTC) which charges the exchange and its founder with evasion of federal law and the operation of an "illegal digital asset exchange."

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  1. U.S. Treasury. "Releases 2023 DeFi Risk Assessment."

  2. U.S. Treasury. "Illicit Finance Risk Assessment in DeFi."

  3. Reuters. "U.S. Justice Dept. is Split Over Binance."

  4. CFTC. "Press Release - CFTC Charges Binance and its CEO."

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