The US Department of the Treasury has issued a warning regarding the rising risks of cross-chain crime in the decentralized finance (DeFi) sector. In its recently published Illicit Finance Risk Assessment of DeFi, the Treasury examines the financial crime risks associated with DeFi and explores potential regulatory responses. This assessment aligns with the growing attention from global watchdogs, including the Financial Action Task Force (FATF), towards the impact of innovation in the DeFi space.
Growing Criminal Exploitation
The Treasury's assessment reveals that criminal actors, including cybercriminals affiliated with North Korea, ransomware gangs, and fraudsters, are increasingly exploiting DeFi services. Notable incidents such as the hack of Axie Infinity by North Korea's Lazarus Group and the use of services like Tornado Cash mixing service exemplify the escalating financial crime risks within DeFi.
Cross-Chain and Cross-Asset Laundering
One of the key drivers behind the illicit exploitation of DeFi is the availability of services enabling cross-chain and cross-asset laundering. Innovations such as decentralized exchanges (DEXs) and cross-chain bridges facilitate seamless fund transfers across different blockchains and various cryptoassets. While these advancements contribute to legitimate DeFi adoption, they also enable criminals to engage in "chain-hopping" money laundering typologies.
Importance of Blockchain Analytics Technology
The Treasury emphasizes the significance of utilizing blockchain analytics solutions, such as Elliptic's Holistic Screening capabilities, for identifying cross-chain laundering activities. By leveraging these tools, cryptoasset exchanges and financial institutions can detect and mitigate risks effectively.
The Treasury's assessment sheds light on the need for improved compliance measures within the DeFi space. It highlights that most DeFi services lack robust know-your-customer (KYC) checks and anti-money laundering/counter-terrorist financing (AML/CFT) controls. The Treasury firmly believes that decentralized services engaged in facilitating conduct covered by US AML/CFT regulations should not be exempted from compliance.
As cross-chain crime risks within DeFi continue to evolve, the US Treasury urges the adoption of effective measures to address these challenges. The role of centralized crypto exchanges and virtual asset service providers in detecting risks, alongside the utilization of blockchain analytics technology, is vital. Moving forward, the Treasury aims to bridge existing gaps in AML/CFT compliance and ensure more consistent and effective regulatory requirements in the DeFi sector.