US Treasury goes after DeFi protocols

In its report released in early April, the U.S. Treasury Department said that decentralized finance protocols facilitate the financing of illegal activities. However, the U.S. Treasury acknowledges that illicit activities are mostly funded outside the crypto ecosystem.

DeFi funds illegal activities

In the United States, the U.S. Treasury Department wants to support efforts to combat money laundering and terrorist financing. The institution has conducted a study specifically focused on the risks of illicit financing through decentralized finance. The report of this study makes a harsh judgment on the protocols of decentralized finance.

Indeed, the U.S. Treasury states in its report that criminals are exploiting the vulnerability and non-compliance of DeFi protocols to fund their illicit activities. The US Treasury gives as an example the case of North Korea which exploits DeFi vulnerabilities to hack and steal funds.

Illicit actors, including cybercriminals, thieves, DPRK scammers, use DeFi services in the process of transferring and laundering their illicit proceeds.

U.S. Department of the Treasury

In addition, the U.S. Treasury notes that the DeFi protocols do not comply with anti-money laundering and anti-terrorist financing requirements. This is due in part to the fact that a DeFi service is not a financial institution under the Bank Secrecy Act (BSA)notes the US Treasury.

It is not the crypto but the fiat that finances illicit activities.

In its report, the U.S. Treasury Department notes that illicit activities are being financed by the DeFi protocols. This institution did not provide any figures on the extent of illicit financing by the DeFi.

Nevertheless, the U.S. Treasury Department recognizes that the majority of funding for illicit activities occurs outside the crypto. For the U.S. Treasury, illicit activities are largely funded by fiat currency.

Most of the money laundering, terrorist financing, proliferation in volume and value of transactions occurs in fiat currency…

U.S. Department of the Treasury

On this point, the U.S. Treasury Department is proving the crypto ecosystem players right. Indeed, according to Chainalysis, only 20.1 billion was sent illicitly via cryptocurrency in 2022. This figure, which does not represent only 0.24% of the volume of all crypto transactions made in 2022 is moreover largely above the reality.

Indeed, transactions involving actors sanctioned by the Office of Foreign Assets Control (OFAC) of the U.S. Treasury are considered illegal by Chainalysis. These transactions represent 44% of the volume of all illicit transactions in 2022. However, entities sanctioned in the US are not necessarily illegal in other countries. This is the case of the crypto exchange Garantex, which is under sanctions in the US while being legal in Russia.

The efforts of the US authorities to combat the financing of illegal activities are commendable. They would normally be directed primarily at the traditional financial system. As the Treasury Department has acknowledged, the financing of terrorism is done more in fiat than in crypto. Nevertheless, it would not be surprising if the crypto ecosystem is the target of the fight against illicit financing for which it is not responsible.