The Treasury Department claims DeFi is centralized and full of criminal risk.
According to a US Treasury Department audit, poor cybersecurity standards in the decentralized finance (DeFi) market threaten bitcoin, consumers, and national security.
The first-of-its-kind document claims that DeFi’s peer-to-peer nature creates new illegal finance dangers that require legislative oversight.
DeFi Risks
The 2023 DeFi Illicit Finance Risk Assessment, released on Thursday, describes how hackers, scammers, and other illicit actors are utilizing the DeFi ecosystem to launder money through systems that lack sanctions and anti-money laundering safeguards.
“There have been several instances of actors, including ransomware actors, thieves, scammers, and drug traffickers, using DeFi services to transfer and launder their illicit proceeds,” the report claimed.
The department suggested switching cash into less traceable cryptos, travelling between blockchains, and using cryptocurrency mixers. Virtual Asset Service Providers convert laundered monies into fiat.
Because of its popularity with Korean cybercriminals, the Treasury sanctioned Tornado Cash last August.
The department also calls ransomware a “national security priority.” Criminals can use crypto networks like Bitcoin to extort victims since transactions are pseudonymous and irreversible.
In the first half of 2022, 13 ransomware strains laundered $50 million across a single cross-chain bridge, according to a 2022 Elliptic analysis.
Finally, the Treasury noted that “fraud and scams” plague the crypto business, with the FBI reporting at least $1.6 billion stolen in 2021. After “rug pull” and “pig slaughtering” scams, proceeds are laundered and obscured.
Weakness: Centralization
The Treasury found many centralized sites of failure in DeFi, despite its moniker.
“In practice, many DeFi services continue to feature governance structures (e.g., management functions, fixing problems with the code, or altering the functionality of the smart contracts to some degree),” the report stated.
Early DAO investors may control DeFi protocols governed by DAOs and their governance token holders. The Treasury stated that developers and early investors in a DeFi service may hold control by allocating large governance tokens to themselves or otherwise maintaining de facto authority.
The paper concedes that cash is still king in financial crime, notwithstanding DeFi threats. “Money laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets,” it stated.
