Many existing decentralized finance services covered by the Bank Secrecy Act fail to comply with anti-money laundering and counterterrorism financing obligations, which illicit actors exploit, according to a Treasury Department report released today on illicit finance risks in the so-called DeFi sector. The report recommended that the U.S. step up its BSA enforcement of DeFi services and close any regulatory gaps such services allegedly use to avoid AML/CTF compliance.
Authored by the Treasury’s Office of Terrorist Financing and Financial Crimes, the report noted there is no generally accepted definition of “DeFi,” although the term has usually referred to services that allow for automated peer-to-peer transactions through the use of blockchain technology. A host of illicit actors—from ransomware criminals to North Korea—rely on DiFi services to transfer and launder funds, it said. “In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”
“This assessment recommends strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations,” the report said. It also recommended strengthening the AML/CFT regulation “by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.” Finally, the report suggested considering additional guidance for the private sector on DeFi services’ AML/CFT obligations.
