North Korea and criminals are using DeFi services for money laundering

Despite the warnings on DeFi, Treasury noted that “most money laundering, terrorist financing, and proliferation financing” occurred using fiat or outside the crypto ecosystem.

A new report from the United States Treasury Department analyzing decentralized finance concluded that actors from the Democratic People’s Republic of Korea as well as other scammers are able to exploit vulnerabilities to facilitate money laundering.

In its ‘Illicit Finance Risk Assessment of Decentralized Finance’ report released on April 6, the U.S. Treasury said many groups engaged in illicit activity from North Korea benefited from some DeFi platforms’ non-compliance with certain anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations. According to the report, insufficient AML/CFT controls and other shortcomings in DeFi services “enable the theft of funds.”

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

The @USTreasury just released a risk assessment on #DeFi illicit finance risk. A risk assessment is a study that is often the first step to regulation. Any regulation on #crypto must be compatible with the technology. https://t.co/iag84fJ67G

— Perianne (@PerianneDC) April 6, 2023

The report noted that some projects had “affirmatively touted a lack of AML/CFT controls as one of the primary goals of decentralization,” noting that actors were often able to circumvent sanctions from the U.S. and United Nations. However, Treasury reiterated that “most money laundering, terrorist financing, and proliferation financing” occurred using fiat currency or was otherwise outside the digital asset ecosystem.

Officials recommended an increase the regulatory supervision of AML/CFT for platforms offering DeFi services, guidance to DeFi platforms with respect to AML/CFT, and addressing any regulatory gaps.

“DeFi services at present often do not implement AML/CFT controls or other processes to identify customers, allowing layering of proceeds to take place instantaneously and pseudonymously, using long strings of alphanumeric characters rather than names or other personally identifying information.”

The assessment was in accordance with the executive order on digital assets signed by President Joe Biden in March 2022. Since the implementation of the EO, many U.S. government agencies have begun investigating the potential impact of aspects of the digital asset space on the country’s financial system and existing payment infrastructure. In September 2022, Treasury released a report which included countering illicit finance risks from crypto assets.

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