Treasury Department Deems Decentralized Finance a National Security Threat

The US Treasury Department has released a report labeling decentralized finance (DeFi) as a potential national security threat. The report cites concerns over the anonymity and lack of regulation in the DeFi industry, which could make it more vulnerable to exploitation by criminal organizations or hostile foreign actors. While some DeFi experts argue that the industry can be regulated without sacrificing its decentralized nature, the Treasury Department has indicated that it will be closely monitoring and potentially taking action against DeFi platforms that pose a risk to national security. This news is likely to cause concern among DeFi investors and traders, as well as regulators grappling with how to address the challenges posed by this emerging sector.

The United States Treasury Department recently released a report highlighting the risks of poor cybersecurity practices within the decentralized finance (DeFi) industry, which the department claims pose a threat to crypto, consumers, and national security. The report argues that DeFi’s peer-to-peer approach presents new illicit finance risks, requiring extra legal supervision to address.

The 2023 DeFi Illicit Finance Risk Assessment, released on Thursday, details how cybercriminals, scammers, and other illicit actors exploit the DeFi ecosystem to launder money through systems that fail to implement proper sanctions and anti-money laundering controls. The report highlights various techniques for accomplishing this, including swapping funds into less traceable cryptos, moving between blockchains, and sending assets through cryptocurrency mixers.

Ransomware is another high-profile issue noted by the department, which recognizes it as a “national security priority.” Criminals extort payments from victims through crypto networks like Bitcoin, which are both pseudonymous and irreversible. The department cited a study from blockchain analytics firm Elliptic, which found that 13 ransomware strains laundered their money through a single cross-chain bridge, amounting to $50 million in the first half of 2022.

Moreover, the prevalence of “fraud and scams” plaguing the crypto industry cannot be ignored, with at least $1.6 billion stolen through crypto-related scams in 2021, according to the FBI. Such scams range from classic “rug pull” thefts to more personal “pig butchering” scams, after which funds are laundered and obfuscated using many of the aforementioned methods.

Contrary to its name, the Treasury noted that much of the DeFi space is rife with centralized points of failure. In practice, many DeFi services continue to feature governance structures. Alternatively, DeFi protocols managed by decentralized autonomous organizations (DAOs) and their governance token holders may be centralized in the hands of early DAO investors. Despite the risks posed by DeFi, the report acknowledges that cash is still king when it comes to financial crime. “Money laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets,” it stated.

In summary, the report underscores the need for increased legal supervision of the DeFi industry, which has undoubtedly revolutionized the financial space but also attracted the attention of cybercriminals and illicit actors. The DeFi industry must prioritize proper implementation of sanctions and anti-money laundering controls to address the risks involved.

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