Illicit Finance Risk Assessment of DeFi Published for the First Time

Although not a consultation, the report closes with questions on which public and industry input is welcome, including on how to foster the adoption of measures to mitigate illicit finance risks and on how AML/CTF obligations may vary depending on the services provided.

The risk assessment covers:

• The market structure of DeFi, including the distinction between the settlement, assets, protocol, and applications tiers;
• Elements of centralization in the governance of the protocols, including recognition that DeFi services seek to decentralise over time;
• Treasury’s views on services’ AML/CFT regulatory obligations, including that DeFi services should comply with the Bank Secrecy Act as the automation of services does not affect their obligations;
• Illicit finance threats emerging from DeFi, including money laundering, fraud, and proliferation financing, including recent case studies;
• Vulnerabilities posed by DeFi, including gaps in international AML/CFT regimes, non-compliant services in the US, and cyber-security risks;
• Mitigation measures including developing regulatory frameworks focusing on the centralised players that act as off-ramps, the public nature of blockchains and blockchain analytic tools, and other nascent solutions like zero-knowledge proofs.

Relevant firms should read the Risk Assessment to gain further insights into the continuing regulatory focus on Decentralised Finance in the U.S.

As regulatory regimes tailored to the unique landscape of cryptocurrency develop around the world, Plenitude’s Digital Assets Practice can help you understand their implications for your project.