The US Treasury Department said on Thursday that the booming decentralized cryptocurrency market threatens US national security and needs to strengthen supervision and enforcement against money laundering risks.
In a new report assessing the risks of the DeFi market, the Treasury Department issued a warning, laying the groundwork for federal agencies to take more stringent regulatory and punitive actions. The report is reportedly the world's first illegal financial risk assessment of decentralized finance (DeFi).
The assessment focuses on the risks associated with DeFi services. Although there is no widely accepted definition of DeFi, the term generally refers to content related to virtual asset protocols and services aimed at enabling some form of automatic peer-to-peer transactions, often using self-executing code called "smart contracts" based on blockchain technology. This term is often loosely used by the private sector for services that are not entirely decentralized in function.
Although the main purpose of the risk assessment is to identify the scope of the problem, the study also includes recommendations for the US government to take action to mitigate illegal financial risks associated with DeFi services. These recommendations include:
Strengthening US anti-money laundering/counter-terrorism financing regulations.
Consider providing additional guidance to the private sector on AML/CFT obligations related to DeFi services.
Evaluate enhanced measures to address any AML/CFT regulatory loopholes related to DeFi services.
DeFi platforms enable cryptocurrency investors to trade with each other through software running online, without the need for a central intermediary to oversee transactions. Regulatory agencies currently have limited understanding of DeFi transactions since they do not involve traditional financial intermediaries like banks.
According to the Treasury Department report, ransomware hackers, rogue states, and other national security threats are exploiting the market's opacity to move funds worldwide undetected, providing critical financing for their actions.
The report outlines how the Treasury Department plans to strengthen supervision of the market, stating that platforms that have not established sufficient review policies could become targets of enforcement actions.
Many services claim to be "completely decentralized," but there is a wide range of activity between fully "centralized" and fully "decentralized" services. In practice, many DeFi services still feature governance structures.
Commentary: Although this report acknowledges that illegal activity is a subset of overall DeFi activity, the DeFi space is still a small part of the entire virtual asset ecosystem. In addition, money laundering, (illegal weapons) proliferation financing, and terrorism financing most often occur using fiat currency or other traditional assets, not virtual assets.
From this move, we can also see that as the cryptocurrency market continues to grow, the decentralized mechanism of cryptocurrency makes transactions more transparent and decentralized, but also provides new opportunities for illegal actors. Strengthening regulation and combating money laundering will be one of the main issues that the cryptocurrency market needs to address in the future.
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