US Treasury Department Publishes Risk Assessment Report on Decentralized Finance (DeFi)
US Treasury Department Publishes Risk Assessment Report on Decentralized Finance (April 6 2023)
The US Department of the Treasury has recently published a risk assessment report on illicit finance in the DeFi sector. The report recognizes the potential risks of money laundering, proliferation financing, and terrorist financing in the sector but highlights that such activities are more likely to occur using fiat currency or other traditional assets as opposed to virtual assets.
Furthermore, the report emphasizes the importance of responsible innovation and collaboration between industry stakeholders and regulators to ensure a safe and secure decentralized financial system. The authors recommend that DeFi service providers adopt KYC/AML procedures, real-time analytics, and monitoring, and work with regulators to comply with the regulatory framework.
While the report highlights the potential risks associated with DeFi, it is also supportive of the sector's potential to facilitate financial inclusion, innovation, and efficiency. It serves as a useful guide for both industry players and regulators in understanding the current state of the DeFi landscape and the measures needed to ensure its sustainable growth.
Based on the findings of the report, the authors make the following recommendations:
Clarify regulatory framework: The U.S. government should provide clarity on how existing AML/CFT regulations apply to DeFi services, and consider developing new regulations if necessary.
Encourage compliance: Regulatory agencies should take enforcement action against non-compliant DeFi services, and work to educate DeFi providers on their obligations under AML/CFT regulations.
Promote international standards: International AML/CFT standards with regards to virtual assets and VASPs, and encourage partners to assess illicit finance risks associated with DeFi services and to develop and implement mitigation measures.
Advocate for cyber resilience: DeFi services should implement real-time analytics, monitoring, and rigorous testing of code in order to more quickly identify vulnerabilities and respond to indicators of suspicious activity. The U.S. government should continue to share information with virtual asset firms and the public about potential threats and mitigation measures that firms can take to improve defenses.
Promote responsible innovation of mitigation measures: The U.S. government should engage with developers to promote innovation that seeks to mitigate the illicit finance risks of DeFi services, potentially through tech sprints and research and development grants. Policymakers and regulators should also seek and assess necessary changes in regulation or guidance to support these developments.
Press Release: https://home.treasury.gov/news/press-releases/jy1391
Link to the full report is here: https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf
Ironclad Financial Web3 support page: https://www.ironclad.financial/web3
Disclaimer. This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations.