Illicit Finance Risk Assessment of Decentralized Finance
Contents
U . S .
D E P A R T M E N T
O F
T H E
T R E A S U R Y
Illicit Finance Risk Assessment of
Decentralized Finance
APRIL 2023
Illicit Finance Risk Assessment of Decentralized Finance
1
Table of Contents
Executive Summary ................................................................................... 1
1. Introduction ............................................................................................ 4
Context.................................................................................................................... 4
Risk Assessment Overview................................................................................ 4
2. Market Structure ..................................................................................... 5
Definition & Scope.................................................................................................. 5
DeFi Services and AML/CFT Regulatory Obligations............................................. 6
Market Overview..................................................................................................... 8
Building Blocks of DeFi ..................................................................................... 8
Market Participants and How They Operate..................................................... 8
Elements of Centralization..................................................................................... 11
Governance........................................................................................................ 12
Application Layer............................................................................................... 14
Settlement Layer................................................................................................ 14
Custody................................................................................................................... 15
3. Illicit Finance Threats.............................................................................. 16
Money Laundering.................................................................................................. 16
Ransomware ...................................................................................................... 18
Theft.................................................................................................................... 19
Fraud and Scams................................................................................................ 21
Drug Trafficking.................................................................................................. 23
Proliferation Finance.............................................................................................. 24
4. Vulnerabilities.......................................................................................... 26
Non-Compliant DeFi Services in the United States............................................... 26
Disintermediation................................................................................................... 28
Cross‑Border Nature and Gaps in AML/CFT Regimes across Countries .............. 29
Cyber-Related Vulnerabilities ................................................................................ 30
5. Mitigation Measures ............................................................................... 31
Regulatory Frameworks......................................................................................... 31
FATF..................................................................................................................... 32
Public Blockchain Transparency....................................................................... 32
Use of Centralized VASPs as On- and Off-Ramps.............................................. 34
Potential Industry Solutions ............................................................................. 35
6. Conclusion, Recommended Actions, and
Posed Questions..................................................................................................36
Recommended Actions.......................................................................................... …
D E P A R T M E N T
O F
T H E
T R E A S U R Y
Illicit Finance Risk Assessment of
Decentralized Finance
APRIL 2023
Illicit Finance Risk Assessment of Decentralized Finance
1
Table of Contents
Executive Summary ................................................................................... 1
1. Introduction ............................................................................................ 4
Context.................................................................................................................... 4
Risk Assessment Overview................................................................................ 4
2. Market Structure ..................................................................................... 5
Definition & Scope.................................................................................................. 5
DeFi Services and AML/CFT Regulatory Obligations............................................. 6
Market Overview..................................................................................................... 8
Building Blocks of DeFi ..................................................................................... 8
Market Participants and How They Operate..................................................... 8
Elements of Centralization..................................................................................... 11
Governance........................................................................................................ 12
Application Layer............................................................................................... 14
Settlement Layer................................................................................................ 14
Custody................................................................................................................... 15
3. Illicit Finance Threats.............................................................................. 16
Money Laundering.................................................................................................. 16
Ransomware ...................................................................................................... 18
Theft.................................................................................................................... 19
Fraud and Scams................................................................................................ 21
Drug Trafficking.................................................................................................. 23
Proliferation Finance.............................................................................................. 24
4. Vulnerabilities.......................................................................................... 26
Non-Compliant DeFi Services in the United States............................................... 26
Disintermediation................................................................................................... 28
Cross‑Border Nature and Gaps in AML/CFT Regimes across Countries .............. 29
Cyber-Related Vulnerabilities ................................................................................ 30
5. Mitigation Measures ............................................................................... 31
Regulatory Frameworks......................................................................................... 31
FATF..................................................................................................................... 32
Public Blockchain Transparency....................................................................... 32
Use of Centralized VASPs as On- and Off-Ramps.............................................. 34
Potential Industry Solutions ............................................................................. 35
6. Conclusion, Recommended Actions, and
Posed Questions..................................................................................................36
Recommended Actions.......................................................................................... …