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Is it just me or is the Treasury Department firing warning shots at DeFi?

Is it just me or is the Treasury Department firing warning shots at DeFi?


Seems like crypto may be in for a new wave of enforcement.

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A cartoon image of a Bitcoin, superimposed on a background of shapes
Who could have guessed?
Illustration: Micha Huigen / The Verge

All kinds of unwanted users — ransomware gangs, thieves, scammers, and North Korea — are merrily transacting in decentralized finance and even laundering funds, according to a new report from the Treasury Department. That’s because DeFi doesn’t comply with anti-money laundering and anti-terrorism finance laws.

Poor compliance with anti-money laundering as well as poor cybersecurity puts DeFi users at risk of theft and fraud, the Treasury says.

In the US, the Bank Secrecy Act — and some other regulations — mean that financial institutions have to help the government detect money laundering. In this paper, the Treasury notes that a DeFi service might well be a financial institution under the BSA, even if it’s decentralized, and will have to comply with the law. Uh-oh! That sounds like a warning shot. If I worked in DeFi, I would be worried that a crackdown is coming; the Treasury is essentially saying that DeFi services are vulnerable under existing laws.

The report finds that “many” DeFi services don’t comply with the BSA, which is not exactly a surprise given, you know, the whole history of Bitcoin being a currency-based way to hate the government. In some cases, the paper notes, DeFi services purposefully decentralize what they’re doing to try to avoid anti-money laundering enforcement. Unfortunately, the Treasury says, that is not at all how the law works.

There’s a second warning shot in the paper: it recommends “stepping up engagements with foreign partners to push for stronger implementation” of anti-money laundering laws, which sounds an awful lot like the US leaning real hard on other countries where DeFi might be established.