US Treasury Department Warns that DeFi Poses A National Security Threat

The US Treasury Department has on Thursday warned that the decentralized cryptocurrency market poses a threat to national security and needs further regulatory oversight.

The warning came amid concerns that cryptocurrency serves as a conduit pipe for money-laundering and tax evasion. The crypto market uses Decentralized Finance (DeFi) as a technique to enable transactions without intermediary oversight.

The components of DeFi are stablecoins, software, and hardware that enables the development of applications. The ecosystem creates a global, fully automated, and economically inclusive financial system from the bottom up.

In a new report assessing the risk of DeFi markets, the Treasury advocated greater oversight and lays the foundation for tougher regulations and punitive action by federal agencies.

DeFi eliminates the fees that banks and other financial companies charge for using their services. Individuals hold money in a secure digital wallet, can transfer funds in minutes, and anyone with an internet connection can use it.

Since becoming an integral part of global finance a few years back, DeFi has left regulators in the dark due to its use of online software to enable transactions. As its adoption spreads, the decentralization deepens the concern, especially in the US, that the crypto industry is creating a platform for undetectable financial irregularities.

“Ransomware hackers, rogue states and other national security threats have seized upon the market’s opaqueness to move money around the world without detection, facilitating the financing critical to their operations,” the Treasury Department report said.

The Treasury Department also noted that DeFi has created crime risks that need to be addressed through regulatory oversight.

“Illicit actors, including criminals, scammers, and North Korean cyber actors are using DeFi services in the process of laundering illicit funds,” WSJ quoted Brian Nelson, Treasury’s undersecretary for terrorism and financial intelligence, as saying. “Capturing the potential benefits associated with DeFi services requires addressing these risks.”

To arrest the situation, the report outlined steps the Treasures Department intends to take. It says the Treasury plans to bring the market under greater federal oversight, which will enable enforcement action against platforms that fail to establish sufficient vetting policies.

Nelson said the private sector should use the department’s findings to inform their own risk mitigation strategies. He added that companies need to take clear steps, in line with regulations to counter money laundering, terror financing and sanctions-evasion, to prevent illicit actors from abusing DeFi services.

The Treasury Department also recommended that the federal government needs to bolster its existing supervision and enforcement of the market by requiring platforms to adhere to the same anti-money-laundering rules that banks and other financial institutions must follow.

“Federal agencies also need to expand their regulatory powers to cover potential gaps in oversight of the markets, and work with other governments to establish international standards,” it said.

However, the implementation of the recommendations will defeat the purpose of DeFi, which is to use emerging technology to remove third parties and centralized institutions from financial transactions.