Is DeFi next to the regulators’ watch?
The latest report from the US Treasury Department suggests that decentralized finance (DeFi) may be the next target for US authorities, following their focus on centralized platforms since the beginning of the year.
What is DeFi?
DeFi is a kind of banking instrument that includes blockchain-based services and apps. The primary purpose of decentralized finance is to create an alternative to the banking industry by replacing existing financial system technology with open-source protocols. Thus, to provide a broad range of people with access to DeFi and new investing platforms, as well as generating income from crypto assets.
The majority of existing DeFi is built on the Ethereum blockchain. Moreover, the number of new decentralized financial apps is continuously increasing.
U.S. Treasury warned of the risks of DeFi services
The US Treasury Department’s Illegal Financing Risk Assessment Report has concluded that DeFi protocols are being used by cybercriminals, particularly those from the DPRK, and fraudsters to transfer and launder money. The report states that DeFi services do not ensure compliance with Bank Secrecy Act regulations that apply to them. Additionally, officials note that the absence of industry services like blockchain analytics “does not adequately address the risks highlighted.”
The report also indicates that the number of violations committed using cryptocurrencies, particularly DeFi, is still relatively minor compared to similar operations involving fiat currency. Nonetheless, the authors of the report highlight the risks associated with the use of DeFi protocols and the need to address them.
Degree of decentralization of DeFi
The Decentralized Finance (DeFi) ecosystem is based on blockchain technology, which enables exceptionally high levels of decentralization. Several DeFi services, however, continue to rely on centralized pricing feeds, which can be manipulated. Furthermore, because certain platforms have a restricted number of developers who handle the code, they are vulnerable to assaults.
Also, concerns have been raised regarding the regulatory environment around DeFi, which may hinder its decentralization. While DeFi is widely thought to be more decentralized than traditional finance, the real extent of decentralization is unclear.
Recommendations and conclusion
The agency suggests tightening regulatory control and encouraging private enterprises to build their solutions to mitigate the dangers of DeFi service breaches and misuse.
However, the authors of the report suggest that illegal behavior represents only a fraction of the DeFi ecosystem, which constitutes a small percentage of the broader virtual asset economy. Additionally, the report notes that money laundering and terrorist funding are more likely to occur when fiat currency or traditional assets are used, rather than virtual assets.
U.S. officials call for regulation of digital assets
In a March report to Congress, US President Joseph Biden stated that digital assets pose risks to investors and financial stability as they do not correspond to specified usage scenarios. The White House has urged Congress to increase its efforts in monitoring the digital asset market.
Furthermore, SEC Chairman Gary Gensler has emphasized the need to regulate the industry, and it is set to be a priority in 2023. Gensler has previously referred to the digital asset market as centralized.
In conclusion, the policymakers seem to be monitoring and considering legislative aspects to provide regulation. Also, the use of open blockchain data and the development of new industry solutions can help to mitigate some of the risks associated with illegal funding.
