U.S Treasury Department Raises National Security Concerns Over DeFi Sector

• This past Thursday saw the release of the 2023 DeFi Illicit Finance Risk Assessment.
• The Treasury found several examples of single points of failure across the “DeFi” industry.

According to a recent assessment from the United States Treasury Department, crypto, consumers, and national security are all at risk due to inadequate cybersecurity measures within the decentralized finance (DeFi) sector.

This groundbreaking report is the first to propose that the decentralized and distributed structure of DeFi necessitates further regulatory oversight to combat the increased illicit financing dangers it poses.

This past Thursday saw the release of the 2023 DeFi Illicit Finance Risk Assessment, which describes the ways in which criminals and fraudsters are using the DeFi ecosystem to launder money via unregulated channels. The agency listed many methods for doing so, such as exchanging money for less trackable cryptocurrencies, switching between blockchains, and transmitting assets via crypto mixers.

National Security Priority

Money launderers use VASPs, or virtual asset service providers, to convert their dirty coins into real money. Because of its widespread use by hackers in South Korea, the Treasury Department blacklisted cryptocurrency mixer Tornado Cash in August of last year.

The agency also highlights ransomware as a significant problem, calling it a “national security priority.” Because of the anonymity and irreversibility of Bitcoin and other crypto network transactions, they provide the perfect conduit for extortion.

The government cited research by blockchain analytics startup Elliptic from 2022, which indicated that in the first half of that year, $50 million in ransomware proceeds were laundered via a single cross-chain bridge.

Despite its self-proclaimed decentralization, the Treasury found several examples of single points of failure across the “DeFi” industry. On the other side, early DAO investors may consolidate control over DeFi protocols that are administered by DAOs and the holders of their governance tokens.

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