US Treasury Calls for DeFi Compliance with Anti-Money Laundering Rules

The US Treasury Department has emphasized the need for decentralized financial (DeFi) transactions, including those involving virtual currencies, to comply with anti-money laundering (AML) and sanctions laws. The statement follows a 39-page report commissioned by the Biden administration that highlights several risks associated with DeFi technology.

DeFi technology, which has no precise definition, encompasses self-executing transactions between two or more parties based on the same blockchain technology underlying cryptocurrencies. The report identifies risks such as potential abuse by ransomware cybercriminals, thieves, scammers, and Democratic People's Republic of Korea (DPRK) cyber actors.

This report arrives at a time when the US and other countries are grappling with how to regulate cryptocurrencies and virtual assets. It recommends stricter rules for DeFi technology and reminds firms that they are required to follow existing laws concerning money laundering and terrorist financing. The report found that many institutions and users do not currently comply with these laws.

Brian Nelson, the Treasury undersecretary for Terrorism and Financial Intelligence, stated that capturing the potential benefits of DeFi services requires addressing the identified risks. Nelson encouraged the private sector to use the assessment's findings to inform their risk mitigation strategies and take clear steps, in line with AML/CFT (combating the financing of terrorism) regulations and sanctions obligations, to prevent illicit actors from abusing DeFi services.

The report's findings, which suggest some changes to the law, coincide with the Biden administration's consideration of a broader regulatory framework for cryptocurrencies and other blockchain-based payment forms. In September, the administration called on the Securities and Exchange Commission (SEC) and other regulators to "aggressively pursue investigations and enforcement actions against unlawful practices."

Alex Zerden, a former Treasury official who advises cryptocurrency firms on their illicit-finance risks, said that while the broader regulation of digital assets remains a divisive legal and legislative issue, the Treasury has attempted to settle some open questions about the technology through guidance and reports like the one issued on Thursday. According to Zerden, the Treasury remains consistent in identifying activities subject to AML/CFT requirements, regardless of their label.

Zerden highlighted the Treasury's focus on the importance of public-private partnerships and the need to reach nontraditional actors who may have Bank Secrecy Act obligations. Though new technologies may pose novel questions, the Treasury remains committed to addressing these challenges and ensuring compliance with existing regulations.