DEX Next? US Treasury Implies Decentralized Sector A Threat To National Security

Key Takeaways:

• The US Treasury released a report regarding the role of illicit players in the DeFi sector
• The sector has been a victim of multiple hacks.

NEW DELHI (CoinChapter.com) — The decentralized sector might be the latest crypto entity in the US government’s crosshairs. The US Treasury released a report that stated illicit players might be laundering money through the sector.

Furthermore, the report stated that hackers, cybercriminals, and the Democratic People’s Republic of Korea (DPRK), among others, use DeFi services to commit crimes such as hacks and heists. As a result, the Treasury claims that DeFi might be a threat to national security.

The risk assessment report recommended the US government extend its Anti-Money Laundering / Countering the Financing of Terrorism AML/CFT) laws to include the DeFi sector. Moreover, US Treasury highlighted decentralized exchanges (DEX) as one of the most prominent components of the sector.

In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.

The report stated

The report also pointed out the lax KYC norms result in illicit players using DEXs instead of centralized exchanges like Coinbase.

In addition, the Treasury report mentioned the use of cross-chain bridges by illicit parties to convert to “convert one virtual asset into a different virtual asset,” helping hackers and cybercriminals to cash out their gains.

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The report also noted criminals’ use of currency mixers to obfuscate illicit transactions or gains from criminal activities.

DeFi, A Longstanding Victim Of Attacks

The DeFi sector was a target of multiple attacks in 2022, with DeFi protocols accounting for nearly $3.1 billion in losses, 82.1% of all cryptocurrency that hackers stole in the year.

Some of the most prominent DeFi hacks include the $625 million Ronin Network hack in July 2022. Hackers exploited Axie Infinity’s Ethereum (ETH) linked sidechain to walk away with the year’s largest haul. Attackers used hacked private keys to make fake withdrawals.

In Feb, malicious elements exploited vulnerabilities in the Wormhole Protocol to get away with over $320 million in wrapped ETH. Elliptic analytics blamed the exploit on the platform’s failure to validate “guardian” accounts.

Nomad, a tool that allows users to swap tokens across blockchains, was a victim of a hack that resulted in a loss of $190 million.

Interestingly, hackers with links to North Korea accounted for most illicit crypto activity in 2022, per a Chainalysis report. The DPRK-backed hackers stole approximately $1.7 billion across multiple hacks.

For perspective, between 2016 and 2021, North Korean exports dropped by $2.54 billion to $181 million in 2021. Meanwhile, in the same time frame, the amount stolen by North Korea-linked hackers in DeFi attacks rose by nearly 28,500% to $428.8 million in 2021.

The number spiked meteorically to $1,650.5 million in 2022, a jump of 285% YoY.

The Treasury report might result in heightened scrutiny of the DeFi sector, given Binance’s recent troubles with regulatory bodies. Furthermore, the report might hurt market sentiments which could give bears the upper hand in the coming days.