FATF flags rising misuse of decentralised finance by criminals

Criminals are increasingly leveraging decentralized finance (DeFi) for illicit activities, including fraud, ransomware, and money laundering, according to a new report by the Financial Action Task Force (FATF). The FATF's Targeted Report on Regulatory Challenges from DeFi highlights a significant gap in regulatory implementation, with approximately 93% of reporting jurisdictions failing to adopt FATF Standards concerning qualifying DeFi arrangements. In practice, only two out of 142 jurisdictions have licensed or registered DeFi platforms. While DeFi's underlying technology offers innovation, its features like permissionless access, automated smart contracts, and anonymity can be exploited for rapid, complex, and opaque transactions. The FATF clarified that DeFi arrangements fall under its virtual asset standards if a natural or legal person exercises control. The report notes that even seemingly decentralized arrangements often retain centralized elements through governance tokens, administrative privileges, and control over upgrades. The FATF has identified indicators of control and provided recommendations for jurisdictions, financial institutions, and DeFi arrangements to safeguard the financial system. It stressed that institutions interacting with DeFi must comply with FATF Recommendations on New Technologies, Customer Due Diligence, and Correspondent Banking. Non-compliance should lead to refraining from interaction. Illicit activities often involve sophisticated techniques like chain-hopping, cross-chain bridges, and mixers to obscure funds. The report also mentioned examples of criminal exploitation related to proliferation financing.

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Although many DeFi arrangements present themselves as decentralised in terms of governance, the report finds that centralised elements frequently persist in practice including through governance token concentration, administrative privileges, control over upgrades, significant economic benefits, and influence over development and infrastructure.