The European Union Agency for Law Enforcement Cooperation (Europol), has cautioned against escalating criminal activities in the Decentralized Finance (DeFi) sector. In a report dubbed the “European Financial and Economic Crime Threat Assessment 2023” Europol acknowledged the remarkable independence and security offered by blockchain technology but sternly criticized the DeFi sector.
Blockchain technology, as the backbone of cryptocurrencies and DeFi platforms, has emerged as a symbol of independence and security. However, Europol has cautioned against the absence
of regulatory oversight in the DeFi space, which creates a breeding ground for economic crimes.
Catherine De Bolle, the Executive Director at Europol, said: “In our globalized world, trade, technology, and transport bring us closer together and create economic opportunities and prosperity. However, there is another side to the coin; our interconnected world is misused and abused by criminal actors involved in
economic and financial crimes.”
DeFi’s Escalating Criminal Ties
Non-fungible tokens (NFTs), which are renowned for their instant trading capabilities and digital ownership representation, have also caught the attention of fraudsters. According to Europol, the cross-border nature of NFT trading has made them a potential vehicle for money laundering.
In addition, the emergence of the metaverse, a digital universe hosting various activities, has introduced new dimensions to the financial sector. However, this virtual environment has already witnessed cases of fraud and theft, hinting at a possible trend of organized crime, the agency indicated.
Europol substantiated its concerns with a real-world example from January 2023. Law enforcement authorities dismantled a crypto platform called Bitzlato, suspected of laundering illicit funds associated with Russian entities under EU sanctions. This platform facilitated the swift conversion of various cryptocurrencies into Russian rubles, involving an estimated EUR 2.1 billion in assets, which is a substantial portion of what was linked to criminal activities.
However, Europol acknowledged that DeFi has the potential to bring about significant positive changes in the financial ecosystem. DeFi can enhance financial inclusion, reduce costs, and increase transparency by eliminating intermediaries and enabling peer-to-peer transactions.
CFTC Extends Its Jurisdiction to DeFi
Europol’s report is complemented by the steps taken by the US Commodity Futures Trading Commission (CFTC). This governing body responsible for regulating commodity markets and derivatives trading in the US has taken significant strides to extend its jurisdiction into key DeFi realms.
As early as March 2021, the CFTC published a “crypto primer” asserting its authority over digital assets, including cryptocurrencies and tokens. The primer explicitly mentioned that certain DeFi operations involving digital assets might fall under the purview of the CFTC.
Furthermore, in October 2020, the CFTC initiated civil enforcement proceedings against BitMEX,
a cryptocurrency derivatives exchange, and its owners, citing anti-money laundering and know-your-customer breaches.
The CFTC’s most recent action involved issuing orders against three DeFi protocols: Opyn, Inc., ZeroEx, Inc., and Deridex, Inc. These protocols were accused of facilitating illegal digital asset derivatives trading within the DeFi realm. Opyn developed a blockchain-based protocol for trading oSQTH tokens, Deridex
offered perpetual contracts, and ZeroEx provided a platform for leveraged token trading.