Decentralized Finance (DeFi) to Usher In The ‘Next Generation of Money Laundering’ – CipherTrace Report

The DeFi boom took everyone by surprise and claimed its significance. According to CipherTrace, regulators are concerned about the booming DeFi sector becoming a home to illicit activists.

DeFi hosts no KYC protocol, and it’s susceptible to criminals to manipulate it potentially. The DeFi space is considered in its initial stages, and it’s quite hard to determine whether illicit activities in the cryptocurrency space will start taking place in the DeFi industry.

Dave Jevans says the previous KuCoin hack incident suggests that most likely decentralized Exchange (DEXs) will receive unwanted attention from nefarious activists. Dave Jevans added,

“I think there’s a lot of concern that these platforms can be used as effectively the next generation of money-laundering mixing services.

If I can put my stuff into a DeFi contract, it gets mixed up with other people’s money when it comes back out. Because there’s no tracing and there’s no KYC, it effectively is operating as an old-school crypto money-laundering service.”

In the latest KuCoin hack, the cryptocurrency exchange almost lost $200 million. The hackers converted stolen tokens from the biggest DeFi exchange Uniswap.

Even though decentralized exchanges helped the hackers to exchange stolen tokens, DEXs did not allow them to clear tracks on transactions.

Mixers and No KYC protocol

CipherTrace CEO says money launderers will benefit from the DeFi industry due to some interesting attributes. The most ironic aspect of the smart contract is that most of them develop a layer of comfort and security for culprits. Jevans further added:

“Because these are contracts, it’s much harder to get ripped off. Some of the mixing services, when they get sufficient volume, they pull an exit fraud and just basically stop working.

That’s the way a bunch of these guys make money; they’ll charge low fees on mixing and wait until there are a few tens of millions in the hopper, then they just take off.”

There is a potential risk for perpetrators to exchange shaded assets from cryptocurrency exchanges as they can be seized by regulators and law enforcement agencies. Jevans said:

“We’ve seen several seizures and arrests. Well, if your money was in there at the time, I assure you, you’re not getting it back.”

“Mixers are expensive. DeFi platforms present less risk, and the fees are less, too. In my view, a DeFi platform is also better because you’re mixing your bad funds with a lot of good funds.”

“I would argue that mixers – and this is just my opinion – have a disproportionately high amount of criminal activity going through them. Whereas DeFi has a lot of people who want to get in on the next investment trend.”

The new report published by CipherTrace shows that DeFi protocols act as a gap in the entire crypto KYC ecosystem. The recent comments from the U.S. Securities and Exchange Commission (SEC) indicate that DeFi is next on their radar. Czar Valerie Szczepanik said at the Parallel Summit on Sept. 18, 2020:

“We’ve seen [DeFi] projects that are subject to vulnerabilities, attacks, hacks, manipulation.

We’ve seen structures that purport to enable users to lend money, earn interest, borrow money, exchange, take positions; these are all financial activities, and they are likely subject to various laws already, including securities law, potentially banking and lending laws – definitely AML/CTF laws.”

Besides, Jevans disagrees with the fact that DeFi will add KYC protocol anytime soon.

“From what we have experienced over the last couple of months is that they don’t want to have anything to do with KYC.

They just say they are writing software, and, while they get beneficial funds from it, they are not ‘operating’ it. But it’s interesting to see what the governance of the platforms is, which often happens to be from venture capital-backed companies.”


The CEO of CipherTrace claims the DeFi sector is more prone to illegal activities than cryptocurrencies. Most certainly, it attracts criminals to mix dirty holding without any risk of getting seized.

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