US Treasury ATTACK On Defi!! Here’s What They Plan To Do!

Is the U.S government about to crack Down on defy the United States Department of the treasury just Published a report about defy which Declared this crypto Niche a national Security risk to address this risk the Report calls on Regulators to force defy Protocols to conduct strict kyc and AML In what may be a Prelude to another wave Of crypto crackdowns so today I'm going To summarize the treasury Department's Defy report and tell you exactly what it Could mean for the crypto Market The report I'll be summarizing today is Titled quote illicit Finance risk Assessment of decentralized Finance it Was published by the U.S treasury Department on the 6th of April and is Part of President Biden's executive Order about crypto from last September The link to the full report will be in The description I'll also leave a link To our summary of that executive order In the description for additional Context Now the report begins with a brief Introduction wherein the authors Explained that the report is part of the Executive order I just mentioned they Specify that the executive order tasked The treasury Department with Investigating the illicit financing Risks associated with defy which the Authors say has no definition

Believe it or not but the authors admit That quote this risk assessment Recognizes that most money laundering Terrorist financing and proliferation Financing by volume and value of Transactions occurs in fiat currency or Otherwise outside the virtual asset Ecosystem via more traditional methods In other words most illicit Financial Activity takes place in the traditional Financial system not in crypto Even so the authors seem to imply that Defy is just the tip of the iceberg on The crypto side because they note that It's just one of the many crypto niches Related to illicit activity In the second part of the report the Authors analyzed the defy ecosystem they Start by saying that not all Defy is Decentralized and suggests that defy Dows where lots of tokens are held by Whales are a point of centralization to Their credit this is an issue 90 of Voting power is held by one percent of Token holders then rather than provide a Definition of what Defy is the authors Provide a definition of what it isn't According to them crypto transfers Between self-custodial crypto wallets That don't involve smart contracts are Not defy but basically everything else Is cryptocurrency exchanges Notwithstanding now this definition is a Tad terrifying because multi-signature

Wallets technically use Smart contracts If you watched our video about the Lightning Network you'll know that it Uses multi-signature wallets this means That the US government's definition of D5 I could force regulations on layer 2 Scaling Solutions In case it wasn't clear enough the Regulations that the US government want For defy are strict kyc and AML the same Kind of stuff you have on most Cryptocurrency exchanges The authors revealed that any D5 Protocol deemed to be operating in the United States is a money transmitter and Must comply what's annoying is that the Authors don't explain exactly what this Means if the website of the D5 protocol Is hosted in the United States is it a Money transmitter what if the front end Is hosted on a decentralized storage System but most of the validators on the Blockchain are based in the US now Instead of providing clarification the Authors claim that the SEC and other Regulators have made it clear what's Allowed and what's not when it comes to Defy except that they haven't at least The authors clarified that U.S Regulators don't care if some services Are automated through smart contracts The authors also reveal how they think About d5's architecture as far as They're concerned D5 consists of four

Layers the blockchain the assets the Code and the front end I.E the website It's safe to assume that centralization On any of these layers means that U.S Regulators will Target the D5 protocol Regarding the activities associated with Defy the authors highlight anything That's analogous to services in the Traditional Financial system these Include borrowing lending trading Insurance and other Financial Services They also include mixers and cross-chain Bridges as being part of D5 debatable The authors admit that they don't know How many D5 protocols exist so they cite Defile armas statistics for Simplicity There are over 2 000 D5 protocols with An overall tvl of around 50 billion Dollars the author's single out dexes Borrowing and lending protocols and Yield protocols due to their popularity Then on the next page they provide a Chart breaking down all the different D5 Services what's scary is that this list Includes oracles which provide data to D5 protocols make no mistake if there Was to be a Crackdown on data oracles Such as chain link by us Regulators defy Would be in big big trouble anyways After explaining how liquidity provision Works in defy the authors claim that People use D5 because it provides Additional features and opportunities For profit because it's more transparent

Than centralized Alternatives and Because it has no kyc or AML I reckon The first two are more important The authors then provide some hints on When U.S Regulators consider D5 Protocols to be centralized and Therefore subject to regulations they Confirm that governance front ends and Blockchains can all be points of Centralization they admit that these Elements can become more decentralized Over time What's interesting is that the authors Seem to imply that large defy governance Token Holdings by developers and early Investors AKA VC firms is a point of Centralization what's crazy is that they Seem to imply that voter delegation can Also be a point of centralization and of Course nobody controls this When it comes to front-end Centralization they seem to imply that If the website for a defy application is Built by the same entity which developed The protocol then that's a problem Luckily this problem can easily be Solved with decentralized front ends and Some D5 protocols like Ave have already Done so In terms of blockchain centralization The authors specify that quote Blockchains that have a limited number Of participants in their consensus Mechanism are a problem but don't

Specify what limited number means Instead they seem to imply that a Concentration of mining power or stake Equals centralization this is Significant because U.S Regulators could Potentially argue that layer twos like The lightning Network are centralized D5 Protocols because a handful of Bitcoin Mining pools make up most of the hash Rate The same goes for D5 protocols on Proof-of-stake blockchains with low Stake distribution like Solana now the Last element of centralization the Author's address is self-custody They seem to imply that any D5 protocol Which requires you to lock up your Assets in a smart contract controlled by Developers or token holders is Centralized this is concerning because Most D5 protocols use Smart contracts Like this In the third part of the report the Authors discuss the illicit Financial Activity risks posed by defy they Commence by correctly pointing out that North Korea has made a lot of money by Hacking exchanges and D5 protocols Surprisingly they seem to admit that This doesn't actually constitute defy Use in fact the authors admit that There's a lack of case studies available For them to back up their claims that Defy is used for illicit Financial

Activity they claim that the absence of Evidence doesn't mean it's not happening And say that their declaration comes From consultation with other government Agencies Not only that but the authors admit that Most of the illicit Financial activity Associated with defy comes from mixers And cross-chain bridges both of which Are arguably not D5 protocols per se but Because the authors put them in the same Bucket they can claim that Defy is Popular with criminals this reminds me Of the recent cbdc report also published By an agency associated with the Treasury Department which lumped crypto And cbdcs into the same category and Then claimed that crypto has the same Risks as cbdc's and should therefore be Restricted more about that in the Description anyhow the authors go on to Detail exactly how criminals use D5 Protocols the tldr is that they tend to Move stolen crypto to a more trustless Blockchain like ethereum then trade this Stolen crypto for a more trustless Crypto like eth and then mix it to Obfuscate the funds or provide Dex Liquidity logically none of this is Profitable until the crypto criminal Cashes out using a crypto to Fiat on Off-ramp of some kind naturally the Authors blame the lack of kyc and AML Measures at some cryptocurrency

Exchanges but they're careful not to Acknowledge that this is the actual area They should be regulating Regarding ransomware meanwhile the Authors claim that the use of Cross-chain bridges in a handful of Ransomware attacks constitutes illicit Defy usage but again this is debatable Regarding theft they claim that the use Of flash loans constitutes illicit defy Usage but this is also debatable for Reasons I won't get into here Regarding fraud and scams they claim That rug pulls constitute illicit defy Usage and I'll concede that they're onto Something in this case however I would Argue that it's up to investors to Understand whether a certain crypto Project is a potential rug pull or not And contend that they have the tools to Do this now regarding drug trafficking The authors are unable to give an Example of how defy has been used Instead they just insist that the use of Defy in drug trafficking is on the rise Citing unnamed blockchain analytics Companies I wonder if the blockchain Analytics company in question is Ciphertrace More about ciphertrace in the Description I digress Then following a lengthy explanation of How North Korea has been stealing Billions of dollars of crypto from

Exchanges and D5 protocols the authors Recount how the office of foreign assets Control or ofac a subsidiary of the Treasury Department sanctioned the Tornado cash mixing service last November they reveal that ofac considers Tornado cash to consist of two Components the developers and the Tornado cash Dao this explains why Alexi Percev is still being held in the Netherlands but it confuses the criteria U.S Regulators are using to determine Defy centralization In the fourth part of the report the Authors assess the vulnerabilities that D5 presents to financial activities in The U.S for starters it repeats that D5 Protocols deem to be operating in the United States must require kyc from Their users and engage in elaborate AML Measures including sanctions what's Alarming is that the authors reference The shapeshift cryptocurrency wallet as Being an example of a D5 protocol that Must comply with such regulations they Go on to give a long list of D5 Protocols that have been sued by U.S Regulators which presumably implies that Shapeshift will soon join that list What's even more alarming is that the Authors underscore quote Disintermediation as the second Vulnerability they explain that Disintermediation means the ability to

Custody your own coins and tokens on Your personal cryptocurrency wallet and Transfer them without an intermediary in Other words they see crypto wallets as a Risk for illicit Financial activity this Is not surprising given that the Financial action task force or fat F Wants to kill cryptocurrency by labeling All self-custodial crypto activities as High risk you can learn more about the Fat def using the link in the Description this ties into the third Vulnerability which is the possibility That other countries won't enforce the Same regulations on D5 protocols and Crypto exchanges the fat F's job is to Essentially ensure that there's Global Compliance with these regulations and it Achieves this by threatening countries With debanking Now the fourth and final vulnerability The authors identify is cyber which Includes security breaches code exploits And so-called flash loan attacks now Believe it or not but the authors blame The open source transparent nature of D5 Protocols for these vulnerabilities Implying that it should all be private Then in the fifth part of the report They unpack the mitigation measures Against these vulnerabilities lo and Behold the first mitigation measure is To ensure that all countries and Companies comply with the fat F's

So-called cryptocurrency recommendations Which we summarized in another video The second mitigation measure is to have Blockchain analytics companies identify Who owns Which cryptocurrency wallets And report that information to Authorities the authors also want Blockchain analytics companies to Identify which wallets and smart Contracts are high risk good old fat f Ously this can't easily be done with Cryptocurrencies and protocols which Preserve privacy and the authors point To layer 2 Technologies as an area of Concern For those unfamiliar the lightning Network can apparently provide quite a Bit of privacy especially after Bitcoin's Taproot upgrade The third mitigation measure is kyc and AML for all crypto to Fiat on and off Ramps such as crypto exchanges however The authors argue this is not enough and That D5 protocols still need kyc and AML Too that's because quote while Centralized vasps that is virtual asset Service providers are currently needed As on and off ramps for many Transactions further adoption of virtual Assets May reduce this necessity in the Future now this sentence is extremely Significant because it's a tacit Admission from the treasury Department That crypto adoption will eventually be

At a point that centralized Intermediaries are no longer required The authors also admit that crypto is Quickly becoming accepted as a form of Payment around the world they then Provide suggestions on what the crypto Industry can do to mitigate the illicit Financial activity risks of D5 they Suggest that crypto should quote enable Illicit Finance risk mitigations to be Integrated into smart contract code such As restricting transaction frequency Placing threshold limits for certain Customer types or using oracles to Screen against virtual asset wallet Addresses appearing on sanctions lists And to prevent sanctioned addresses from Using a defy service Doesn't sound like crypto to me anywho In the final part of the report the Authors lay out their recommendations For what Regulators should do about defy The list is predictable strict kyc and AML for crypto to Fiat on an off-ramps Strict kyc and AML for D5 protocols come Up with ways to Target D5 protocols that Can't be regulated ensure that all Countries are on board audit crypto code And ensure that kyc and AML are built Into crypto code all of which brings me To the big question and that's what the Treasury Department's D5 report means For the crypto Market in short it Suggests that smart contract

Cryptocurrencies are going to have a Hard time because that's where defy Exists this could be a part of why Bitcoin has been doing so well lately But as I mentioned earlier Bitcoin may Not be entirely safe either it's Possible if not likely that Regulators Will try and force layer 2 scaling Solutions like the lightning Network to Require kyc these layer twos will be no Different from centralized Intermediaries especially if compliance Is in the code itself in case it wasn't Clear enough it really seems like the Treasury Department is using defy as an Excuse to try and control cryptocurrency You'll recall that the authors admitted There aren't any notable cases of D5 Protocols being used for illicit Activity outside of mixers and bridges Which are arguably not defy this didn't Stop the authors from making blatantly Insane regulatory recommendations for Every aspect of cryptocurrency including Self-custodial wallets however there is One important crypto component they Overlooked and that's stable coins now This is very odd considering stable Coins are integral to defy it's also odd Because the fed and other us Regulators Want to crack down on stable coins Because they're direct competitors to Central Bank digital currencies or cbdcs A stablecoin Crackdown would kill two

Birds with one stone cbdc competitors And the defy ecosystem so why wasn't This recommended well the only answer I Can think of is that U.S Regulators want Stable coins to continue existing Because most of them are denominated in US Dollars and can be used for U.S Foreign policy objectives consider that Usdc has been used by the US and the UN To deliver Aid to Venezuela and Ukraine Respectively moreover most stable coins In circulation are backed by U.S Government debt this means that when you Buy a stable coin you're subsidizing the US government spending besides defy Sable coins are also used for payments And saving in countries with weak Currencies poor folks footing the bill As always in any case it's clear that The US government once Regulators around The world to crack down on everything That makes crypto crypto if it gets its Way then crypto won't be crypto anymore It'll be yet another arm of the existing Financial system where illicit activity Is rampant as per the author's admission The good news is that not all countries Will comply with the US government's Requests and that means that crypto Actual crypto will continue to grow with A bit of luck it will grow to the point That intermediaries like crypto to Fiat On and off-ramps are no longer required As the authors again admitted the bad

News is that this non-compliance will Likely come with its fair share of Friction the US has already started to Reign in the UK and the EU after they Tried to introduce pro-crypto Regulations we could see the same Compliance in other U.S Allied countries And de facto sanctions on detractors now The Silver Lining is that this Non-compliance will in fact occur at That point you will have to ask yourself Whether you want to continue living in a Country that's opposed to Financial Freedom or if you should move to one That Embraces it I can't tell you what To do but well I myself chose the latter And that's all for today's video folks So if you enjoyed it smash that like Button to let me know and don't forget To subscribe to the channel and ping That notification Bell before you go and If you're looking to make the most of The crypto Market head on over to the Coin Bureau deals page it's got massive Discounts and thousands of dollars of Incentives on the top exchanges when you Trade the link will be down in the Description as always thank you all for Watching and I'll see you next time till Then stay cool stay safe and stay crypto Foreign [Music]

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