FATF flags rising misuse of decentralised finance by criminals, urges countries to strengthen oversight

PARIS: The Financial Action Task Force (FATF), in a new report published on Tuesday, highlighted the rapid growth of decentralised finance (DeFi) and how its unique features are being increasingly exploited by illicit actors, including fraudsters, ransomware operators, professional money laundering networks and proliferation financing actors.

In an official statement it noted that despite estimates indicating rapid growth in global use, the FATF’s Targeted Report on Regulatory Challenges from DeFi highlights that almost 93 per cent of reporting jurisdictions (132 of 142) have not yet implemented the FATF Standards in relation to qualifying DeFi arrangements, and just two of 142 jurisdictions have actually licensed or registered DeFi arrangements in practice.

Noting that while the underlying decentralised technology in DeFi protocols offers opportunities for financial innovation, features such as permissionless access, rapid execution through automated smart contracts, cross-border reach, and the ability to conduct transactions without disclosing the user’s identity, can facilitate fast, complex and opaque financial transactions that can be exploited by criminals.

As per the FATF, the report clarified that DeFi arrangements fall within the scope of the FATF Standard covering virtual assets (Recommendation 15), where a natural or legal person exercises control or sufficient influence over the arrangement.

“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”, it said.

The FATF report further identified a list of on-chain and off-chain indicators of control and sets out recommendations to help jurisdictions, but also financial institutions, VASPs and DeFi arrangements to protect the integrity of the financial system while also preventing and mitigating the criminal abuse of the DeFi ecosystem.

The report underlined that financial institutions and VASPs that interact with or provide services to DeFi arrangements should comply, as appropriate, with the relevant FATF Recommendations, including Recommendations 15 (New Technologies), Recommendation 10 (Customer Due Diligence) and Recommendation 13 (Correspondent Banking). Where compliance with the FATF Standards cannot be achieved, they should refrain from interacting with such DeFi arrangements.

It noted how Illicit activity linked to DeFi arrangements often involves the use of sophisticated techniques such as chain-hopping, cross-chain bridges, decentralised exchanges, mixers and governance manipulation, enabling the layering and co-mingling of illicit funds within legitimate financial flows.

The report also highlighted examples of criminal exploitation of DeFi platforms which included Proliferation Financing and mentioned that in April 2026 alone, two major cyberattacks on DeFi platforms attributed to the DPRK accounted for approximately 76 per cent of all annual losses from virtual asset hacking incidents, with combined proceeds of over $570 million.

“Fraud and scams: the SafeMoon Token Scheme and the Forsage Case’ illustrate how criminals can exploit seemingly legitimate DeFi platforms to defraud investors and misappropriate funds. By secretly retaining control over key technical functionalities of these platforms, perpetrators were able to manipulate operations and divert substantial amounts of virtual assets for personal gain,” it further mentioned.

In line with the FATF’s risk-based approach to fighting financial crime, the report underlined that jurisdictions with more significant DeFi activity should allocate more resources to understanding, supervising, and developing approaches to mitigate the illicit finance risks associated with DeFi arrangements.

“Available data indicates that DeFi activity is currently highly concentrated, with North America and Europe accounting for approximately 60 per cent of global transactions, whereas the Middle East and Africa together are estimated to contribute to less than 10 per cent,” it added.

The report further noted that the top 20 DeFi protocols are estimated to represent more than 70 per cent of total DeFi activity. “Regulatory and supervisory efforts should take these market asymmetries into account and prioritise engagement with the largest and most systemically relevant DeFi protocols and associated stakeholders”.

It listed out key recommendations for jurisdictions, DeFi arrangements, financial institutions, and VASPs; some of which included advanced efforts to develop an appropriate and proportionate regulatory framework for DeFi arrangements, including through smart contract certification; enhanced domestic co-operation between financial regulators and law enforcement authorities to support the supervision of DeFi arrangements; conducted regulatory thematic workshops and established public-private partnerships to promote understanding of risks and compliance in DeFi and advance asset tokenisation through open and interoperable network standards, set up a dedicated cryptocurrency investigation team to analyse and investigate the misuse of DeFi protocols by illicit actors; and shared information between financial intelligence units to detect cross-border DeFi-related risks, including through the Egmont Secure Web and FIU.net.

Amid these developments, FATF President, Giles Thomson, urged to stop emerging technologies from being exploited by criminals trying to launder dirty money, whilst also supporting their wider adoption for legitimate purposes. He noted that the report set out practical recommendations to help jurisdictions and the private sector strengthen their defences against criminal abuse of DeFi arrangements whilst supporting responsible financial innovation.

“Strong co-operation and information sharing, particularly through public-private partnerships, is critical to sharpening the global response to this emerging technology and protecting the integrity of the international financial system”, Thomson said. (ANI)