Europol Warns of DeFi and NFT Crimes in EU

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.”

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.

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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, a substantial
portion of which was linked to criminal activities.

However, Europol
acknowledges 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, it said.

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 (AML) and know-your-customer (KYC) breaches.

The CFTC’s most recent
move 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.