DeFi: Risk, Regulation, and the Rise of DeCrime

Growth in the use of DeFi over the past two years has been staggering, the total capital locked in DeFi services has grown by over 1,700% to $247 billion in the past year alone.

The same openness and innovation that makes DeFi so powerful also brings with it new risks. The relative immaturity of the underlying technology has allowed hackers to steal users’ funds, while the deep pools of liquidity have allowed criminals to launder proceeds of crime such as ransomware and fraud. This is part of a broader trend in the exploitation of decentralised technologies for illicit purposes, which Elliptic refers to as DeCrime.

These losses are accelerating, with losses totaling $10.5 billion in 2021, up from $1.5 billion in 2020

As DeFi grows to become an increasingly significant part of our financial system the risks inherent in it will also impact traditional financial institutions. These risks can not be mitigated through industry abstention alone.

In this Elliptic report, we examine the concept of DeFi, what it actually ‘is’, as well as the associated risks, how DeFi is (or isn’t) regulated and potential DeFi financial crime compliance and controls.

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