Paradigm joins DEF and SPI in comment to Treasury on how innovative crypto practices can prevent and combat illicit finance

The best way to fight illicit finance in crypto is with crypto.

In August, the Treasury Department issued another request for comment regarding the implementation of the GENIUS Act, this time on “innovative or novel methods, techniques, or strategies that regulated financial institutions use, or could potentially use, to detect illicit activity involving digital assets.” At present, illicit finance in crypto remains uncommon, with illicit transactions accounting for between 0.014 and 0.4% of overall crypto volume in 2024 according to TRM Labs and Chainalysis, far below the 2-5% of global GDP that money laundering in the traditional economy accounts for. Even as crypto volumes have grown, illicit finance volumes in crypto are shrinking, with Chainalysis finding that illicit volumes shrunk by 51% between 2023 and 2024. As crypto continues to grow, it is important that the share of illicit finance in crypto not grow alongside it.

Crypto is too varied, fast-moving, and decentralized for there to be one solution to illicit finance. Instead, the best way to combat illicit finance in crypto is via a group of interlocking tools and strategies, a concept in cybersecurity known as “defense in depth.” Specifically, we propose that the best way to combat illicit finance is using multiple, redundant defenses and approaches such that there is no single point of failure. In particular, we focus on three different types of innovative defensive solutions.

First, there are risk assessment and defensive blocking tools, which serve as intelligence gathering of and heightened barriers against threats. The former involves evaluating potential threats via reputational due diligence, such as analyzing wallet history and token legitimacy, yielding quantifiable risk scores that users can use to make more informed decisions. The latter is more classically defensive in nature, providing proactive barriers that stop the execution of harmful acts, such as by screening transactions in real time or detecting and halting bots and exploits.

Second, there are proactive user-protection tools, which allow for the simulation of blockchain transactions before they are actually executed on-chain. Think of these tools as akin to seeing a model of how a video game character in a tactical RPG will move under a set of specific instructions, and how they will interact in their environment or other characters, before they actually are ordered to act in-game. The user can experiment with different versions of possible on-chain transactions before doing so, thereby seeing which versions of an action trigger such traps as infinite wallet drains or an encounter with a phishing contract. These tools allow users to not just make educated guesses of how transactions will work, but do rigorous pre-execution modeling and testing of different options, thereby empowering ordinary users.

Finally, there are threat information coordination solutions. Simply put, these are ways to reduce risks by sharing greater information among ecosystem actors. Such solutions involve “real-time collaboration and intelligence sharing among the digital asset ecosystem, law enforcement, security researchers, and other stakeholders to combat digital asset crimes.” One of the best examples of threat information coordination is the Security Alliance (SEAL). SEAL is a nonprofit center for “crypto threat intelligence sharing, emergency response, and industry security standards development that focuses on rapid response to exploits and threat information dissemination through SEAL 911, a free service supported by industry contributors.” Optimal threat coordination is both forward-looking for possible threats and rapid response for present ones; we have to both put out fires already blazing and work to prevent them from starting.Ultimately, the native tools of crypto are the best way to solve problems within this space. We hope that Treasury and all policymakers find ways to encourage the use of innovative tools and analytical abilities in crypto to combat illicit finance.

The comment letter can be found here.