A new bill was introduced on Wednesday by Sen. Jack Reed (D-R.I.) that seeks to impose stringent anti-money laundering (AML) controls on decentralized finance (DeFi) protocols, akin to the regulations in place for traditional banks.
US Senate Bill Aims to Bring DeFi Protocols Under Regulatory Framework
Sen. Mike Rounds (R-S.D.), Sen. Mitt Romney (R-UT), and Sen. Mark Warner (D-VA) have joined forces as co-sponsors, creating a bipartisan initiative to bring the rapidly growing, yet largely unregulated, DeFi sphere under the umbrella of regulatory scrutiny. The bill, dubbed the Crypto-Asset National Security Enhancement Act of 2023, could drastically change the currently unfettered landscape of decentralized finance.
According to a description of the bill reviewed by CoinDesk, the legislation is designed “to fight the rise in crypto-facilitated crime and close off avenues for the evasion of money laundering and sanctions measures that are critical to our national security.”
DeFi protocols—decentralized, blockchain-based financial systems that allow for lending, borrowing, and trading of cryptocurrencies through smart contracts—have surged in popularity but also in controversy. Unlike traditional financial institutions or centralized cryptocurrency platforms like Coinbase, these protocols operate on permissionless blockchains, posing a significant challenge for regulators.
The proposed bill aims to overcome these regulatory hurdles by putting accountability measures on “anyone who ‘controls’ a DeFi protocol or makes available an application to use the protocol.” This suggests that the developers of user-friendly interfaces for the otherwise intricate smart contracts, akin to what Uniswap Labs provides for Ethereum’s leading decentralized exchange, may fall within the purview of the law.
In a move that further underscores the expansive vision of the legislation, the bill mandates that if a protocol lacks a controlling entity, anyone who invests over $25 million into developing the protocol would bear the responsibility of these obligations.
The responsibilities that these controlling entities—or major investors—will bear include implementing rigorous customer identification programs, maintaining comprehensive anti-money laundering protocols, reporting suspicious activity to government bodies, and preventing sanctioned individuals from utilizing their protocols.
The bill further envisions broadening the Treasury Department’s mandate to scrutinize alleged money launderers in unconventional financial settings, including crypto, demonstrating an overall tightening of the regulatory grip on digital finance. It seems Choke Point 2.0 is not over yet.
The Crypto-Asset National Security Enhancement Act of 2023 marks a significant step towards the incorporation of DeFi into the wider regulated financial ecosystem. However, as the bill moves through the legislative process, it will undoubtedly ignite vigorous debate within the crypto industry and beyond about the balance between innovation and regulation.
