Latest Proposal from Both Parties in the United States DeFi and Crypto ATMs Also Need AML and KYC

Latest US DeFi and Crypto ATM Proposal Requires AML and KYC

Author: senate.gov; Translation: LianGuai0xxz

In order to prevent money laundering and stop cryptocurrency from promoting criminal activities and violating sanctions, a group of US senators is introducing new bipartisan legislation that requires decentralized finance (DeFi) services to meet the same anti-money laundering (AML) and economic sanctions compliance obligations as other financial companies, including centralized cryptocurrency exchanges, casinos, and even pawn shops. The legislation also updates the Treasury Department’s anti-money laundering authority and establishes new requirements to ensure that “cryptocurrency ATMs” do not become channels for illegal money laundering activities.

DeFi generally refers to applications that facilitate peer-to-peer financial transactions recorded on a blockchain. The most prominent example of DeFi is the so-called “decentralized exchanges,” where automated software allegedly allows users to trade cryptocurrencies without intermediaries.

By design, DeFi offers anonymity. This allows malicious and criminal actors to evade traditional financial regulatory tools, including well-established rules that require financial institutions to monitor all transactions and report suspected money laundering and financial crimes to the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN). This enables DeFi to be used for money laundering and funding more criminal activities.

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Criminals, drug traffickers, and hostile state actors such as North Korea have all shown a preference for using DeFi as a preferred method to transfer and launder illicit proceeds. These bad actors quickly realized how DeFi could be exploited to facilitate cross-border fentanyl trafficking and fund the development of mass destruction weapons.

According to a recent US National Money Laundering Risk Assessment: “DeFi services typically do not involve any AML or other processes to KYC.” According to another recent report by the Treasury Department: “Illegal actors, including ransomware criminals, thieves, fraudsters, and Democratic People’s Republic of Korea (DPRK) network hackers, have used DeFi services in the process of transferring and laundering their illicit proceeds. To achieve this goal, illegal actors exploit vulnerabilities in AML regulations, supervision, and enforcement mechanisms in the US and abroad, as well as in the technology that supports DeFi services.”

Given the importance of transparency and fair rules in protecting the financial system from crime, US Senators Jack Reed, Mike Rounds, Mark Warner, and Mitt Romney released the Cryptocurrency Assets National Security Enforcement and Law Enforcement Act (CANSEE Act, S. 2355) on July 19th. This legislation aims to combat money laundering and sanctions evasion involving DeFi.

The CANSEE Act will end the special treatment of DeFi, and DeFi will also be subject to national security laws applicable to banks and securities brokers, casinos, pawn shops, and even other cryptocurrency companies such as centralized exchanges. This means that DeFi services will be forced to fulfill basic obligations, especially maintaining AML programs, conducting due diligence on their customers, and reporting suspicious transactions to FinCEN.

These requirements will close an attractive channel for money laundering, which has been exploited by the North Korean government, Mexican drug cartels, cybercriminals, ransomware attackers, scammers, and other bad actors over the past few months.

The legislation also explicitly states that if sanctioned individuals (such as Russian oligarchs) use DeFi services to evade US sanctions, then anyone controlling the project will be held responsible for facilitating such misconduct. If no one controls the DeFi service, as a backup, anyone investing over $25 million in developing the project will be liable for these obligations.

The CANSEE Act also requires cryptocurrency automated teller machines (also known as cryptocurrency ATMs) to verify the identity of each counterparty in every transaction, improving the traceability of funds. Unless these loopholes are addressed, criminals will continue to use these ATMs to launder money from drug trafficking, human trafficking, fraud, and other criminal activities.

The interface of cryptocurrency ATMs is similar to regular ATMs and is usually located in convenience stores, laundromats, and gas stations. Users can insert cash or debit cards into the machine to convert real currency into cryptocurrency and then transfer it to a digital wallet. Once the transfer is completed, users cannot retrieve their money. According to Coin ATM Radar data, there are currently around 30,600 cryptocurrency ATMs in the United States, compared to only 1,200 in 2018.

Finally, the CANSEE Act makes significant updates to the Treasury Department’s authority to require participants in the US financial system to take special measures against money laundering threats. Currently, these powers are limited to transactions conducted in the traditional banking system. However, as new technologies like cryptocurrency increasingly enable new forms of financial transactions, expanding the Treasury Department’s enforcement authority to illegal financial activities that may occur outside the banking industry is crucial.

“DeFi and cryptocurrency ATMs are technologies that are essentially unregulated and require stronger supervision and safeguards to prevent rampant money laundering and sanctions evasion,” said Senator Reed. “This legislation enhances the Treasury Department’s tools to protect our national security and economic security. Drug cartels, human traffickers, and others should not be able to use DeFi platforms to evade justice, and their victims deserve better protection. Our bill will also ensure that law enforcement agencies can obtain better information about cryptocurrency transactions, which is necessary for combating cross-border drug trafficking, weapons proliferation, ransomware attacks, and other criminal activities. We must protect the integrity of the financial system against the emerging threats posed by the most serious criminal organizations and malicious state actors.”

“Our adversaries and criminals are using creative methods every day to exploit the US financial system, and we should not allow them to use American innovation to evade sanctions and launder money,” said Senator Lummis. “As more and more Americans start using and investing in cryptocurrency, both DeFi platforms and cryptocurrency ATMs remain regulatory blind spots. This targeted legislation will initiate an important discussion on how to protect our financial system and provide law enforcement agencies with the tools they need to prosecute bad actors.”

“As the Chairman of the Senate Intelligence Committee, I remain deeply concerned that criminals and rogue states continue to use cryptocurrencies to launder money, evade sanctions, and conceal illegal activities. The targeted measures we propose today will help address specific issues in decentralized finance and cryptocurrency ATMs, and incorporate the legislation I introduced in the previous Congress, the ‘Taking Action Against Modern Threats Act,’ to update FinCEN’s existing anti-money laundering authority,” said Senator Warner. “I believe these targeted measures will help maintain strong AML and sanctions enforcement capabilities that are necessary to protect our national security, while allowing compliant participants to continue leveraging the potential of distributed ledger technology.”

“Malicious actors are exploiting existing loopholes in current laws to use decentralized financial services to evade sanctions,” said Senator Romney. “By strengthening America’s anti-money laundering framework, our legislation combats the criminal behavior facilitated by cryptocurrencies, ultimately solidifying our national security.”

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