New U.S. bipartisan bill DeFi projects to be regulated like banks, DeFi investors may be held accountable

New U.S. bill to regulate DeFi projects like banks, holding DeFi investors accountable.

Author: LianGuaiBitpushNews Mary Liu

On July 19th, members of the US Senate Banking Committee, Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT), announced the “Cryptocurrency Assets National Security Enhancement and Enforcement (CANSEE) Act” (S. 2355) and submitted it to the US Senate.

At the time of writing, the full text of the bill has not been released, but according to the briefing summary, this new bill will impose strict anti-money laundering (AML) requirements on decentralized finance (DeFi) protocols, requiring DeFi protocols to implement controls on their user base similar to traditional banks. If passed, it will have a significant impact on DeFi projects.

The briefing document states that the bill aims to “combat the increasing cryptocurrency crime and cut off avenues for money laundering and sanction evasion that are crucial to national security.”

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DeFi protocols are financial applications that allow anyone with a cryptocurrency wallet to borrow, lend, and trade cryptocurrencies through smart contracts. These projects are more difficult to regulate than centralized companies like Coinbase because they operate directly on permissionless blockchains.

Some key points of the bill include:

Requiring DeFi businesses to comply with the same requirements as “other financial institutions, including centralized cryptocurrency exchanges, casinos, and even pawnshops.” The bill will hold “anyone in control of the project” responsible for the use of DeFi services by sanctioned individuals. Requiring anyone “in control” of a DeFi protocol to ensure an effective anti-money laundering program and comply with know-your-customer (KYC) policies. DeFi protocol controllers will also be responsible for reporting suspicious activities and ensuring that anyone blocked by sanctions does not use the protocol.

The bill mentions: “If there is no identifiable controller of the DeFi service, then anyone who invests more than $25 million in developing the project will be held responsible as a payer.”

The bill also expands the anti-money laundering powers of the US Treasury Department, extending them beyond the traditional financial system. The statement says, “As new technologies such as cryptocurrencies increasingly enable new ways of conducting financial transactions, expanding the Treasury Department’s power to combat illegal financial activities outside the banking industry is crucial.”

New requirements are also proposed for cryptocurrency ATM operators, who need to verify the identity of both parties in a transaction. The bill stipulates that operators of such ATMs/machines must “at a minimum, verify and record the consumer’s name and physical address, including reviewing official documentation proving nationality or residence, which includes a photograph of the consumer.”

This bill is another bipartisan effort to advance cryptocurrency regulations at the federal level. Democratic Senator Elizabeth Warren of Massachusetts and Republican Senator Roger Marshall of Kansas introduced the “Digital Asset Anti-Money Laundering Act” last year, aiming to tighten anti-money laundering rules for digital assets, but it did not progress further. Warren has pledged to reintroduce the legislation in this Congress.

Strong Opposition from the Cryptocurrency Community

The proposed legislation has immediately drawn strong opposition from the cryptocurrency community, with some individuals believing that it could stifle innovation, while others argue that DeFi should not be regulated in the same way as traditional financial institutions and should be approached in a new manner.

The DeFi Education Fund (DEF) stated in a tweet, “While we support taking effective measures to combat illicit use of DeFi, the bill introduced today is essentially saying ‘centralize, shut down, or leave the United States’.”

The organization added that there are better ways to address illicit financial activities in DeFi, which would have lower implementation costs and not stifle technological innovation.

Yaya Fanusie, the Anti-Money Laundering and Cybersecurity Director at the Cryptocurrency Innovation Council, described the bill as “arbitrary and vaguely defined,” as it would apply traditional financial company rules to anyone who controls a DeFi protocol or develops applications using the protocol.

Amy James, an industry advocate and founder of the Web3 Working Group, commented, “It’s unfortunate that the United States is becoming less supportive of web3 innovation. […] While some may see any degree of regulatory clarity as a victory, it must be the right one, or it won’t be a lasting victory. We commend these legislators for attempting to provide regulatory clarity and hope to see them adjust various aspects of the bill based on industry feedback to make the United States a long-term competitive market for web3.”

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