New bipartisan bill in the United States DeFi projects to be regulated like banks; DeFi investors can be held accountable.

US bipartisan bill proposes regulating DeFi projects as banks, holding investors accountable.

On July 19th, members of the U.S. Senate Banking Committee, Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT), introduced the Cryptocurrency Act of 2022 (S. 2355) and submitted it to the U.S. Senate.

As of the writing of this article, the full text of the bill has not been released, but according to a briefing summary, this new legislation 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, this will have a significant impact on DeFi projects.

The briefing document states that the bill aims to “combat the increase in cryptocurrency crime and cut off avenues for money laundering and sanctions evasion that are critical to national security.”

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 firms, including centralized cryptocurrency exchanges, casinos, and even pawnshops.” The bill will hold “any person in control of the project” responsible for providing DeFi services to sanctioned individuals. Requiring anyone “in control” of a DeFi protocol to ensure the effectiveness of their anti-money laundering programs 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 cannot use the protocol.

The bill states: “If there are no identifiable controllers of a DeFi service, then as the payor, anyone who invests more than $25 million in developing the project will be held liable.”

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

New requirements are also proposed for cryptocurrency ATM operators, who must verify the identities 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 documents proving nationality or residency containing the consumer’s photograph.”

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 Crypto Community

The proposed legislation has immediately sparked strong opposition from the crypto community. Some believe that it could stifle innovation, while others argue that DeFi should not be subject to the same regulations as traditional financial institutions and should be approached in a new way.

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

The organization further added that there are better ways to address illicit financial activities in DeFi with lower implementation costs and without stifling technological innovation.

Yaya Fanusie, the Director of Anti-Money Laundering and Network Investigations at the Crypto Innovation Council, called the bill “arbitrary and poorly defined” because it applies traditional financial rules to anyone who controls DeFi protocols or develops applications using those protocols.

Amy James, a industry advocate and founder of the Web3 Working Group, commented, “Unfortunately, the support for web3 innovation in the United States is diminishing. […] While some may see any degree of regulatory clarity as a victory, it must be the right one for long-term success. We commend these lawmakers for attempting to provide regulatory clarity and hope to see them adjust various aspects of the bill based on industry feedback, making the United States a long-term competitive market for web3.”

Author: LianGuaiBitpushNews Mary Liu

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