US Senate Bill Aims to Regulate DeFi on Par with Banks

US Senate Bill Aims to Regulate DeFi on Par with Banks

The Crypto-Asset National Security Enhancement Act: Regulating DeFi Protocols

The U.S. Senate is preparing to address the growing concern of crypto-facilitated crime and money laundering by introducing a new bill called the Crypto-Asset National Security Enhancement Act of 2023. This bill aims to regulate decentralized finance (DeFi) protocols and impose stringent anti-money laundering (AML) requirements on them. The goal is to close off avenues for the evasion of money laundering and sanctions measures that are critical to national security.

DeFi protocols are financial applications that enable users to borrow, lend, and trade cryptocurrency through the use of smart contracts. Unlike centralized companies like Coinbase, DeFi protocols operate directly on permissionless blockchains, making them harder to regulate. However, the proposed bill seeks to address this challenge by imposing requirements on those who control DeFi protocols or provide applications for their use.

The bill’s language suggests that it aims to target groups that build user-friendly frontends for decentralized protocols, such as Uniswap Labs. These groups simplify the often complex smart contracts behind DeFi protocols, making them more accessible to users. Under the bill, such controlling entities would be responsible for ensuring compliance with AML regulations. In cases where no specific entity controls a DeFi protocol, the bill proposes that anyone who invests more than $25 million in developing the protocol would assume these obligations.

To meet the AML requirements, controlling entities would need to vet and collect information on their customers, maintain anti-money laundering programs, report suspicious activity to the government, and block sanctioned individuals from using their protocol. Additionally, the bill would introduce identity verification requirements for crypto kiosks, expanding the Treasury Department’s authority to police potential money laundering activities in non-traditional financial settings, including the crypto industry.

The bill was introduced by Senator Jack Reed (D-R.I.), who is a member of the Senate Banking Committee. Co-sponsors of the bill include Senator Mike Rounds (R-S.D.), Senator Mitt Romney (R-UT), and Senator Mark Warner (D-VA). This bipartisan support demonstrates the recognition of the urgent need to address the potential risks associated with DeFi protocols and their role in facilitating financial crimes.

It is important to note that while the bill aims to enhance national security and combat money laundering, it also raises concerns within the blockchain community. Blockchain technology is built on principles of decentralization, transparency, and censorship resistance. The introduction of stringent regulations could potentially stifle innovation and hinder the growth of the blockchain industry.

However, it is crucial to strike a balance between regulatory measures and preserving the core values of blockchain technology. The crypto industry has made significant strides in developing self-regulatory frameworks, such as the Travel Rule Protocol, which enables the secure sharing of customer information between virtual asset service providers. Collaborative efforts between regulators and industry participants can ensure the adoption of effective AML measures without compromising the fundamental benefits of blockchain technology.

In conclusion, the Crypto-Asset National Security Enhancement Act of 2023 represents the U.S. Senate’s latest attempt to regulate the crypto industry, particularly focusing on DeFi protocols. By imposing AML requirements on controlling entities and expanding the Treasury Department’s authority, the bill aims to mitigate the risks of crypto-facilitated crime and money laundering. However, it is essential to maintain a delicate balance between regulation and innovation to ensure the sustainable development of the blockchain industry.