US Senate Introduces Bipartisan Bill to Regulate DeFi and Address Crypto Security Risks

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Key takeaways:

  • Bipartisan legislation that would tighten KYC, AML, and Sanctions standards for DeFi was presented to the Senate with support from US Senator Jack Reed.
  • The bill aims to combat the surge in crypto-enabled crime and sanctions laws vital to national security.

Bipartisan legislation that would tighten Know Your Customer (KYC), Anti-Money Laundering (AML), and Sanctions standards for decentralized finance (DeFi) was presented to the Senate on July 18 with support from US Senator Jack Reed. 

The bill is known as the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act, according to a news release on Reed’s website. 

According to the briefing document, the bill aims to combat the surge in crypto-enabled crime and eliminate ways for people to get around money laundering and sanctions laws that are vital to national security.

Under the proposed legislation, DeFi operations would be subject to the same regulations as other financial businesses, such as centralized crypto trading platforms, casinos, and even pawn shops. DeFi protocols work directly on permissionless blockchains, making them more challenging to govern.

The usage of the DeFi service by sanctioned individuals would subject “anyone who controls that project” to liability under the proposed law. The bill mentioned:

“If nobody controls a DeFi service, then — as a backstop — anyone who invests more than $25 million in developing the project will be responsible for these obligations.”

Additionally, by extending Treasury Department AML authority outside the conventional financial system, the bill would “modernize” this authority. As stated in the statement:

“As new technologies like cryptocurrency increasingly enable new ways to conduct financial transactions, it is critical to extend Treasury’s authority to crack down on illicit financial activity that may occur outside the banking sector.”

AML programs would need to be maintained, suspicious behavior would need to be reported to the government, and sanctioned people would need to be blocked from using the protocol. These controlling companies would also need to vet and gather information on their clients.

In order to stop the use of cryptocurrency ATMs (or kiosks) for money laundering, the measure also established additional rules for their operators. Operators of kiosks would have to confirm the parties to a transaction’s identification.

The bill’s sponsors include Senators Mitt Romney, Mike Rounds, and Mark Warner. The Digital Asset Sanctions Compliance Enhancement Act, a measure sponsored by Reed and Warner, was filed by Sen. Elizabeth Warren in March 2022.

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