On Wednesday, a bipartisan group of US Senators introduced a bill to regulate DeFi services. The proposed legislation aims to impose compliance requirements similar to those for banks and centralized crypto exchanges. Jack Reed (D-RI) introduced a proposal to halt criminals and adversaries from exploiting decentralized financing for illegal activities, including North Korea.
The proposed restrictions, called the CANSEE Act, would enforce AML laws and U.S. trade embargoes on DeFi services. Decentralized finance, or DeFi, refers to services developed on the blockchain using smart contracts, which do away with the need for middlemen in financial transactions. Leading examples are the decentralized exchange UniSwap and the lending system Aave.
Under the proposed law, the project leaders may be held accountable if they enable a sanctioned person to evade U.S. sanctions via DeFi. Even without a controlling company, investors with over $25 million contributed to a project could face accountability.
The proposal proposes to provide the U.S. Treasury Department more authority to combat illegal financial activity that takes place outside of the mainstream banking industry. Congress has not yet made the complete text of the legislation available on its website.
Impact of the Bill on DeFi and Cryptocurrency Ecosystem
The bill’s description highlights the impact on so-called crypto ATMs, where customers can buy cryptocurrencies using cash or debit cards. The machines’ operators would need to confirm the identity of transaction participants. Mike Rounds (R-SD), Mitt Romney (R-UT), and Mark Warner (D-VA) are co-sponsors, asserting the legislation safeguards national security interests.
Senator Warner voiced alarm about how rogue nations and criminals are using cryptocurrency to escape sanctions, launder money, and engage in illegal activity. He highlighted that honest participants in the cryptocurrency industry can still reap its rewards.
The bill expressly mentions the use of DeFi in transnational fentanyl trafficking, connecting criminals to the growth of the illicit market. This worry is consistent with Senator Elizabeth Warren’s (D-MA) earlier remarks.
The fines levied on the privacy tool Tornado Cash, which whistleblower Edward Snowden denounced as authoritarian, show that the U.S. Treasury Department has previously taken action against decentralized protocols.
The crypto advocacy group Coin Center is contesting the US Treasury Department’s action, arguing it unfairly penalizes the DeFi project. They fear it could set a dangerous precedent if not addressed.