US Senate Proposes Tighter Control of DeFi Protocols
The US Senate drafted new bill, which aims to regulate decentralized finance (DeFi) as part of the fight against money laundering and in the face of sanctions. The bill requires developers and investors of DeFi protocols to comply with banking standards for customer verification and reporting of suspicious activity.
The bill, called the Crypto Asset National Security Enhancement Act of 2023, was introduced by Senators John Cornyn, Mark Warner, and Kyrsten Sinema. It is intended to “close the legal loopholes that allow criminals to use cryptocurrencies to evade justice,” according to a press release.
The main goal of the bill is to regulate DeFi protocols that allow users to engage in financial transactions without intermediaries. The bill defines the DeFi protocol as “software that allows users to exchange, borrow or invest crypto assets without the participation of a centralized governing body.”
The bill establishes that any organization or person that “controls” the DeFi protocol or provides an application for its use must be registered with the Ministry of Finance as a financial institution and comply with all anti-money laundering (AML) obligations. This includes verifying the identity of customers, storing their data, reporting suspicious transactions, and blocking access to the protocol for sanctioned individuals.
If no one controls the DeFi protocol, then the responsibility for AML compliance rests with those who invest more than $25 million in its development. As such, the bill attempts to cover both centralized and decentralized DeFi projects.
“If no one controls the DeFi protocol, then anyone who invests more than $25 million in the development of the protocol as support will be liable for control obligations,” the white paper says.
The bill also provides for addressing other issues in the crypto industry, such as regulating crypto terminals (ATM), expanding the powers of the Ministry of Finance to curb money laundering in non-traditional financial systems, and creating an inter-agency working group on cryptocurrencies.
The bill has drawn criticism from members of the crypto community who believe it threatens innovation and freedom in the DeFi space. They also point out that many DeFi protocols are decentralized and do not have a single regulatory authority that could comply with the requirements of the bill.
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