New US Senate Bill to Regulate DeFi and Address Crypto Security Risks

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The US Senate has introduced a bipartisan bill, the Crypto-Asset National Security Enhancement Act of 2023, to regulate the crypto industry by placing stringent anti-money laundering (AML) requirements on decentralised finance (DeFi) protocols. These DeFi protocols are financial applications that operate on permissionless blockchains, making them harder to regulate.

The bill seeks to tackle the rise in crypto-facilitated crime and prevent money laundering and sanctions evasion. To achieve this, the proposed legislation imposes bank-like controls on the user base of DeFi protocols. This involves placing obligations on individuals or groups that ‘control’ a DeFi protocol or provide applications for using them. 

In cases where no single entity controls a DeFi protocol, the responsibility for meeting these obligations would fall on those who invest more than $25 million in developing the protocol. These controlling entities must vet and gather customer information, implement anti-money laundering programs, report suspicious activities to the government, and prevent sanctioned individuals from using their protocols.

The bill would also extend the Treasury Department's authority to investigate alleged money laundering activities in non-traditional financial settings, including the crypto industry. Moreover, it would set new identity verification requirements for operators of crypto kiosks (ATMs) to prevent money laundering through these platforms.

However, the US Senate Bill has faced significant criticism from the crypto community. Critics argue that it could be an "existential threat to DeFi" and may discourage venture capital investments into the industry due to the imposed control responsibility. Some also believe the bill needs more technical guidance for decentralised protocols to comply with Bank Secrecy Act reporting requirements.

Supporters of the DeFi industry advocate for a more nuanced approach that recognises the unique characteristics of blockchain systems and involves leveraging transparency and programmability for tailored compliance measures.

The bill has yet to be published, and there is uncertainty regarding its timeline for enactment. Industry feedback is expected, and there may be adjustments based on the input received to create a regulatory framework that supports innovation while addressing concerns related to illicit financial activities in the crypto sector.

Shashank is the founder of yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash