U.S. Senate Proposes New Bill To Regulate DeFi With Strong AML Measures

Key Points:

• The U.S. Senate is introducing a new bill, the Crypto-Asset National Security Enhancement Act of 2023, to regulate the decentralized finance (DeFi) industry.
• The bill aims to impose stringent anti-money laundering (AML) requirements on DeFi protocols, treating them similarly to traditional financial intermediaries.
• If passed, the bill would require DeFi protocol controllers to implement AML programs, adhere to know-your-customer (KYC) policies, report suspicious activities, and block sanctioned individuals from using their protocols.

The U.S. Senate is making a fresh attempt to regulate the decentralized finance (DeFi) industry with the introduction of a new bill, the Crypto-Asset National Security Enhancement Act of 2023, CoinDesk reported.

This bill aims to impose stringent anti-money laundering (AML) requirements on DeFi protocols, treating them similarly to traditional financial intermediaries.

Sponsored by Senator Jack Reeds and co-sponsored by Senators Mark Warner, Mike Rounds, and Mitt Romney, the bill seeks to address concerns related to crypto-facilitated crimes and the evasion of money laundering and sanctions measures. While the official bill text has not yet been released, a draft copy obtained by Blockworks reveals the key provisions.

Under the proposed bill, individuals or entities that control a DeFi protocol would be responsible for implementing AML programs and adhering to know-your-customer (KYC) policies. They would also be required to report any suspicious activities and ensure that the protocol is not being used by individuals subject to sanctions. If there is no identifiable controller, the responsibility will fall on investors who contribute more than $25 million to the development of the protocol.

In addition, the bill includes provisions that would require virtual currency kiosks, such as Bitcoin ATMs, to comply with federal KYC laws. Operators of these kiosks would be mandated to verify and record the personal information of consumers, including their name, physical address, and nationality or residence documentation.

The introduction of this bill follows previous bipartisan efforts to establish regulations for the crypto industry at the federal level, which did not gain sufficient traction. Senators Elizabeth Warren and Roger Marshall introduced the Digital Asset Anti-Money Laundering Act in the previous session, but the legislation did not progress beyond the floor reading. Their bill aimed to restrict financial institutions’ access to privacy coins, crypto mixing services, and technologies enhancing anonymity.

DeFi protocols are financial applications that operate on permissionless blockchains, allowing users to borrow, lend, and trade cryptocurrencies through smart contracts. The challenge in regulating DeFi arises from its decentralized nature. The new bill aims to address this by placing obligations on entities that control or provide access to DeFi protocols, ensuring compliance with AML regulations, reporting requirements, and sanctions enforcement.

Furthermore, the bill aims to expand the authority of the Treasury Department to combat money laundering in non-traditional financial settings, including the cryptocurrency sector.

It is important to note that the bill is still subject to review and potential modifications as it progresses through the legislative process.

Not only DeFi, the US Senate is also very interested in the entire industry.

As Coincu reported, US Senate Financial Services Committee Chair Ron Wyden and ranking member Mike Crapo sent an open letter to the digital asset community soliciting feedback on digital asset taxation. The senators asked the crypto industry for help in better understanding how Congress can manage the tax challenges and opportunities presented by digital assets.

In April, the SEC declared its intention to reopen the exchange’s definition comment period, following its decision to broaden the scope to include crypto and DeFi. The SEC has put forward a proposal to modify the definition of exchanges, which would encompass platforms trading in both crypto asset securities and certain platforms. 

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