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Bipartisan Bill to Regulate DeFi Draws Industry-wide Backlash

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A bipartisan group of four Senators led by Sen. Jack Reed, this week, introduced a bill that would require decentralized finance (DeFi) services to comply with the same guidelines applicable to banking, brokerage and other traditional firms like casinos. The bill – whose full text is yet to be released at the time of compiling – places direct liability on those who control DeFi projects if found guilty of failing to report or thwart money laundering activity on their services.

The trio of Senators Mark Warner, Mitt Romney, and Mike Rounds cosponsored the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act. For projects without controlling entities or individuals, the lawmakers proposed that individuals or entities with an investment stake of “more than $25 million in developing the project” be held liable.

The scope of the bill also includes crypto ATM operators with updated requirements for them to verify the identities of transaction counterparties.

Redefining the reach of Anti-Money Laundering and Know Your Customer rules

The CANSEE Act will, in some respects, strengthen the Treasury Department's ability to enforce its authority. Markedly, the bill read on the Senate floor late Tuesday is the latest effort by legislators to combat crypto crime. The legislation additionally wants to give the US Treasury Department more authority – illicit financial activity outside the banking sector should be reported.

“This legislation bolsters the Treasury Department’s tools to protect our national and economic security. Drug cartels, sex traffickers, and the like shouldn’t be able to use DeFi platforms to avoid justice,” Reed said.

The heightened scrutiny of DeFi protocols comes on the back of claims that the niche has evolved to avenues facilitating money laundering and sanctions.

“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,” the briefing document read.

Various sects of the crypto community faulted the bill for being vague and one that could likely stymie DeFi development in the US. In the previous session, the Senate duo of Elizabeth Warren and Roger Marshall unsuccessfully submitted a bipartisan bill to update AML rules so that they can encompass the entire digital assets sector.

Warren and Marshall's bid sought to restrict financial institutions' access to enabling technologies and offerings like privacy-focused coins and coin mixers. Its implementation would see the AML rules apply to digital asset wallet providers, network validators and other blockchain ecosystem players. Though the duo's legislative proposal was presented to the floor in December, it failed to advance. Earlier in February though, the Senators said they planned to bring back the Digital Asset Anti-Money Laundering Act.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.