U.S. Senate Bill Calls for Strict KYC and AML Regulations for DeFi

If nobody controls a DeFi service, anyone who invests more than $25 million in developing the project will be responsible for these obligations, stated the bill.

A bipartisan bill introduced to the U.S. Senate aims to prevent money laundering, crypto-facilitated crime and sanctions violations by imposing the same regulations on decentralized finance (DeFi) as traditional financial institutions. 

A brief outlining the contents of the bill, titled The Crypto-Asset National Security Enhancement and Enforcement Act (CANSEE), was published on U.S. Senator Jack Reed’s website on Wednesday.

“The CANSEE Act would end special treatment for DeFi by applying the same national security laws that apply to banks and securities brokers, casinos and pawn shops, and even other cryptocurrency companies like centralized trading platforms,” read the bill. 

It further stated that DeFi services would have to maintain Anti Money Laundering (AML) and Know Your Customer (KYC) requirements as regulated centralized entities, including reporting suspicious transactions to FinCEN and conducting due diligence on customers.

“If nobody controls a DeFi service, then—as a backstop—anyone who invests more than $25 million in developing the project will be responsible for these obligations,” stated the bill.

The bill defines “control” with respect to DeFi protocols as the power to directly or indirectly change the protocol’s codebase or other operational terms through governance tokens and administrative privileges amongst other things.  The somewhat broad definition of control in this context, which would be determined by the U.S. Department of Treasury, drew criticism from proponents of decentralization.

Case in point:

The definition of “control” is so broadly worded that it’s meaningless. No thresholds, no specifics, just “control,” as determined by the Secretary of the Treasury. Completely and utterly unworkable.https://t.co/rVk26MJwfA

— Meat (🥩,🥩) (@MeatEsq) July 19, 2023

“The policy underpinnings of what amounts to “control” will have echoing effects on blockchain tech and could even funnel developers towards specific build paths and chill investment in protocols,” tweeted Brandon Ferrick, general counsel at blockchain venture firm B&J Studios.