U.S. Senate Introduces New Bill to Impose Anti-Money Laundering Regulations on DeFi Protocols

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In a bid to combat crypto-related crime and bolster national security, the U.S. Senate is preparing to address the regulation of the decentralized finance (DeFi) industry through a new bill. Titled the “Crypto-Asset National Security Enhancement Act of 2023,” the proposed legislation aims to implement stringent anti-money laundering (AML) requirements on DeFi protocols, marking another step towards increased oversight of the crypto space.

The bill, which was reviewed by CoinDesk, outlines plans to enforce bank-like controls on DeFi protocols and their user base. The intention behind these measures is to curb illicit activities facilitated by cryptocurrencies and prevent the evasion of money laundering and sanctions, which are crucial for national security, according to the bill’s briefing document.

DeFi protocols serve as financial platforms that enable individuals with a crypto wallet to engage in activities such as borrowing, lending, and trading cryptocurrencies through smart contracts. Unlike centralized companies like Coinbase, DeFi protocols operate directly on permissionless blockchains, making them more challenging to regulate.

To address the regulatory complexities associated with DeFi, the proposed bill aims to impose obligations on individuals or groups who “control” a DeFi protocol or provide applications for users to access these protocols. This provision likely targets entities that develop user-friendly interfaces for DeFi protocols, effectively streamlining the user experience. For instance, Uniswap Labs, known for its facilitation of Ethereum’s leading decentralized exchange, could fall under this category.

Furthermore, the bill introduces an additional safeguard for DeFi protocols. In cases where no specific entity exercises control over a protocol, any investor who commits more than $25 million toward developing the protocol will assume responsibility for meeting the outlined obligations, as stated in the briefing document.

This legislation signifies the U.S. government’s increased focus on regulating the rapidly growing DeFi sector. While DeFi platforms have gained popularity for their potential to democratize finance and provide inclusive financial services, concerns surrounding illicit activities and potential vulnerabilities have prompted lawmakers to seek regulatory measures.

The proposed bill will undergo deliberation and discussion in the Senate, where lawmakers will assess its potential implications and gather feedback from industry stakeholders. If passed into law, the bill would introduce significant regulatory changes to the DeFi landscape, potentially shaping the future of the industry and its compliance standards.

The introduction of the “Crypto-Asset National Security Enhancement Act of 2023” reflects the ongoing efforts of regulators to strike a balance between fostering innovation in the crypto space and ensuring robust oversight to safeguard national security and mitigate illicit financial activities.

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