US Senator Jack Reed introduces bill to tighten regulations for the crypto industry and DeFi

US Senator Jack Reed introduces bill to tighten regulations for the crypto industry and DeFi

Title: US Senator Jack Reed introduces bill for stricter regulation of DeFi and crypto industry

Date: July 18, 2023

U.S. Senator Jack Reed introduced a bipartisan bill in the Senate on July 18 that would tighten know-your-customer (KYC) and anti-money laundering (AML) regulations in the crypto industry, as well as sanctions regulations for decentralized financial services (DeFi). The bill is titled the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act.

The bill stipulates that DeFi projects should be subject to the same requirements as other financial companies, including centralized crypto trading platforms, casinos and pawnshops. Anyone who controls the project would therefore be liable for the use of the DeFi service by sanctioned persons. Should no one control a DeFi service, anyone investing more than $25 million in the development of the project would be responsible for these obligations.

The bill also includes a modernization of the Treasury Department's AML powers, extending them beyond the traditional financial system. The point is that new technologies such as cryptocurrencies enable new ways of carrying out financial transactions and therefore an expansion of the Ministry of Finance's powers is necessary to take action against illegal financial activities outside the banking sector.

In addition, the bill imposes new requirements for operators of crypto cash machines (ATMs) to prevent their use for money laundering. Operators should be obliged to verify the identity of both counterparties in a transaction.

The draft law had not yet been published at the time of going to press. A Jack Reed employee was also unable to confirm when the bill would be published. However, a text has already been leaked on GitHub that appears to be the finished draft law.

The reactions in the crypto community to the draft law have already been very critical. One commentator called the bill an “existential threat to DeFi” and deemed it “non-negotiable.” Another pointed out that imposing control responsibility on an investment of $25 million or more would significantly reduce risk capital in the DeFi space.

The lobby association Crypto Council for Innovation was similarly critical. The association emphasized that the bill does not provide specific guidance on how decentralized protocols can meet the disclosure requirements of the Bank Secrecy Act (BSA). The association therefore prefers an approach that takes a differentiated look at the various elements within DeFi and uses the unique possibilities of blockchain systems to derive suitable compliance measures.

It remains to be seen how the bill develops and whether it can win support in the Senate. However, the discussion around appropriate and effective regulation of the crypto industry and DeFi will undoubtedly continue.