US Senate Proposes DeFi Regulation Bill

The U.S. Senate is gearing up to tackle crypto industry regulation once again, this time with a focus on decentralized finance (DeFi) protocols. The recently introduced bipartisan bill, known as the Crypto-Asset National Security Enhancement Act of 2023, aims to impose rigorous anti-money laundering (AML) measures on DeFi platforms.

Regulating DeFi Platforms

According to the bill’s description reviewed by CoinDesk, DeFi protocols would be required to implement bank-like controls on their user base. The primary objective of the legislation is to combat the surge in crypto-related crime and establish a robust system to prevent money laundering and circumvention of sanctions, which are deemed critical for national security.

DeFi protocols have emerged as financial platforms that enable crypto users to borrow, lend, and trade digital assets through smart contracts, all without intermediaries. Their decentralized nature makes them challenging to regulate compared to centralized entities like Coinbase, as they operate directly on permissionless blockchains. To address these challenges, the bill proposes placing obligations on entities that “control” DeFi protocols or make user-friendly applications available for their use. This likely refers to groups that create frontends to facilitate access to otherwise complex smart contracts, similar to what Uniswap Labs does for Ethereum’s leading decentralized exchange.


Bill’s $25M Investment Clause

The legislation outlines that if no single entity exercises control over a DeFi protocol, any entity investing more than $25 million in developing the protocol will assume the responsibility for meeting the regulatory obligations. These controlling entities would need to verify and collect customer information, maintain anti-money laundering programs, report suspicious activities to the government, and block sanctioned individuals from using their protocols.

The bill also extends the Treasury Department’s authority to oversee alleged money laundering activities in non-traditional financial environments, including the cryptocurrency sector. Introduced by Senator Jack Reed (D-R.I.), a member of the Senate Banking Committee, the bill has garnered support from co-sponsors Senator Mike Rounds (R-S.D.), Senator Mitt Romney (R-UT), and Senator Mark Warner (D-VA).

If passed, this legislation could significantly impact the DeFi landscape in the U.S., introducing a new era of regulation aimed at enhancing security and accountability in the rapidly evolving crypto industry. As the bill moves through the legislative process, it will likely undergo further scrutiny and amendments to strike a balance between investor protection, national security, and the innovative potential of DeFi technology.