The US Senate has proposed a new bill that aims to regulate decentralized finance (DeFi) protocols by imposing strict anti-money laundering (AML) requirements. The bill, called the Crypto-Asset National Security Enhancement Act of 2023, seeks to combat crypto-facilitated crime and strengthen national security measures.

Key Points:

• The bill requires DeFi protocols operating in the US to implement bank-like controls on their users.
• It also mandates identity verification requirements for crypto kiosks.

DeFi protocols are financial applications that allow users to borrow, lend, and trade digital currencies using smart contracts. Unlike centralized crypto businesses, such as Coinbase, DeFi protocols operate on permissionless blockchains, making them harder to regulate.

The bill addresses this regulatory challenge by imposing obligations on those who control a DeFi protocol or provide an application for its use. This includes organizations like Uniswap Labs, which create smart contracts for streamlined interfaces of protocols like the Uniswap decentralized exchange.

The bill also states that if no one controls a DeFi protocol, individuals or entities that invest more than $25 million in developing the protocol will be responsible for meeting the regulatory obligations.

These controlling entities would be required to vet and collect information on their clients, maintain up-to-date anti-money laundering programs, report suspicious activities to authorities, and prevent sanctioned individuals from using their protocols.

FAQ:

What is decentralized finance (DeFi)?

DeFi refers to financial applications that operate on decentralized networks, enabling peer-to-peer transactions without intermediaries like banks. These applications use smart contracts to facilitate various financial services, including borrowing, lending, and trading.

Why is the US Senate proposing this bill?

The US Senate is aiming to regulate the DeFi sector to combat crypto-related crimes and protect national security. By imposing stricter AML requirements and controls similar to traditional banks, the bill intends to close off avenues for money laundering and sanction evasion.

Will this bill apply to all DeFi protocols?

The bill’s obligations will apply to DeFi protocols operating in the US or those entities that invest over $25 million in developing the protocol. The goal is to hold accountable those who control or provide applications for DeFi protocols to ensure compliance with AML regulations.

How will this bill impact the DeFi industry?

If the bill becomes law, DeFi protocols will face increased regulatory obligations, including client screening, data collection, and AML compliance. It may also create challenges for protocols that operate on permissionless blockchains, as they will be required to implement controls similar to centralized financial institutions.

What are the next steps for this bill?

The bill has been introduced in the US Senate and is currently in the early stages of the legislative process. It will need to go through committee review, amendments, and voting before it can become law. The outcome and timeline of the bill’s progression are uncertain at this point.

Summary:
The US Senate has introduced a bill called the Crypto-Asset National Security Enhancement Act of 2023, aiming to regulate DeFi protocols by imposing strict AML requirements and controls similar to traditional banks. The bill addresses the challenge of regulating decentralized financial applications by placing obligations on those who control or provide applications for DeFi protocols. These entities would need to vet clients, maintain AML programs, report suspicious activities, and prevent sanctioned individuals from using their protocols. The bill is intended to combat crypto-related crimes and protect national security, but its impact on the DeFi industry and its potential to become law are uncertain.