The US Senate is gearing up for another round of regulatory scrutiny of the burgeoning crypto sector, with a new bill that could force decentralized finance (DeFi) protocols to adopt stringent anti-money laundering (AML) measures.
The proposed Crypto-Asset National Security Enhancement Act of 2023 anticipates the escalation of crimes aided by cryptographic technologies and seeks to obstruct avenues for evasion of AML and sanctions measures crucial to national security. DeFi protocols are complex financial apps enabling anyone possessing a crypto wallet to engage in borrowing, lending, and trading cryptocurrency via smart contracts.
Regulation presents a unique challenge due to the inherent structure of DeFi, which is harder to control than centralized entities like Coinbase because they operate directly on permissionless blockchains.
However, the bill proposes a novel solution to this issue by placing requirements on anyone who ‘controls’ a DeFi protocol or provides an application to use the protocol. It seems to target groups who build user-friendly interfaces like Uniswap Labs does for Ethereum’s top decentralized exchange.
Additionally, in a situation where no particular entity controls a DeFi protocol, the bill accounts for a fallback strategy. Anyone who invests over $25 million in developing the protocol will take responsibility for obligations, thus ensuring accountability.
Such controlling entities assume an essential role in maintaining the integrity of their platforms by vetting and collecting information on their customers. They are also expected to uphold AML programs, report suspicious activities to authorities, and prevent sanctioned individuals from utilizing their protocol.
The bill also calls for identity verification requirements on crypto kiosks, enhancing security and accountability. This legislation further extends the Treasury Department’s jurisdiction to monitor alleged money laundering in unconventional financial settings, including crypto.
The Crypto-Asset National Security Enhancement Act of 2023, introduced by Sen. Jack Reed, is a clear suggestive measure of the increasing need for regulation in the crypto sector due to its inherent complexities and vulnerabilities. Its successful implementation could potentially balance innovation with security and ensure future growth sustainability.
However, on the flip side, such strict regulatory measures could potentially stifle the innovative nature of the industry. It may also discourage potential developers or investors who might see these requirements as overly burdensome.
Thus, while the bill ultimately aims for a safer crypto landscape, it remains a tenuous balancing act between fostering innovation and curbing malpractices.
Source: Coindesk
