In a controversial move, United States Sen. Jack Reed has sponsored a bipartisan bill aimed at regulating decentralized finance (DeFi) and addressing crypto security risks. The bill is titled the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act and it was introduced on July 18. It is set to tighten Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Furthermore, it will sanction requirements for the DeFi sector.

Applying Traditional Regulations to DeFi

Under the proposed bill, DeFi operations would be held to the same regulatory standards as other financial entities. This includes centralized crypto trading platforms, casinos, and pawn shops. As a result, those in control of DeFi projects could be held liable for any illicit use of the services by sanctioned individuals.

Additionally, investors contributing more than $25 million to the development of a DeFi project would also bear responsibility for meeting these regulatory obligations.

The CANSEE Act will also “modernize” the Treasury Department’s AML powers by expanding their reach beyond the traditional financial system. The bill aims to empower the Treasury Department to crack down on illicit financial activities occuring outside the conventional banking sector. This is as cryptocurrencies and other new technologies facilitate alternative ways of conducting financial transactions.

Furthermore, the bill sets forth new requirements for operators of crypto kiosks or ATMs to combat money laundering. These operators would be obligated to verify the identities of both parties involved in a transaction to prevent illegal activities.

Mixed Reactions on Crypto Twitter

Although the bill has not been officially published yet, a draft version has surfaced on GitHub. Crypto Twitter has been swift in expressing its opinions, with some commentators branding it an “existential threat to DeFi” and a “nonstarter.”

Crypto coins

Additionally, they have raised concerns about the potential chilling effect on venture capital investment in DeFi. This is because the bill’s approach to control responsibility for a $25 million investment may not align with the nature of passive tokenholding.

Industry Advocates Urge Clarity and Flexibility

The Crypto Council for Innovation has criticized the bill. This is for failing to offer clear technical guidance for decentralized protocols to comply with the Bank Secrecy Act (BSA) reporting requirements.

The organization advocates for a different approach. This is one that takes into account the various elements within the DeFi technology stack and leverages blockchain systems’ transparency and programmability to establish appropriate compliance measures unique to the crypto ecosystem.

Amy James, founder of the industry advocate Web3 Working Group, expressed concern about the declining support for web3 innovation in the US. She further emphasized the importance of getting it right for sustainable success. All these while acknowledging that any regulatory clarity is a step forward. James commended the legislators’ efforts to provide regulatory clarity.

She further urged them to consider industry feedback to ensure the US remains a competitive market in the long run.

Bipartisan Support and Past Initiatives

Senators Mike Rounds, Mark Warner, and Mitt Romney have co-sponsored the bill. They are showing a broad bipartisan interest in addressing DeFi and crypto security risks. It’s worth noting that both Senators Reed and Warner were co-sponsors of a previous bill introduced by Senator Elizabeth Warren. This bill was called the Digital Asset Sanctions Compliance Enhancement Act in March 2022.

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