U.S. Senate Proposes Bill to Regulate Crypto Industry with Stricter Measures on DeFi Protocols

The U.S. Senate is once again preparing to address the regulation of the crypto industry with a new bill. The proposed Crypto-Asset National Security Enhancement Act of 2023 has received support from both sides of the aisle and aims to impose strict anti-money laundering (AML) measures on decentralized finance (DeFi) protocols. The objective is to require these protocols to implement banking-like controls for their users.

DeFi protocols are decentralized applications that enable users to engage in crypto borrowing, lending, and trading through smart contracts on permissionless blockchains. Due to their unique nature, they pose a regulatory challenge.

However, the new bill, released on July 18, aims to tackle these concerns by placing obligations on entities that exert control over DeFi protocols or offer user-friendly interfaces for their complex smart contracts, similar to how Uniswap Labs facilitates Ethereum’s primary decentralized exchange.

As per the briefing document, if a DeFi protocol lacks central control, entities investing over $25 million in its development would be responsible for meeting regulatory requirements. These requirements include customer screenings, anti-money laundering programs, prompt reporting of suspicious activities to authorities, and blocking access for sanctioned individuals.

The bill also proposes identity verification requirements for crypto kiosks, increasing scrutiny on these service providers. Additionally, it seeks to expand the Treasury Department’s authority to combat money laundering in unconventional financial sectors, including crypto assets.

Regarding the Securities and Exchange Commission (SEC) and crypto regulations, discussions about regulating DeFi have been ongoing. In April, SEC chair Gary Gensler highlighted that many crypto platforms are operating as unregistered securities exchanges. He emphasized the enforcement of existing regulations on platforms trading crypto asset securities, including DeFi systems.

Gensler made it clear that calling oneself a DeFi platform does not exempt a firm from complying with securities laws. The SEC plans to evaluate each case based on the nature of the activities involved, rather than establishing a formal definition for DeFi in the rule.

Overall, the proposed bill indicates that there will likely be a clear distinction in how exchanges and DeFi protocols are regulated in the near future.

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