US Senate introduces bill seeking to regulate DeFi like traditional banks

• The bill aims at ensuring DeFi protocol operating in the US imposes strict controls on their users.
• The controls proposed in the bill resemble those that apply to traditional banks.
• The bill also places identity verification requirements on crypto kiosks.

The US Senate is prepared to attempt to regulate the cryptocurrency industry once more with a new bill that aims at imposing strict anti-money laundering (AML) requirements on decentralised finance (DeFi) protocols.

According to the description of the bill, the Crypto-Asset National Security Enhancement Act of 2023 would mandate DeFi protocols to impose bank-like controls on their user base. According to the briefing document, the bill aims “to combat the rise in crypto-facilitated crime and close off avenues for the evasion of money laundering and sanctions measures that are critical to our national security.”

Vetting and collecting information on customers,

Anyone with a cryptocurrency wallet can use DeFi protocols, which are financial applications that allow borrowing, lending, and trading digital currency using smart contracts.  They use of permissionless blockchains making them more difficult to regulate than centralised crypto businesses like Coinbase.

The proposed legislation aims to deal with the problem of regulating DeFi protocols by imposing obligations on “anyone who ‘controls’ a DeFi protocol or makes available an application to use a DeFi protocol.” This is most likely a reference to organisations like Unswap Labs that create complex smart contracts for streamlined frontends for protocols like the Uniswap decentralized exchange.  

According to the bill’s briefing document, “If nobody controls a DeFi protocol, then—as a backstop—anyone who invests more than $25 million in developing the protocol will be responsible for these obligations.”

These controlling entities would have to screen and compile data on their clients, keep anti-money laundering programmes up to date, alert the authorities to any suspicious activity, and prevent those who have been sanctioned from using their protocol.