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(Kitco News) - Digital assets continue to be one area where United States politicians have managed to set aside their differences to craft legislation as a group of Senators has introduced a bipartisan bill that could have significant ramifications for anonymity in decentralized finance (DeFi).
Senator Jack Reeds (D-RI) is the sponsor of the Crypto Asset National Security Enhancement Act of 2023, which was read on the Senate floor Tuesday evening. Co-sponsors of the bill include Senators Mark Warner (D-VA), Mike Rounds (R-SD), and Mitt Romney (R-UT).
According to a draft copy of the bill seen by Kitco Crypto, the legislation seeks to subject DeFi protocols to the same rules as other US-regulated financial intermediaries in an effort “to fight 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.”
The text of the bill requires that anyone who “controls” a DeFi protocol must take measures to prevent money laundering by conducting know-your-customer (KYC) checks before granting a user access to the platform. The operators would also be mandated to report any suspicious activity and ensure that all parties subject to sanctions by the U.S. government are not able to utilize its services.
For protocols without an identifiable controller, anyone who invests more than $25 million in developing the protocol would be held responsible for fulfilling these duties.
The bill also proposes requirements for “virtual currency kiosks,” such as Bitcoin ATMs. Operators of such ATMs/machines must “verify and record, at a minimum, the name and physical address of the consumer, which shall include review of an official document evidencing nationality or residence that includes a photograph of the consumer,” the bill states.
While the risks presented by unregulated DeFi are clear, imposing regulations will have negative consequences on the sector as regulations stand in opposition to the open nature of the decentralized markets.
“The proposed bill to require Know Your Customer and Anti-Money Laundering (AML) checks for DeFi operators is a double-edged sword,” said James Allen, a certified public accountant and founder of Billpin.com.
“On one hand, it's a necessary step towards legitimizing the crypto industry and ensuring it's not a haven for illicit activities,” he said. “It's akin to asking a guest to show an ID before entering a private party - it's not about restricting freedom, but about ensuring the safety and integrity of all present.”
“On the other hand, the beauty of DeFi lies in its decentralization and the freedom it offers to users worldwide, regardless of their geographical location or socio-economic status,” Allen said. “Imposing stringent KYC requirements could potentially stifle this inclusivity. It's like asking a bird to walk instead of fly - it fundamentally changes the nature of what it is and what it can do.”
“In my experience, the key to navigating this delicate balance lies in smart regulation - rules that protect without stifling innovation,” he said. “The crypto industry is not the Wild West, but it's also not Wall Street. It's a new frontier that requires a new way of thinking about regulation.”
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The introduction of this bill comes as the U.S. struggles to craft and adopt a comprehensive regulatory framework for digital assets that can help inform the industry on the steps needed to legally operate.
Previous bipartisan efforts to advance crypto legislation have fallen short of full Congressional approval for a variety of reasons, including a limited time left in the legislative session, and disagreements about the finer points of regulation.
The Digital Asset Anti-Money Laundering Act was reintroduced on the Senate floor by Sens. Elizabeth Warren (D-MA) and Roger Marshall (R-KS) in December, but that was just weeks before the session ended, and the legislation never progressed to markup or a full vote.
That bill sought to limit financial institutions’ access to crypto mixing services, privacy coins and “other anonymity-enhancing technologies.”
