Bipartisan Senate Bill Would Apply Bank-Like AML Rules to Crypto

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“Defi and crypto ATMs are part of a largely unregulated technology that requires strong oversight and safeguards to prevent rampant money laundering and sanctions evasion,” Reed said in a press release. “This legislation strengthens the tools of the Treasury Department to protect our national and economic security.”

Ting Shen/Bloomberg

WASHINGTON A bipartisan group of senators, led by Jack Reed, DR.I., introduced legislation that would strengthen regulation of the crypto space.

Titled the National Crypto-Asset Security Enforcement and Enforcement Act, or “CANSEE,” the bill would impose similar anti-money laundering compliance obligations on banks on decentralized financial platforms. Proponents of the legislation say the bill aims to strengthen oversight and guard against rampant money laundering and sanction evasion in the largely unregulated crypto space, in particular by holding defi investors with majority stakes in a platform accountable for wrongdoing.

Reed, a member of the Senate Banking Committee, led the bill’s introduction with co-sponsors Sens. Mike Rounds, RS.D., Mitt Romney, R-Utah, and Mark Warner, D-Va.

“Defi and crypto ATMs are part of a largely unregulated technology that requires strong oversight and safeguards to prevent rampant money laundering and sanctions evasion,” Reed said in a press release. “This legislation strengthens the tools of the Treasury Department to protect our national and economic security.”

Defi protocols are financial applications running on blockchain technology, mostly on permissionless blockchains not controlled by a central intermediary. They are often used to trade cryptocurrencies anonymously and cross-border. The bill defines them as any challenging software like smart contracts that provide a mechanism for users to interact and agree to the terms of an exchange of digital assets. Smart contracts are a type of supposedly tamper-proof computer program that enables many challenging activities. Unlike centralized protocols such as traditional bank private ledgers or even private blockchains, permissionless blockchains allow anyone with a crypto wallet to send payments without identifying themselves.

The bill would increase government oversight of the challenge by subjecting the beneficial owners of the decentralized protocol to those with some level of control responsible for compliance, based on the number of “governance tokens” a person holds, as defined by the Securities and Exchange Commission. Defi platforms often deploy these tokens to quantify user voting power within the protocol. The CANSEE Act would amend the Bank Secrecy Act to subject “digital asset protocol supporters” and “digital asset transaction enablers” to anti-money laundering compliance requirements. The bill defines a digital asset protocol supporter as anyone holding governance tokens worth more than $25 million, and transaction facilitators as anyone who runs a digital asset trading application or otherwise controls a digital asset protocol as determined by the Treasury.

The bill would also require backers of the defi digital asset protocol to submit annual certifications regarding the value of governance tokens held to the SEC and the Treasury, and it notes that the SEC may set out procedures for calculating token values.

The bill would also subject U.S. individuals classified as digital asset transaction facilitators and digital asset protocol supporters to legal ramifications for violating Treasury-issued sanctions. This would crack down on crypto kiosks and require virtual currency kiosk operators to verify and record the identity of consumers who make virtual currency transfers. Additionally, the bill would direct the Financial Crimes Enforcement Network to implement a new reporting system in which crypto kiosk operators would provide a running list of their kiosk locations to Fincen.

The CANSEE Act addresses one of the main concerns of crypto-skeptical policy makers in the regulation of the crypto industry: the fact that it is almost impossible to hold bad actors responsible for laundering money in decentralized ledgers if there is no process to identify the controlling entity of a protocol.

Regulators have previously pointed out that these public blockchains, which conceal identities both between trading parties and law enforcement, fundamentally contradict established BSA/AML requirements.

While recent legal battles and regulatory bills promise to provide some crypto companies with an eventual path to regulatory compliance, Wednesday’s bipartisan bill suggests that anonymous platforms are not a starting point for many in the peripheral. There is a growing consensus in Washington around the idea that defi and AML compliance may not be compatible, which Office of the Comptroller of the Currency Acting Chief Michael J. Hsu said in remarks in June.

Defi operating beyond government jurisdiction could soon face judgment.

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