On July 20, crypto industry advocacy bodies, Coin Center and the Blockchain Association, criticized a newly proposed U.S. Senate bill for its approach to regulating the decentralized finance (DeFi) sector. The bipartisan Crypto-Asset National Security Enhancement Act (CANSEE) bill, introduced on July 18, aims to address money laundering violations in DeFi.
The bill proposes new penalties for individuals who “control” or provide an application to facilitate transactions using a digital asset protocol, subjecting them to anti-money laundering and financial reporting standards. However, the definition of “control” is left to be determined by the U.S. Secretary of the Treasury, raising concerns about potential excessive controls on DeFi.
Coin Center’s blog post on July 20 criticized the bill for granting the Secretary unbounded discretion in deciding what constitutes “control” of a protocol. The think tank also argued that the legislation is unconstitutional as it could implicate software developers who have a First Amendment right to publish code, considering it an extension of free speech. Moreover, Coin Center raised concerns about the practical enforcement of control over decentralized protocols, given the inherently decentralized nature of DeFi.
Kristin Smith, CEO of the Blockchain Association, echoed Coin Center’s concerns and labeled the legislation as unworkable. Smith argued that the bill overstates the prevalence of money laundering in DeFi and the broader crypto space. She asserted that federal law enforcement agencies already possess the necessary tools and expertise to address this relatively small but significant issue. Consequently, she criticized the new punitive measures in the bill as redundant.
Despite the criticisms from crypto organizations, an April 7 U.S. Treasury report revealed that many DeFi protocols are more centralized than claimed, with a concentration of funds and voting power in the hands of a few tokenholders. This report might have implications for future regulatory approaches to the DeFi sector.
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