A group of U.S. senators have introduced a bill that would require decentralized finance (DeFi) services to meet the same anti-money laundering (AML) and economic sanctions compliance obligations as other financial companies.
DeFi refers to applications that facilitate peer-to-peer financial transactions that are recorded on blockchains. The most prominent example of DeFi are “decentralized exchanges,” where automated software purportedly allows users to trade cryptocurrencies without using intermediaries.
The bill, the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act (S. 2355), targets money laundering and sanctions evasion involving DeFi. Further, the legislation would modernize certain Treasury Department anti-money laundering authorities, while establishing new requirements to ensure that “crypto kiosks” don’t become a vector for laundering the proceeds of illicit activities.
The bipartisan bill is sponsored by Sens. Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT).
One of the features of DeFi is that it provides provides anonymity, and that can allow malicious and criminal actors to evade traditional financial regulatory tools, including money laundering and other financial crimes.
Criminals, drug traffickers, and hostile state actors such as North Korea have all used (DeFi) as a preferred method of transferring and laundering ill-gotten gains. These bad actors recognize how DeFi can be exploited to advance nefarious activities like cross-border fentanyl trafficking and financing the development of weapons of mass destruction. That’s because DeFi services often involve no AML or other processes to identify customers.
This bill would end special treatment for DeFi by applying the same national security laws that apply to banks and securities brokers, casinos and pawn shops, and even other cryptocurrency companies like centralized trading platforms. Thus, DeFi services would be forced to meet basic obligations, most notably to maintain AML programs, conduct due diligence on their customers, and report suspicious transactions to FinCEN, the Financial Crimes Enforcement Network (FinCEN).
“This legislation bolsters the Treasury Department’s tools to protect our national and economic security,” Reed said. “Drug cartels, sex traffickers, and the like shouldn’t be able to use DeFi platforms to avoid justice – their victims deserve better. Our bill will also ensure that law enforcement has access to better information about cryptocurrency transactions, which they need to fight crimes like cross-border drug trafficking, weapons proliferation, and ransomware attacks. We must protect the integrity of the financial system from new and emerging threats from the worst criminal organizations and malicious state actors.”
The legislation also states that if a sanctioned person, like a Russian oligarch, uses a DeFi service to evade U.S. sanctions, then anyone who controls that project will be liable for facilitating that violation.
“Our adversaries and criminals worldwide are using creative ways every day to take advantage of the United States financial system and we should not allow them to exploit American innovation to evade sanctions and money launder,” Rounds said. “As more Americans start to use and invest in cryptocurrency, both DeFi platforms and crypto kiosks remain in the blind spot of regulation.”
The CANSEE Act would also require operators of crypto kiosks, or crypto ATMs, to improve traceability of funds by verifying the identities of each counterparty using a kiosk. Crypto ATMs are often found at convenience stores, laundromats, and gas stations, where users can insert cash or a debit card into the machine to turn their real money into cryptocurrency. The crypto is then transferred into a digital wallet that can then be accessed by scammers. Currently, there are about 30,600 crypto ATMs across the country – up from 1,200 in 2018.