US senators introduce bill to regulate DeFi money laundering- will this kill the industry?

A new bipartisan bill to regulate DeFi protocols like uniswap has been introduced into the US Senate.

The bill, called the Crypto-Asset National Security Enhancement Act of 2023, or the CANSEE act, would require DeFi protocols to impose controls on their users similar to how traditional financial institutions do.

The purpose of the bill is 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 CANSEE act would force anyone who ‘controls’ a DeFi protocol to also enforce, or be responsible for enforcing, KYC and AML obligations for users of the protocol.

If nobody can be said to control the protocol, then anyone who invests more than US$25 million into developing the protocol would be responsible for fulfilling these KYC and AML obligations.

These controls would include collecting and vetting customer information, and place responsibility for reporting suspicious activity to the government on the controlling entity.

DeFi protocols and many others in the crypto space have criticised the move, saying that this move will kill the industry, or at least drive DeFi protocols and investors in DeFi protocols away from the US.

One commenter called the bill ‘an existential threat to DeFi’, while Bill Hughes, a lawyer at ConsenSys took a more nuanced view, suggesting on twitter that ‘Unless Lazarus magically disappears tomorrow, whether because they move on to hacking drones or AI, or because Kim Jong Un has a change of heart and drops the whole Communist Dystopia thing, then some legislation in the US that seeks to solve for a growing national security problem WILL probably, eventually get enough support to go through.’

Naturally, the figure of US$25 million is quite the small figure for investment, and indeed many in the crypto space seem to agree.

Additionally, while the bill may offer some clarity as to the status and responsibilities of DeFi protocols, these responsibilities do not lie with those actually capable of shouldering them.

Finding out who ‘controls’ a DeFi protocol could prove to be difficult and pointless, especially if the protocol itself is run by a Decentralised Autonomous Organisation.

Additionally, investment does not always imply an ability to control the development of a project. The bill may simply end up driving investment away from DeFi protocols in the US, with jurisdictions like Hong Kong and Singapore, who have expressed a willingness to work with crypto companies reaping the benefits.