U.S. to impose bank requirements on protocols running crypto operations

A draft regulation in the Senate aims to impose strict control on users.

The cryptocurrency market is about to get another blow from American legislators who are considering a bipartisan bill that would place severe anti-money laundering requirements on decentralized finance (DeFi) protocols. 

The new Crypto-Asset National Security Enhancement Act would impose bank-like controls on their users in order “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.”

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DeFi protocols are financial applications that allow users with a crypto wallet to borrow, lend and trade cryptocurrencies via smart contracts.

They are harder to regulate than crypto exchanges like Binance or Coinbase, for example, because they operate directly on blockchains that don’t require permissions.

As Coinbase, a crypto company, explains, the bill envisions sidestepping these issues by placing requirements on “anyone who ‘controls’ a DeFi protocol or makes available an application to use the protocol.” It could be a reference to individuals or groups who build user-friendly frontends for protocols’ smart contracts. 

“If nobody controls a DeFi protocol, then - as a backstop - anyone who invests more than 25 million dollars in developing the protocol will be responsible for these obligations,” according to the Senate document.

These controlling entities would need to vet and collect information on their customers, maintain anti money laundering programs, report suspicious activity to the government, and block sanctioned individuals from using their protocol.

The bill would also require crypto exchanges to carry out identity verification measures while expanding the Treasury Department’s authority to police alleged money launderers in non-traditional financial settings, including crypto.

The bill was introduced this week by Democrat Senator Jack Reed, a member of the Senate Banking Committee, and was co-sponsored by Republicans Mike Rounds and Mitt Romney, as well as Democrat Mark Warner.