New bill proposes strict rules for DeFi protocols

The U.S. Senate is again preparing to tackle crypto industry regulation through a new bill.
The proposed Crypto-Asset National Security Enhancement Act of 2023, backed by bipartisan support, aims to enforce strict anti-money laundering (AML) measures on decentralized finance (DeFi) protocols, mandating them to adopt banking-like controls for their users.
Regulating DeFi
DeFi protocols, the decentralized applications enabling users to engage in crypto borrowing, lending, and trading through smart contracts, present a unique regulatory challenge due to their operation on permissionless blockchains. 
However, the proposed bill released on July 18 addresses these concerns by imposing obligations on those who exert control over DeFi protocols or offer user-friendly interfaces for their complex smart contracts, akin to Uniswap Labs facilitating Ethereum’s primary decentralized exchange.

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As outlined in the briefing document, if a DeFi protocol lacks central control, entities investing over $25 million in its development would assume responsibility for meeting regulatory obligations.
These requirements include conducting customer screenings, implementing anti-money laundering programs, promptly reporting suspicious activities to authorities, and blocking access for sanctioned individuals.

The bill proposes identity verification requirements for crypto kiosks, which will increase scrutiny on these service providers. It also aims to expand the Treasury Department’s authority to combat money laundering in unconventional financial sectors, including crypto assets.
SEC and crypto regulations
Talk of regulating DeFi has been ongoing. In April, the United States Securities and Exchange Commission (SEC) chair Gary Gensler brought up that many crypto platforms are currently operating as unregistered securities exchanges, after which he emphasized the enforcement of existing regulations on platforms trading crypto asset securities, including DeFi systems, as outlined in an SEC fact sheet. 
Then, Gensler also quickly stated that calling oneself a DeFi platform does not exempt a firm from complying with securities laws.
Before the meeting, officials from the SEC announced that they would provide more information and resume discussions. This was because market participants had requested clarity about the proposed changes and how they would affect crypto assets and DeFi.
Although the agency does not intend to establish a formal definition for DeFi in the rule, it will evaluate each case based on the nature of the activities involved. This new bill suggests a clear distinction in how exchanges and DeFi protocols are regulated will likely be part of near-future developments.

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