The crypto industry is watching the U.S. Senate with bated breath. There, a bill for stricter regulation of the DeFi industry is being negotiated. The bill requires operators of DeFi protocols to oversee compliance with money laundering regulations. This is anomalous because similar responsibilities generally do not exist in the area of decentralized finance. The proposals in the bill are met with criticism.

DeFi sector target

Control obligations as they also apply to banks: The "Crypto-Asset National Security Enhancement Act of 2023" is intended to extend financial market rules to the DeFi sector. It specifically addresses the "applicability of money laundering penalties and compliance obligations to U.S. persons in the decentralized financial technology sector." The bill is supported by both Democrats and Republicans.

The bill aims to close loopholes in the money laundering process and counter the "rise of cryptocurrency crime," according to a briefing document cited by Coindesk. Sanctions measures are also discussed. Their implementation would be a stress test for DeFi protocols.

Who is liable?

DeFi transactions are automatic, using so-called smart contracts. So there are no operators. But the laws must be applied to someone. According to the draft, these are individuals "who manage a DeFi protocol or make an application available for use of the protocol." So developers who build user interfaces, for example, could be in the crosshairs.

Otherwise, investors could also be affected. "If no one has control over a DeFi protocol, then - as a precautionary measure - anyone who invests more than $25 million in the development of the protocol is responsible for these liabilities," the document says.

These monitoring bodies should screen clients, collect data, adhere to anti-money laundering policies, report suspicious activity and exclude sanctioned individuals from using the protocol.

DeFi-GAU?

In its current form, the law would be a setback for the DeFi industry. Applications are developed in such a way that there are precisely no directly responsible parties. Since developers are also liable, the requirements could lead to a creeping DeFi death in the US.

Similar requirements, as will be enforced at the EU level with the Data Act, are the subject of controversial debate. Again, there are fears of a de facto ban on smart contract applications.