DeFi bill introduced in Senate would hold major investors responsible for illegal use

Senators Jack Reed (D-RI) and Mark Warner (D-VA) have introduced a new bill that aims to combat illicit financial activity like money laundering and terrorism financing in decentralized finance (DeFi), Bloomberg News reported on July 19.

The legislation stipulates that any violations or illegal transactions on a DeFi protocol should be punished to discourage such activity. However, due to the inherent anonymity of DeFi users, the bill wants to make the person controlling the platform liable for any violations.

If a DeFi platform does not have a discernible controller or owner, then the proposed legislation asserts that the liability falls upon those who have heavily invested in the platform. This basket would include venture-capital firms and other notable investors that have invested more than $25 million into the platform.

According to Reed:

“DeFi and crypto ATMs are part of a largely unregulated technology that needs stronger oversight and guardrails to prevent rampant money laundering and sanctions evasion.”

Many of the rules the bill intends to impose on the DeFi platforms are similar to requirements and mandates set for banks and other traditional financial institutions, including requirements around maintaining customer records and reporting suspicious transactions to the Treasury Department. Additionally, the bill includes new rules for crypto ATM operators and would mandate them to verify user identities.

Pushback

The proposed legislation has received considerable criticism from industry insiders, who perceive it as a potential squelcher of innovation. Meanwhile, others argue that DeFi cannot be regulated like traditional financial institutions and needs to be viewed in a new way.

The DeFi Education Fund (DEF) said:

“While we are supportive of effective measures to combat the illicit use of DeFi, the bill introduced today essentially says ‘centralize, shut down, or get out of the United States.’”

The organization added that there are better ways to tackle the issue of illicit financial activity in DeFi that would be cheaper to enact and would not stifle technological innovation.

Recent months have seen DeFi platforms drawn into controversies due to their alleged role in facilitating sanction evasion and serving as a conduit for hackers to launder illicit gains.

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