On July 19, 2023, a bipartisan coalition of U.S. Senators announced the introduction of the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act, aimed at strengthening regulations surrounding decentralized finance (DeFi) to combat money laundering and illicit financial activities. The legislation, spearheaded by Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT), seeks to ensure that DeFi services adhere to the same anti-money laundering (AML) standards as traditional financial institutions, including banks and cryptocurrency exchanges.
Understanding the Legislative Context
The CANSEE Act responds to the growing concerns over how DeFi platforms enable anonymity in transactions. This anonymity has become a loophole for criminals and malicious state actors, allowing them to exploit these platforms to evade regulatory measures. By holding DeFi services to the same compliance standards as other financial entities, the legislation aims to close the gaps that have allowed illicit activities to flourish.
The Threat of DeFi
DeFi applications facilitate direct financial transactions between users through blockchain technology, often without intermediaries. While this innovation has its benefits, it has also attracted nefarious actors, including drug traffickers and cybercriminals, who have recognized the potential for using DeFi to launder money and finance illegal operations. A recent U.S. National Money Laundering Risk Assessment highlighted that many DeFi services lack adequate AML processes to identify their users, making them attractive to those seeking to conceal their activities.
Key Provisions of the CANSEE Act
- Equal Treatment for DeFi: DeFi platforms will be required to implement AML programs, assess customer identities, and report suspicious transactions to the Financial Crimes Enforcement Network (FinCEN).
- Accountability Measures: If a sanctioned individual uses a DeFi service to evade U.S. sanctions, those controlling the platform will be held liable. In instances where no one controls a DeFi service, significant investors will share this responsibility.
- Crypto Kiosk Regulations: Operators of cryptocurrency kiosks, commonly found in convenience stores and gas stations, will need to verify the identities of users for each transaction to prevent money laundering.
- Enhanced Treasury Authority: The Act also expands the Treasury Department’s ability to address money laundering threats beyond traditional banking, ensuring that oversight keeps pace with technological advancements.
Statements from the Senators
Senator Reed emphasized the need for stronger oversight, stating, “DeFi and crypto ATMs are part of a largely unregulated technology that needs stronger guardrails to prevent rampant money laundering and sanctions evasion.” He underscored the necessity of equipping law enforcement with better tools to combat crimes facilitated through these platforms.
Senator Rounds echoed these sentiments, warning that as cryptocurrency becomes more mainstream, the lack of regulation in DeFi platforms and kiosks could pose significant risks to the financial system. He stressed the importance of initiating a national conversation on how best to protect this system.
Senator Warner, as Chair of the Senate Intelligence Committee, expressed ongoing concern about the misuse of cryptocurrency by criminals and rogue states. He believes the targeted measures proposed in the CANSEE Act are crucial for maintaining robust AML enforcement and protecting national security.
Finally, Senator Romney pointed out that the legislation aims to close loopholes exploited by malicious actors, thereby reinforcing U.S. national security against crypto-facilitated crimes.
As the landscape of financial technology continues to evolve, the CANSEE Act represents a significant step toward ensuring that the benefits of innovation do not come at the expense of security and accountability.
