Bipartisan U.S. Senators Propose Legislation to Curb Money Laundering and Sanctions Evasion in DeFi
REED-ROUNDS-WARNER-ROMNEY INTRODUCE THE CRYPTO-ASSET NATIONAL SECURITY ENHANCEMENT AND ENFORCEMENT (CANSEE) ACT
A bipartisan group of U.S. Senators, including Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT), has introduced a new legislation titled Crypto Asset National Security Enhancement and Enforcement (CANSEE) Act (S. 2355). This Act aims to curb the risks and loopholes associated with cryptocurrency, particularly decentralized finance (DeFi) and virtual currency kiosks, which are currently being exploited for illicit activities such as money laundering and sanctions evasion. CANSEE ACT
CANSEE Act aims to impose the same anti-money laundering (AML) and sanctions compliance obligations on decentralized finance (DeFi) services that are mandatory for other financial companies, such as banks, casinos, pawnshops, and centralized crypto trading platforms. Sen. Mark Warner Press Release “S.2355 - A bill to clarify the applicability of sanctions and antimoney laundering compliance obligations to United States persons in the decentralized finance technology sector and virtual currency kiosk operators, and for other purposes.”
The Senators maintain that DeFi applications, primarily known for enabling peer-to-peer transactions without intermediaries, have been exploited by criminals and hostile state actors for illicit purposes due to their inbuilt anonymity and lack of regulatory oversight. The proposed Bill seeks to counter this by making DeFi services adhere to AML programs, perform due diligence on customers, and report suspicious activities to the Financial Crimes Enforcement Network (FinCEN).
The CANSEE Act would end special treatment for DeFi by applying the same national security laws that apply to banks and securities brokers, casinos and pawn shops, and even other cryptocurrency companies like centralized trading platforms. That means DeFi services would be forced to meet basic obligations, most notably to maintain AML programs, conduct due diligence on their customers, and report suspicious transactions to FinCEN. Sen. Jack Reed Press Release
The proposed CANSEE Act aims to address these concerns by placing DeFi services under the same regulatory obligations as traditional financial intermediaries such as banks and securities brokers. This means DeFi services will be required to maintain AML policies and procedures, conduct due diligence on their customers, and report suspicious transactions to the government. The Act also stipulates that if a sanctioned individual (e.g., a Russian oligarch) uses a DeFi service to evade U.S. sanctions, anyone who controls that platform will be held accountable for the violation. If the DeFi service is not controlled by anyone, the Act establishes that the largest investors in the project will be held responsible for meeting these obligations.
Additionally, the act mandates that operators of crypto ATMs or "crypto kiosks" verify the identities of ALL transaction participants to “improve traceability of funds by verifying the identities of each counterparty to each transaction using a kiosk.” The Senators maintain these kiosks have been exploited by criminals for money laundering tied to drug trafficking, human trafficking, and other crimes. The that end, the CANSEE Act proposes stricter customer due diligence requirements for operators of virtual currency ATMs, requiring them to verify the identities of BOTH parties in every transaction.
Lastly, the proposed legislation seeks to expand the Treasury Department's authority to regulate financial transactions conducted outside the traditional banking system, such as those enabled by new technologies like cryptocurrencies. The Senators stressed the importance of protecting the financial system from evolving threats posed by criminal organizations and malicious state actors, while still supporting the growth and potential of distributed ledger technologies.
The CANSEE Act could have a significant impact on permissionless, peer-to-peer (P2P) blockchain ecosystems, especially those that operate within the U.S. A permissionless blockchain ecosystem is one where any participant can join, interact, and engage with the system without the need for approval from a central authority. This open, decentralized structure is a core principle of many blockchain-based platforms, including many forms of DeFi and cryptocurrency networks.
TLDR: The CANSEE Act imposes very strict AML and KYC regulatory obligations on operators who control DeFi services or the largest investors if there's no clear controller. If CANSEE passes and is signed into law in its current form, it could essentially mean the end of pure P2P decentralized finance protocols doing business in the Untied States.