Coin Center and Blockchain Association criticize US Senate DeFi bill as ‘unworkable’.

Coin Center and Blockchain Association criticize US Senate DeFi bill as 'unworkable'.

The Confused Approach to Regulating DeFi: A Critique of the Proposed US Senate Bill

The blockchain industry has been abuzz with discussions around a newly proposed United States Senate bill that aims to regulate the decentralized finance (DeFi) sector. However, the bill has received significant backlash from crypto industry advocacy bodies, who argue that it takes a confused and unworkable approach to regulating this rapidly growing industry.

The bipartisan bill, known as the Crypto-Asset National Security Enhancement Act (CANSEE), was introduced on July 18 with the intention of combating money laundering violations in DeFi. If passed, the legislation would introduce new penalties for individuals who “control” or “make available an application designed to facilitate transactions using a digital asset protocol.” These individuals would also be required to adhere to anti-money laundering and financial reporting standards.

One of the major concerns raised by crypto advocacy groups, such as Coin Center and the Blockchain Association, is the vague definition of who or what “controls” a DeFi protocol. The bill leaves the decision of determining control in the hands of the U.S. Secretary of the Treasury. This has raised fears that excessive controls may be applied to DeFi, stifling innovation and hindering the growth of the industry.

In a blog post on July 20, Coin Center criticized the bill for giving “virtually unbounded discretion to the Secretary to decide what it would take to designate one as having ‘control’ of a protocol.” This lack of clarity and specificity in the legislation undermines the principles of transparency and decentralization that are at the core of the blockchain industry.

Coin Center further argued that the bill is unconstitutional as it threatens the First Amendment rights of software developers. By cracking down on developers, who are essentially exercising their freedom of speech by publishing code, the bill infringes upon their right to freely contribute to the advancement of technology.

The scope of the legislation is another point of contention. DeFi, by its very nature, is decentralized, making it legally challenging to enforce control over any specific protocol. Coin Center highlighted this issue, stating that DeFi’s decentralized structure makes it inherently difficult to regulate and control.

Kristin Smith, the CEO of the Blockchain Association, echoed Coin Center’s concerns and described the bill as unworkable. She also questioned the bill’s characterization of money laundering in DeFi and the broader crypto space. Smith pointed out that illicit transactions represent only a small fraction of total volume, accounting for just 0.24% of all digital asset transactions in 2022. She argued that federal law enforcement agencies already possess the necessary tools and expertise to address this relatively small issue, making the new punitive measures proposed in the bill redundant.

While crypto organizations have criticized the broad scope of the bill, it is worth noting that an April 7 U.S. Treasury report found that many DeFi protocols are more centralized than claimed. It revealed that a significant concentration of funds and voting power often resides in the hands of a few token holders. This finding suggests that some aspects of the industry may require closer scrutiny and regulation to ensure the protection of investors and prevent potential abuses.

In conclusion, the proposed US Senate bill aimed at regulating the DeFi sector has faced strong opposition from crypto industry advocacy bodies. The bill’s vague definition of control, potential infringement on developers’ First Amendment rights, and the challenges of enforcing regulations on a decentralized industry have all contributed to the criticism. While concerns about money laundering in DeFi are valid, existing law enforcement agencies may already possess the necessary tools to address this issue without resorting to new punitive measures. As the blockchain industry continues to evolve, it is essential for regulators to strike a delicate balance between fostering innovation and ensuring the integrity of the financial system.

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