Crypto Council opposes US Senate’s proposed bill due to its unworkable obligations for DeFi.

Crypto Council opposes US Senate's proposed bill due to its unworkable obligations for DeFi.

The Crypto Council for Innovation Criticizes Proposed AML Bill for DeFi

A bill introduced in the US Senate on anti-money laundering (AML) and illicit finance activities in the decentralized finance (DeFi) space has come under criticism from the Crypto Council for Innovation (CCI). The CCI, which represents a group of industry leaders and players committed to advancing the crypto industry, argues that the bill fails to provide a workable framework to address illicit finance in these sectors. The council believes that the proposed legal obligations are arbitrarily placed on persons and that the bill goes in the opposite direction of what the proper approach should be.

Background and Context

The bill, introduced by Senators Jack Reed, Mike Rounds, Mark Warner, and Mitt Romney, aims to apply AML obligations to DeFi protocols and crypto ATMs. While the intentions behind the bill are rooted in legitimate concerns about illicit finance, the CCI believes that the bill’s framers have not taken into account the unique attributes of blockchain-backed systems.

Illicit finance is indeed a national security concern, but the CCI argues that leveraging the transparency and programmability inherent in blockchain systems can lead to appropriate compliance measures unique to crypto. However, the current bill falls short in this regard.

Criticisms of the Proposed Bill

The CCI highlights several issues with the bill’s proposals. One of the key concerns is the obligation placed on “Digital Asset Protocol Backers.” According to the bill, anyone holding more than $25 million worth of a DeFi protocol’s governance token or investing $25 million or more into the protocol’s development would be considered a backer. The council finds this requirement problematic, as it places legal obligations on individuals who have no actual influence over protocols once they are deployed.

Similarly, the bill places obligations on “Digital Asset Transaction Facilitators,” defined as individuals who have control over the protocol or offer access to an application that facilitates transactions on the crypto protocol. The CCI criticizes the vagueness of the definition of “facilitators” and argues that the bill lacks workable obligations and practical guidance.

The council specifically notes that the proposal fails to provide technical ways for decentralized protocols to comply with Bank Secrecy Act (BSA) reporting requirements. Collecting personal identification information from such protocols is not feasible, and the bill does not address this technical complexity or offer solutions on how to overcome it.

The CCI’s Approach to DeFi Regulation

In response to the bill’s shortcomings, the CCI is actively collaborating with industry experts and regulators in the US and other leading jurisdictions to develop a technologically sound approach to mitigating illicit finance in DeFi. The council aims to draft a framework for the appropriate regulation of the sector.

While the CCI’s statement strongly criticizes the bill, it acknowledges that the legislation is still in the early stages and that the authors are open to dialogue for finding the best way forward. The expectation is that the bill will undergo significant edits as it progresses.

Conclusion

The proposed AML bill for the DeFi space has faced criticism from the Crypto Council for Innovation. The CCI argues that the bill’s framework is unworkable and fails to consider the unique attributes of blockchain-backed systems. The council specifically highlights issues with the obligations placed on protocol backers and transaction facilitators, as well as the lack of practical guidance for complying with BSA reporting requirements.

Despite its criticisms, the CCI is actively engaging with industry experts and regulators to develop a technologically sound approach to regulating the DeFi sector. The council believes that striking a careful balance between establishing safeguards and fostering innovation is crucial for effective regulation in the US.

As the bill progresses, it is expected that there will be ongoing discussions and edits to address the concerns raised by the CCI and other industry stakeholders. The ultimate goal is to create a regulatory framework that effectively addresses illicit finance while supporting the growth and innovation of the DeFi industry.

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