Senators Jack Reed (D-RI) and Mark Warner (D-VA) introduced a new bill aimed at combating illegal financial activities such as money laundering and terrorist financing in decentralized finance (DeFi), Bloomberg News reported July 19.
The law stipulates that any violation or illegal transaction on a DeFi protocol must be penalized to discourage such activity. However, due to the inherent anonymity of DeFi users, the bill aims to hold the person who runs the platform accountable for any violations.
If a DeFi platform has no observable controller or owner, the proposed legislation puts the liability on those who have invested heavily in the platform. This basket would include venture capital firms and other notable investors who have invested more than $25 million in the platform.
According to Riet:
“DeFi and crypto ATMs are part of a largely unregulated technology that needs more oversight and guardrails to prevent rampant money laundering and sanctions evasion.”
Many of the rules the bill seeks to impose on the DeFi platforms are similar to the requirements and mandates established for banks and other traditional financial institutions, including requirements for keeping customer records and reporting suspicious transactions to the Treasury Department. In addition, the bill includes new rules for crypto ATM operators and would require them to verify users’ identities.
Push back
The proposed legislation has drawn widespread criticism from industry insiders, who see it as a potential suppressor 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 support effective measures to combat the unauthorized use of DeFi, the bill introduced today essentially says ‘centralize, shut down, or exit the United States.'”
The organization added that there are better ways to address the problem of illicit financial activity in DeFi that are cheaper to run and don’t hinder technological innovation.
In recent months, DeFi platforms have been drawn into controversy for their alleged role in facilitating sanctions evasion and serving as a conduit for hackers to launder illicit profits.
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