Crypto Advocacy Agency Criticizes US Senate Bill’s Approach To DeFi Regulation

The proposed National Crypto Asset Security Enhancement Act (CANSEE) introduced in the United States Senate on July 18 has faced strong opposition from crypto industry advocacy bodies, who argue that it takes a confusing and inapplicable approach to governing the decentralized finance (DeFi) sector.

In separate statements on July 20, both crypto think tank Coin Center and crypto advocacy group Blockchain Association expressed their concern about the bill, calling it “messy”, “unenforceable” and even “unconstitutional” in its current form.

The main goal of the CANSEE bill is to tackle money laundering offenses in the DeFi space. However, if passed, the law will provide new penalties for individuals who “control” or provide applications designed for transactions using digital asset protocols. Such persons will also be subject to anti-money laundering and financial reporting standards.

One of the main issues highlighted by critics is the ambiguity in the bill’s definition of who or what constitutes “control” over a DeFi protocol. Responsibility for making these decisions has been left to the US Secretary of the Treasury, raising concerns that doing so could lead to the imposition of excessive and arbitrary controls on DeFi platforms.

Coin Center’s blog post on July 20 pointed out that the bill gives the Secretary virtually unlimited discretion in deciding what qualifies as “control” over a protocol. This level of discretion raises questions about its constitutionality, particularly because it could violate a software developer’s First Amendment right to publish code freely.

The scope of the law has also come under scrutiny, with critics arguing that DeFi is, by design, decentralized, making it challenging to enforce control over individual protocols. Coin Center highlighted the complexities of setting up a decentralized system, stressing that imposing tight controls could prove to be legally burdensome.

Blockchain Association CEO Kristin Smith echoed Coin Center’s concerns and further criticized the bill for exaggerating the prevalence of money laundering in DeFi and the wider crypto space. According to Smith, illegal transactions accounted for only 0.24% of all digital asset transactions in 2022, significantly lower than traditional financial figures. He suggested that existing federal law enforcement agencies already had the necessary tools and expertise to effectively address this relatively minor problem, making the new punitive measures in the bill redundant.

While crypto organizations oppose the broad scope of the bill, an April 7 US Department of the Treasury report indicates that some DeFi protocols are more centralized than claimed, with some token holders controlling the majority of funds and voting power.

As the debate continues, the crypto industry advocates for a more thoughtful and comprehensive approach to DeFi regulation that strikes a balance between addressing legitimate concerns and preserving the decentralized nature of this financial system.