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U.S. Senate to Decide if DeFi Should be Sanctioned as a Money Laundering Tool: Here’s What’s Being Discussed

Published July 20, 2023 1:42 PM
Omar Elorfaly
Published July 20, 2023 1:42 PM

Key Takeaways

  • Senate Wants to Understand who is to Blame when DeFi is used for Money Laundering
  • US crypto developers may become responsible for foreign crypto manipulation
  • Former Associate Deputy Attorney General blames North Korea for the mess

On Wednesday, bipartisan US senators put forth a bill  that focuses on Anti-Money Laundering (AML) restrictions meant to end illicit transfers on crypto blockchains.

According to the bill’s text, it ” clarifies the applicability of sanctions and anti-money laundering compliance obligations to United States persons in the decentralized finance technology sector and virtual currency kiosk operators, and for other purposes.”

At its core, the bill aims to inquire about the measures taken against money laundering and purchasing illicit services/products by those who manage crypto blockchains.

However, the bill proposed involves plenty of jargon. So, let’s break it down.

US Senators Request Clarity

U.S. Senators Jack Reed, Mike Rounds, Mark Warner, and Mitt Romney put forth the Crypto-Asset National Security Enhancement and Enforcement.

The bill requires “decentralized finance (DeFi) services to meet the same anti-money laundering (AML) and economic sanctions compliance obligations as other financial companies, including centralized crypto trading platforms, casinos, and even pawn shops. 

The legislation also modernizes key Treasury Department anti-money laundering authorities, and sets new requirements to ensure that “crypto kiosks” don’t become a vector for laundering the proceeds of illicit activities,” according to Senator Warner’s press release 

The press release explains DeFi, which is basically the ability to trade finances for goods and services independently avoiding the involvement of Traditional Finance (TradFi) institutions, such as banks and the US Treasury Department.

“By design, DeFi provides anonymity. This can allow malicious and criminal actors to evade traditional financial regulatory tools, including longstanding and well-developed rules requiring financial institutions to monitor all transactions and report suspected money laundering and financial crime to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury Department.  This allows DeFi to be used to launder criminal proceeds and fund more crime.”

Senator Warners goes on to mention the following:

“Hostile state actors such as North Korea have all demonstrated a propensity for using (DeFi) as a preferred method of transferring and laundering ill-gotten gains.”

The statement likely refers to Lazarus, an anonymous cybercrime group comprised of individuals run by the government of North Korea.

Signs point toward Lazarus when it comes to over $2 billion worth of crypto stolen off blockchains, including the $100 million Horizon hack , which saw the theft of Ethereum (ETH), Binance Coin, Tether, USD Coin, and Dai.

A US Treasury Department report  states that “illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds. To accomplish this, illicit actors are exploiting vulnerabilities in the U.S. and foreign AML regulatory, supervisory, and enforcement regimes as well as the technology underpinning DeFi services.”

Proposed Anti-money Landauring Regulations

The Crypto-Asset National Security Enhancement and Enforcement, wittily abbreviated to CANSEE, suggests the idea that blockchain developers and managers would require information on wallet holders that would essentially eliminate the anonymity that comes with DeFi.

“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.”

What if a blockchain is not owned/managed by anyone?

“Anyone who invests more than $25 million in developing the project will be responsible for these obligations,” reads Senator Warner’s press release.

So, basically, if an investor puts $25 million or more into developing a blockchain, they will be responsible for carrying out anti-money laundering protocols on the chain, regardless of whether they volunteer to develop/manage the chain.

Former Associate Deputy Attorney General, and attorney at ConsenSys, Bill Hughes points out Subsection (e)(1)(C) of the bill in his tweet , which states that “a US backer or facilitator will have all the money-services-business obligations under the Bank Secrecy Act when it comes to users transacting through the protocol, which also carries criminal and civil penalties for failures.”

Lazarus is a Problem

Hughes also highlights that one of the key influential factors driving the creation of the bill is the involvement of Lazarus and the DPRK.

“Unless Lazarus magically disappears tomorrow, whether because they move on to hacking drones or AI, or because Kim Jong Un has a change of heart and drops the whole Communist Dystopia thing, then some legislation in the US that seeks to solve for a growing national security problem WILL probably, eventually get enough support to go through.”

But, according to Senator Warner’s statement, North Korea is not the only party to blame, as he also mentions “Drug cartels, sex traffickers”, and Russian oligarchs who use “a DeFi service to evade U.S. sanctions”.

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