Senators Jack Reed (D-RI) and Mark Warner (D-VA) introduced a new bill that aims to combat illicit financial activities like money laundering and terrorist financing in decentralized finance (DeFi ), Bloomberg News announced July 19.
The legislation states that any violation or illegal transaction on a DeFi protocol must be punished to discourage such activity. However, due to the inherent anonymity of DeFi users, the bill wants to make the person controlling the platform liable for any violations.
If a DeFi platform has no discernible controller or owner, the proposed legislation says the liability lies with those who have invested heavily in the platform. This basket would include venture capitalists and other notable investors who have invested more than $25 million in the platform.
According to Reid:
“DeFi and crypto ATMs are part of a largely unregulated technology that requires stronger oversight and safeguards to prevent rampant money laundering and sanctions evasion.”
Many of the rules the bill intends to impose on DeFi platforms are similar to requirements and mandates set for banks and other traditional financial institutions, including requirements for maintaining customer records and reporting suspicious transactions to the Treasury Department. Additionally, the bill includes new rules for crypto ATM operators and would require them to verify user identities.
Repel
The proposed legislation has been heavily criticized by industry insiders, who see it as a potential brake on innovation. Meanwhile, others argue that DeFi cannot be regulated like traditional financial institutions and needs to be seen in a new way.
The DeFi Education Fund (DEF) said:
“While we support effective measures to address the illicit use of DeFi, the bill introduced today essentially says ‘centralize, shut down, or get out of the United States’.”
The organization added that there are better ways to tackle the problem of illicit financial activity in DeFi that would be cheaper to adopt and would not stifle technological innovation.
In recent months, DeFi platforms have been embroiled in controversy over their alleged role in facilitating sanctions evasion and serving as a conduit for hackers to launder illicit gains.
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