Last week, a bipartisan group of four U.S. Senators introduced the Crypto-Asset National Security Enhancement and Enforcement Act of 2023, dubbed the "CANSEE Act", in response to concerns over the use of decentralised software platforms to facilitate illicit finance.
The bill's lead sponsor, Senator Jack Reed, noted that the proliferation of cryptocurrencies has provided new avenues for financial transactions and in his opinion necessitates an expansion of regulatory power to curb illicit financial activities effectively. The bill aims to crack down on nefarious actors, such as drug cartels and sex traffickers, exploiting DeFi platforms to facilitate illegal financial transactions and would equip the US Treasury Department with enhanced tools to safeguard national and economic security.
Key provisions of the CANSEE Act require individuals who make available or control DeFi protocols or offer user-friendly applications for them to implement AML/CTF and sanctions compliance measures akin to those required of traditional banks. This includes the collection of customer information, reporting suspicious activities, and blocking transactions involving sanctioned individuals.
In cases where no centralised control exists, the bill would require any entity investing more than $25 million in developing the DeFi project to assume responsibility for these compliance obligations. This would make large investors and venture capitalists responsible for AML/CTF and sanctions compliance by decentralised protocols and websites which facilitate access to those platforms.
Critics of the bill have raised concerns about the potential impact on innovation within the crypto industry. Some argue that overly stringent regulations might stifle the development of DeFi protocols and limit the freedom of developers to develop decentralised software applications.
Jerry Brito, Executive Director of Coin Center, raised his concerns regarding the bill in a tweet.
[The CANSEE Act] would extend sanctions penalties and AML obligations to developers of decentralized protocols. It's unconstitutional and ill-considered.
In an article published by Coin Centre, Brito described the bill as tantamount to a ban on:
decentralized software development that cedes an innovative sector to the rest of the world
Coin Centre also criticized the potential infringement on first amendment rights to the extent the bill imposes legal liability on software developers and the broad discretion given to Treasury under the bill to define the concept of a controller of a platform.
Striking the right balance between bolstering national security and fostering innovation remains a significant challenge for lawmakers across the globe. While there is broad agreement on the CANSEE bill's goal of safeguarding national security and preventing financial crime, Coin Centre called for lawmakers to engage in constructive dialogue with industry stakeholders to address potential unintended consequences which may cause headaches for legitimate business and otherwise stifle innovation.