Jul 19 2023
WASHINGTON - In an effort to prevent money laundering and stop crypto-facilitated crime and sanctions violations, a leading group of U.S. Senators is introducing new, bipartisan legislation requiring 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.
DeFi generally refers to applications that facilitate peer-to-peer financial transactions that are recorded on blockchains. The most prominent example of DeFi is so called “decentralized exchanges,” where automated software purportedly allows users to trade cryptocurrencies without using intermediaries.
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.
Criminals, drug traffickers, and 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. These bad actors have been quick to recognize how DeFi can be exploited to advance nefarious activities like cross-border fentanyl trafficking and financing the development of weapons of mass destruction.
According to the most recent U.S. National Money Laundering Risk Assessment: “DeFi services often involve no AML or other processes to identify customers.” According to another recent Treasury Department report, “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.”
Noting that transparency and sensible rules are vital for protecting the financial system from crime, U.S. Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT) today unveiled the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act (S. 2355). This legislation targets money laundering and sanctions evasion involving 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.
These requirements will close an attractive avenue for money laundering that has been routinely exploited over the past several months by the North Korean government, Chinese chemicals manufacturers, Mexican drug cartels, cybercriminals, ransomware attackers, scammers, and a host of other bad actors.
The legislation also makes clear that if a sanctioned person, like a Russian oligarch, uses a DeFi service to evade U.S. sanctions, then anyone who controls that project will be liable for facilitating that violation. If nobody controls a DeFi service, then—as a backstop—anyone who invests more than $25 million in developing the project will be responsible for these obligations.
The CANSEE Act would also require operators of crypto kiosks (also known as crypto ATMs) to improve traceability of funds by verifying the identities of each counterparty to each transaction using a kiosk. Unless these vulnerabilities are addressed, criminals will continue to exploit these kiosks to launder money from drug trafficking, human trafficking, scams, and other crimes.
Featuring an interface similar to regular ATMs, crypto ATMs are often found at convenience stores, laundromats, and gas stations. Users can insert cash or a debit card into the machine to turn their real money into cryptocurrency, which is then transferred into a digital wallet that can then be accessed by scammers. Once a transfer is complete, users cannot get their money back. Currently, there are about 30,600 crypto ATMs across the country – up from 1,200 in 2018, according to Coin ATM Radar.
Finally, the CANSEE Act makes important updates to the Treasury Department’s authority to require participants in the U.S. financial system to take special measures against money laundering threats. Currently, these authorities are limited to transactions conducted in the traditional banking system. But as new technologies like cryptocurrency increasingly enable new ways to conduct financial transactions, it is critical to extend Treasury’s authority to crack down on illicit financial activity that may occur outside the banking sector.
“DeFi and crypto ATMs are part of a largely unregulated technology that needs stronger oversight and guardrails to prevent rampant money laundering and sanctions evasion,” said Sen. Reed. “This legislation bolsters the Treasury Department’s tools to protect our national and economic security. Drug cartels, sex traffickers, and the like shouldn’t be able to use DeFi platforms to avoid justice – their victims deserve better. Our bill will also ensure that law enforcement has access to better information about cryptocurrency transactions, which they need to fight crimes like cross-border drug trafficking, weapons proliferation, and ransomware attacks. We must protect the integrity of the financial system from new and emerging threats from the worst criminal organizations and malicious state actors.”
“Our adversaries and criminals worldwide are using creative ways every day to take advantage of the United States financial system and we should not allow them to exploit American innovation to evade sanctions and money launder,” said Sen. Rounds. “As more Americans start to use and invest in cryptocurrency, both DeFi platforms and crypto kiosks remain in the blind spot of regulation. This targeted legislation kicks off an important debate on how to protect our financial system and give law enforcement the tools they need to prosecute bad actors.”
“As Chair of the Senate Intelligence Committee, I remain deeply concerned that criminals and rogue states continue to use crypto to launder money, evade sanctions, and conceal illicit activity. The targeted package we’re introducing today will help address specific problems in decentralized finance and crypto kiosks, and incorporates the Special Measures to Address Modern Threats bill I introduced in the last Congress to modernize FinCEN’s existing anti-money laundering authorities,” said Sen. Warner. “I believe these focused measures will help maintain the robust AML and sanctions enforcement we need to protect our national security, while allowing participants who play by the rules to continue to take advantage of the potential of distributed ledger technologies.”
“Malign actors—including China-based fentanyl manufacturers and drug cartels operating along the southern border—are capitalizing on existing loopholes under current law to evade sanctions using decentralized finance services,” said Sen. Romney. “By fortifying U.S. anti-money laundering frameworks, our legislation cracks down on crypto-facilitated crimes and ultimately reinforces our national security.”