The CANSEE Act of 2023
On Wednesday, Senators Mark Warner (D-VA), Jack Reed (D-RI), Mike Rounds (R-SD), and Mitt Romney (R-UT) introduced the Crypto-Asset National Security Enhancement Act of 2023 (CANSEE Act), a bill that would effectively ban DeFi development in the United States by creating a Catch-22: centralize, or face criminal consequences.
The bill would impose anti-money laundering requirements that are predicated on the existence of intermediating financial gatekeepers on people involved with the development of software that allows Americans to exchange their own assets. The bill’s requirements would apply to “digital asset transaction facilitators,” which are defined to include those who “control a digital asset protocol as determined by the Secretary of Treasury” or “make available an application designed to facilitate transactions” (i.e., a frontend). If there is no facilitator, the bill would apply these requirements to a “digital asset protocol backer,” meaning a person who has invested at least $25,000,000 in a protocol’s development.
What does this mean?
We of course share the senators’ goal of reducing the illicit abuse of DeFi, and there are ways to do so that can coexist with the core characteristics of public blockchains and protocols. Unfortunately, the CANSEE Act does not thread this needle because it would effectively ban DeFi development in the United States.
House Committees Introduce Joint Digital Asset Market Structure Bill
Republican leaders on the House Financial Services and House Agriculture Committees officially introduced the Financial Innovation and Technology for the 21st Century Act on Thursday, with a vote and markup scheduled for next week on Wednesday, July 26th. The bill creates classifications for crypto assets, digital securities, commodities, and stablecoins, and includes a framework for assessing the level of decentralization in blockchain systems.
What Does This Mean?
The success of the bill will require bipartisan support. As such, House Agriculture Committee Chair Glenn “GT” Thompson (R-PA) and House Financial Services Committee Chair Patrick McHenry (R-NC) will continue their efforts to secure bipartisan support in advance of next week’s vote. According to Bloomberg, Chair Thompson believes that last week’s Ripple decision will bolster support for the bill because the court’s decision highlights that the law regarding the proper treatment of digital assets under existing securities statutes is not clear or well-settled.
CFTC discusses DeFi
On July 18, the Commodities Futures Trading Commission (CFTC) held a meeting with Technology Advisory Committee (TAC) to discuss existing “regulatory issues for DeFi”. The TAC Meeting featured the following topics: 1) Enforcement Case Study: Ooki DAO, 2) Extent of Decentralization and Models of Governance in DeFi, and 3) Stability and Security Challenges and Regulatory Implications for Crypto.
The list of experts included Anthony Biagioli, Special Counsel to the Director at CFTC’s Division of Enforcement; Ben Milne, the Founder & CEO of Brale Inc.; Justin Slaughter, Policy Director at Paradigm; and Dr. Dan Awrey, Professor of Law at Cornell Law School.
Enforcement Case Study: Ooki DAO
While illustrating the concept of regulatory enforcement, Anthony Biagioli highlighted the Ooki DAO (Decentralized Autonomous Organization) as an exemplary case. By classifying Ooki as an unincorporated association, where multiple individuals collaborated without a formal charter to achieve a shared objective, Biagioli pointed out that DAOs are susceptible to being sued.
Further, Mr. Biagioli argued that DAOs can be properly served with civil process. In the specific case of Ooki, the Court determined that serving through a help chat box on the DAO's website, accompanied by simultaneous notification to the DAO through its online discussion forum, fulfilled the requirements outlined in the service rules and met the constitutional obligations.
The Extent of Decentralization and Models of Governance in DeFi
While outlining the unique nature of blockchain technology, Ben Milne highlighted that “decentralization is a spectrum, it's not a toggle” and argued that “the aim of the blockchain is to provide a ledger of universally accepted truth” where its integrity is paramount in holding the whole system together.
Continuing on the theme of decentralization, Justin Slaughter mentioned that “the goal of regulation somewhere should be to… try to reward those decentralized protocols that are actually decentralized.”
Stability and Security Challenges and Regulatory Implications for Crypto
Dr. Dan Awrey stressed the need for a DeFi-specific regulatory framework by showcasing how the “existing regulatory frameworks have relied historically on a very, very high degree of centralization of the actors' activities involved in financial services” and added that “we're going to have to really rethink the way that we approach [DeFi] regulation."
What Does It Mean?
The discussions highlighted an evolving understanding of decentralization as a spectrum, implying a shift in regulatory perspectives toward promoting genuinely decentralized protocols and developing new frameworks tailored to DeFi. The discussion also highlighted the growing sentiment toward increasing the CFTC’s role in crypto oversight—similar to the approach taken in the recent bill by US Senators Cyntha Lummis (R-WY) and Kirsten Gillibrand (D-NY)—which would require crypto asset exchanges to register with the CFTC.