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Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we are looking at a bill that could spell the end of DeFi in the US.
US senators continued America's war on crypto this week when they introduced a bipartisan bill aimed at cracking down on a lesser-known corner of the digital asset space.
After a series of high-profile failures caused by last year's market crash, 2023 has been a year in which US regulators have repeatedly hammered down cryptocurrencies. Most of the attention has focused on the enforcement actions taken against industry benchmarks Coinbase and Binance, which, as the biggest names in the industry, are naturally on the front lines of cryptocurrency's showdown with US financial watchdogs.
But this week, new battle lines were drawn against decentralized finance, a niche reserved for the most devoted cryptocurrency enthusiasts who proudly stand for privacy and financial freedom.
Sens. Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA) and Mitt Romney (R-UT), this week inserted the National Crypto Asset Security Enhancement and Enforcement Bill, aptly named the "Cansee" Bill. Point to prevent cryptocurrency-enabled crime and penalizes evasion by requiring DeFi services to meet the same standards as "centralized" (read: normal) companies.
The very nature of many DeFi platforms, which eliminate the need for third-party intermediaries, means that they run on lines of code without the controlling hand of a compliance department. Precisely for this reason, the bill also proposes that if the authorities cannot identify a person in control of a DeFi platform, anyone who invests more than $25 million in the development of the project will be liable for their compliance obligations.
Unsurprisingly, the bill has sent cryptocurrency advocates into a frenzy, arguing that the text misses the point of DeFi entirely. “The real story here is that lawmakers are clearly struggling to imagine solutions beyond the confines of the current system,” said Akash Mahendra, a director at Haven1 Foundation and a portfolio manager at Yield App, a crypto platform serving nearly 100,000 users.
Yaya Fanusie, director of anti-money and cyber laundering at the Crypto Council for Innovation, a trade association in the US, added: "The bill places legal obligations on people who have no way to actually influence the operation of standalone DeFi protocols," adding that "investors in the protocol and original software developers have no way to change operations once the protocols are implemented."
But it is interesting to argue that the US anti-money laundering regime, based on proven legislation like the Bank Secrecy Act of 1970 and the post-9/11 Patriot Act, does not meet the standards of decentralized finance, and not vice versa.
Aside from the most staunch crypto libertarians, there are few in finance (crypto or otherwise) to suggest that any part of the sector should be exempted or given special treatment under well-established anti-money laundering laws.
“Congress decided that it was worth sacrificing some financial privacy to make sure there was no 9/11 in the future. True believers in cryptocurrency have never understood that — their mantra is to give people a means to protect themselves from government oversight,” John Reed Stark, former head of Internet compliance for the Securities and Exchange Commission, told me.
Cansee's bill shouldn't come as a surprise either. Scrutiny over DeFi's alleged misdeeds increased last summer when the Office of Foreign Assets Control placed sanctions on Tornado Cash, a decentralized cryptocurrency mixing service said to have been used to launder more than $7 billion over three yearsand helping North Korean state hackers evade economic sanctions.
“If your ultimate goal is a fully decentralized, self-perpetuating financial system based on smart contracts, the United States will always regulate you,” Stark added. "It's anathema to the basic premise of America's anti-money laundering laws."
What do you think about the Cansee bill and the general state of decentralized finance in the eyes of regulators? Email me at scott.chipolina@ft.com
Weekly Highlights:
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On the subject of the US crackdown on digital assets, Nasdaq, one of the world's largest exchange operators, has halted plans to launch a crypto custody service, citing regulatory uncertainty. The U-turn is a blow to a crypto industry in desperate need of a win, especially after last year's market crash wiped out once-trustworthy benchmarks like FTX and Celsius. Read more here.
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You may remember my story earlier this year that revealed that Binance Holdings, the Cayman Islands holding company for the sprawling offshore exchange, used the same Washington lobbyists as its allegedly separate US arm, Binance US. The Hogan Lovells law firm, which lobbied Binance US until the end of November 2022, registered as a lobbyist for the Cayman Islands entity the next day. The revelations now reveal that the relationship between the law firm and Binance Holdings has ended. Hogan Lovells refused to tell me why, but here are some reminders of Binance's clashes with US regulators.
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Late Thursday night, crypto exchange FTX crashed defendant its founder-turned-disgraced cryptocurrency kingpin Sam Bankman-Fried along with three other former executives in a bid to recover more than $1 billion. Led by restructuring expert John Ray, the lawsuit alleges that a series of transactions allegedly benefited former FTX heavyweights, including Caroline Ellison, a former head of FTX's sister trading firm Alameda Research, FTX co-founder Zixiao "Gary" Wang, and Nishad Singh, who worked at both FTX and Alameda, forming a key part of Bankman-Fried's inner financial circle. All three have pleaded guilty to charges including fraud unrelated to Thursday's lawsuit.
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British MP and Treasury Economic Secretary Andrew Griffith has flatly rejected calls on the UK government to regulate cryptocurrencies as gambling, arguing that such a move would go against globally agreed recommendations regarding the supervision of cryptocurrencies, create unclear mandates among regulators, and may fail to mitigate various risks. Educate yourself about the broader debate and need for health warnings about crypto gambling addiction here.
Soundbite: Gary Gensler Bets on a Stronger SEC
It feels like an era since the crypto industry eagerly anticipated the appointment of Gary Gensler as chairman of the Securities and Exchange Commission, assuming the fact that he once taught a course on blockchain meant he would be a friend to the industry while leading the top US financial watchdog.
Since then, Gensler has quickly become public enemy number one for crypto evangelists who believe the US, and primarily the SEC, is unfairly driving the industry off its shores.
Gensler shows no sign of backing down, and the chief regulator this week told the Senate appropriations committee that a stronger SEC was needed if it was to continue its work in what it described as a "compliance-ridden" industry.
“The president also mentioned things about what I would call the wild west of crypto markets, riddled with defaults where investors have put their hard-earned assets at risk. Such rapid growth and change also means a greater possibility of misconduct. As a cop on the beat, we must be able to deal with the march of bad actors. . . therefore, it makes sense for the SEC to grow along with the expansion.”
Data Mining: Stablecoins Hit A New Low
Stablecoins act as a vital cog in the cryptocurrency market because they help connect the world of digital assets with traditional markets, allowing traders to rely on what should be a safe store of value between otherwise volatile transactions.
But after being hit by several scandals, including the collapse of the Terra stablecoin or the temporary decoupling of the USDT and USDC marquee stablecoins, the dollar-pegged crypto token market has been in decline for more than a year.
New numbers from CCData show that the stablecoins' market capitalization fell for the 16th consecutive month in July, falling 0.8 percent to $127 billion, the lowest market capitalization since August 2021.
Crypto Finance This Week is edited by John Aglionby. Send your ideas and comments to cryptofinance@ft.com.
