Is the US trying to kill crypto’s decentralised finance?

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Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re looking at a bill that might mean the end for DeFi in the US. 

US senators continued America’s war against crypto this week when they introduced a bipartisan bill aimed at cracking down on a lesser-known corner of the digital assets space. 

After a spate of high-profile failures caused by last year’s market crash, 2023 has been a year where US regulators have repeatedly landed hammer blows against crypto. Most of the attention has focused on enforcement action taken against industry bellwethers Coinbase and Binance, which as the biggest names in the sector are naturally on the frontline of crypto’s clash with American financial watchdogs. 

But this week, fresh battle lines were drawn against decentralised finance, a niche reserved for the most devout of crypto enthusiasts who proudly champion financial privacy and freedom. 

Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA) and Mitt Romney (R-UT), this week introduced the Crypto-Asset National Security Enhancement and Enforcement Bill, aptly dubbed the “Cansee” bill. It aims to prevent crypto-facilitated crime and sanctions evasion by requiring DeFi services to meet the same standards as “centralised” (read: normal) companies. 

The very nature of many DeFi platforms, which take away the need for third-party intermediaries, means they run on lines of code without the controlling hand of a compliance department. Precisely because of that, the bill also proposes that if authorities cannot identify a person in control of a DeFi platform, anyone who invests more than $25mn in developing the project will be responsible for its compliance obligations. 

The bill has predictably whipped crypto’s defenders into a frenzy, arguing the text completely misses the point of DeFi. “The real story here is that lawmakers are clearly struggling to picture solutions beyond the confines of the current system,” said Akash Mahendra, director at Haven1 Foundation and portfolio manager at Yield App, a crypto platform that services almost 100,000 users.

Yaya Fanusie, director of anti-money laundering and cyber at the Crypto Council for Innovation, a trade association in the US, added: “The bill places legal obligations on persons who have no way to actually influence the operation of autonomous DeFi protocols,” adding that “investors in the protocol and the original software developers do not have a way to change operations once the protocols are deployed”.

But it’s an interesting take to argue that the US’s anti-money laundering regime — founded on time-tested legislation such as the 1970 Bank Secrecy Act and the post-9/11 Patriot Act — is failing to meet the standards of decentralised finance, rather than vice-versa. 

Other than the staunchest of crypto’s libertarians, there are few in finance — crypto or otherwise — suggesting any part of the sector should be exempt from, or receive special treatment under well-established anti-money laundering laws.

“Congress decided it was worth sacrificing some financial privacy to make sure there’s no future 9/11. The true believers of crypto have never understood that — their very mantra is giving people a means to shield themselves from government oversight,” John Reed Stark, the Security and Exchange Commission’s former head of internet enforcement, told me.

Nor should the Cansee bill come as a surprise. Scrutiny over DeFi’s alleged misdeeds ramped up last summer when the Office of Foreign Assets Control imposed sanctions on Tornado Cash, a decentralised crypto mixing service said to have been used to launder more than $7bn over three years, and helping North Korean state hackers evade economic penalties. 

“If your ultimate goal is a wholly decentralised, self-perpetuating financial system based on smart contracts, the US is always going to regulate that,” Stark added. “It’s anathema to the basic premise of America’s anti-money laundering laws.”

What are your thoughts on the Cansee bill and the overall state of decentralised finance in the eyes of regulators? Email me at [email protected]

Weekly highlights: 

• On the subject of America’s crackdown on digital assets, Nasdaq — one of the world’s largest exchange operators — halted plans to launch a crypto custody service, citing regulatory uncertainty. The U-turn is a blow for a crypto industry in desperate need of a win, especially after last year’s market crisis killed off once-trusted bellwethers such as FTX and Celsius. Read more here. 

• You might recall my story earlier this year that revealed Binance Holdings — the Cayman Islands holding company for the sprawling offshore exchange — used the same Washington lobbyists as its allegedly separate American arm, Binance US. Law firm Hogan Lovells, which lobbied for Binance US until the end of November 2022, registered as a lobbyist for the Cayman entity the following day. Disclosures now reveal that the relationship between the law firm and Binance Holdings has been terminated. Hogan Lovells declined to tell me why, but here are some reminders of Binance’s clashes with American regulators. 

• Late on Thursday evening, collapsed crypto exchange FTX sued its founder-turned-disgraced crypto kingpin Sam Bankman-Fried, along with three other former executives in an attempt to claw back more than $1bn. Under the lead of restructuring expert John Ray, the lawsuit alleges a host of transactions allegedly benefited former FTX heavyweights including Caroline Ellison, the 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 that include fraud unrelated to Thursday’s lawsuit.

• British MP and economic secretary to the Treasury Andrew Griffith has outrightly rejected calls for the UK government to regulate cryptocurrency as gambling, arguing such a move would run counter to globally agreed recommendations regarding crypto oversight, create unclear mandates between regulators and potentially fail to mitigate several risks. Read up on the wider debate and the need for health warnings about crypto gambling addiction here. 

Soundbite: Gary Gensler bids for a stronger SEC

It feels like an age since the crypto industry eagerly anticipated the appointment of Gary Gensler as chair of the Securities and Exchange Commission, assuming the fact he once taught a course on blockchain meant he’d be a friend to the industry while leading the US’s leading financial watchdog. 

Since then, Gensler has fast become public enemy number one for crypto evangelists who believe America — and chiefly the SEC — is unfairly driving the sector from its shores.

Gensler is showing no sign of backing down, and this week the regulator-in-chief told the Senate appropriations committee that a stronger SEC was needed if it is going to be able to continue its work on what he described as an industry “rife with non-compliance.” 

“The chair also mentioned things about what I would call the wild west of crypto markets, rife with non-compliance where investors have put hard-earned assets at risk. Such growth and rapid change also means more possibility for wrongdoing. As the cop on the beat we must be able to meet the march of bad actors . . . thus 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 crypto market because they help connect the digital assets world to traditional markets, allowing traders to rely on what should be a safe store of value between otherwise volatile trades. 

But after being stung by several scandals — not least the collapse of the Terra stablecoin, or the temporary de-pegs of marquee stablecoins USDT and USDC — the market for dollar-pegged crypto tokens has been in decline for well over a year. 

Fresh numbers from CCData show the market capitalisation of stablecoins fell for the 16th consecutive month in July, dropping 0.8 per cent to $127bn, the lowest market cap since August 2021. 

Cryptofinance this week is edited by John Aglionby. Please send any thoughts and feedback to [email protected].