Madam President, today I am introducing the Crypto Asset National Security Enhancement and Enforcement, CANSEE, Act along with Senators Rounds, Warner, and Romney. This bipartisan bill will close…
Madam President, today I am introducing the Crypto Asset National Security Enhancement and Enforcement, CANSEE, Act along with Senators Rounds, Warner, and Romney. This bipartisan bill will close concerning gaps in the anti-money laundering, AML, and sanctions frameworks for cryptocurrency, most importantly decentralized finance, DeFi, and virtual currency kiosks.
Decentralized finance or ``DeFi'' refers to cryptocurrency protocols and applications that purport to allow automated peer-to-peer transactions using blockchain technology. DeFi enables users to transact and trade cryptocurrency without requiring a traditional financial institution to broker trades, clear and settle transactions, or custody assets.
Criminal syndicates, fraudsters, ransomware hackers, and rogue states have been quick to recognize how DeFi can be exploited to advance their nefarious activities. By design, DeFi provides anonymity allowing malicious and criminal actors to evade traditional tools that the government uses to enforce the AML and sanctions laws.
According to the U.S. National Money Laundering Risk Assessment published in February 2022, ``DeFi services often involve no AML/CFT or other processes to identify customers, allowing layering of proceeds to take place instantaneously and pseudonymously.'' A risk assessment published by the Treasury Department in April 2023 specifically found that ``ransomware cybercriminals, thieves, scammers, and Democratic People's Republic of Korea (DPRK) cyber actors are using DeFi services [and] exploiting vulnerabilities in the U.S. and foreign AML/CFT regulatory, supervisory, and enforcement regimes.''
In addition, DeFi is used in cross-border drug trafficking. Blockchain analytics firm Elliptic has estimated that China-based chemical manufacturers have received enough payments in cryptocurrency to sell $54 billion worth of fentanyl--enough to manufacture 8.6 billion deadly doses.
A series of Federal indictments unsealed in April 2023 revealed how these Chinese companies sell precursor chemicals to the Sinaloa drug cartel to manufacture fentanyl in Mexico, which is then smuggled for distribution in the United States. The manufacturers and cartels transact in cryptocurrency and no longer need to rely exclusively on bulk cash shipments. According to the indictments, once ``fentanyl proceeds are deposited into cryptocurrency wallets, that cryptocurrency can also be used directly to purchase additional fentanyl, without the need to convert the cryptocurrency back into cash.'' Wallets associated with a large sanctioned Chinese chemicals manufacturer have used DeFi to launder funds.
DeFi is so attractive to criminals and other bad actors because the industry takes the position that it does not need to comply with the AML requirements in the Bank Secrecy Act nor the economic sanctions programs administered by the Treasury Department. That places DeFi on a different footing than traditional financial intermediaries like banks and securities brokers, which must monitor all transactions and report suspected money laundering and financial crimes to the government. Other participants in the cryptocurrency markets, such as U.S.- headquartered centralized trading venues, are also expected to maintain AML programs and ensure that sanctioned persons do not use their services. Even casinos have these obligations. It is past time to end special treatment for DeFi and prevent this dark corner of our financial system from being used to fund crime and launder criminal proceeds.
The bipartisan bill we are introducing closes these alarming gaps facilitating narco-trafficking, WMD proliferation, ransomware attacks, and other threats to national and economic security. Our bill simply requires anyone who controls a DeFi service to meet critical--yet basic--regulatory obligations to maintain AML policies and procedures, conduct due diligence on customers, and report suspicious transactions to the government. These requirements will curtail a tool that is used to disguise ownership and movement of criminal funds.
Our legislation also makes clear that if a sanctioned person, such as a Russian oligarch, uses a DeFi service to evade U.S. sanctions, then anyone who controls that platform will be liable for facilitating that violation. If nobody controls a DeFi service, then--as a backstop--the largest investors in that project will be responsible for meeting these obligations.
Our bipartisan legislation also dramatically enhances the customer due diligence requirements for operators of virtual currency kiosks or ``bitcoin ATMs.'' Bitcoin ATMs are typically found in convenience stores, gas stations, and grocery stores, and are used to buy, sell, and exchange cryptocurrency. According to a report by the Government Accountability Office published in December 2021, ``FBI officials said they expect to see an increase in the use of virtual currency kiosks for illicit purposes, including for human and drug trafficking.'' To crack down on this abuse of our financial system, our legislation requires kiosk operators to verify the identities of both counterparties to every transaction. That will help prevent criminals from using cryptocurrency to profit from illegal activity and avoid detection by law enforcement.
Finally, this legislation makes important updates to the Treasury Department's authority to require participants in the U.S. financial system to take special precautions 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 without customary intermediaries.
All of our constituents deserve a financial system that is protected from geopolitical adversaries and criminals. The CANSEE Act will deliver those protections by preventing DeFi services from using purported decentralization as a shield to avoid meeting obligations to prevent money laundering and sanctions evasion. That will protect the integrity of the U.S. financial system and help curtail the activities of the worst criminal organizations and malicious state actors. I urge my colleagues to support this important bipartisan legislation.
