DeFi Security Best Practices as Senate Proposes Sweeping AML Regulations

On July 19, 2023, a bipartisan group of U.S. Senators introduced the Crypto-Asset National Security Enhancement and Enforcement Act, known as the CANSEE Act, which would subject decentralized finance platforms to the same anti-money laundering requirements as traditional financial institutions. The proposal arrives amid growing concerns about the use of DeFi protocols by North Korean hackers, drug traffickers, and sanctioned entities to launder billions in illicit proceeds. For everyday crypto users and DeFi participants, the legislation signals a fundamental shift in how decentralized platforms will need to operate — and how users must protect themselves.

The Threat Landscape

The CANSEE Act, introduced by Senators Jack Reed (D-RI), Mike Rounds (R-SD), Mark Warner (D-VA), and Mitt Romney (R-UT), directly targets the anonymity that DeFi services provide by design. According to the U.S. National Money Laundering Risk Assessment, DeFi services often involve no AML processes or customer identification procedures. The Treasury Department has documented that illicit actors — including ransomware operators, scammers, and North Korean cyber units — routinely exploit DeFi to transfer and launder proceeds from criminal activity.

The timing is significant. The Atomic Wallet hack, attributed to North Korea’s Lazarus Group, had just surpassed $100 million in stolen funds in the preceding weeks. Bitcoin was trading at approximately $29,914, Ethereum at $1,889, and the broader crypto market cap hovered around $1.2 trillion. The scale of these thefts, combined with the pseudonymous nature of DeFi transactions, has made regulatory action almost inevitable.

Core Principles

For DeFi users, the legislative push underscores several security principles that should already be standard practice. First, never assume that any platform — decentralized or not — is immune to regulatory action or exploitation. Second, maintain strict operational security across all wallets and DeFi interactions. Third, understand that compliance requirements will increasingly extend to individual users through the platforms they use.

The CANSEE Act would require DeFi services to maintain AML programs, conduct customer due diligence, and report suspicious transactions to the Financial Crimes Enforcement Network (FinCEN). It also introduces liability for developers and investors: if a sanctioned person uses a DeFi service to evade U.S. sanctions, anyone who controls the project can be held liable. If nobody controls the service, anyone who has invested more than $25 million in developing the project becomes responsible as a backstop.

Tooling and Setup

DeFi users should adopt a layered security approach that addresses both technical and regulatory risks. Hardware wallets remain the gold standard for storing private keys, with devices from established manufacturers providing isolation from malware and phishing attacks. For DeFi interactions, use dedicated browser profiles that are isolated from everyday browsing activity.

Transaction monitoring tools are becoming increasingly important. Services like Elliptic and Chainalysis provide on-chain analytics that can help identify whether funds you receive have been flagged as potentially illicit. Smart contract interaction tools like Tenderly and Revoke.cash allow users to review and manage token approvals, reducing the risk of unauthorized transfers from their wallets.

For developers building DeFi protocols, the CANSEE Act’s provisions on developer liability make comprehensive security audits non-negotiable. Formal verification, static analysis, and multiple independent audits should be standard for any protocol handling significant user funds. The bill’s approach of holding investors accountable as a backstop also means that venture capital firms and major token holders have a direct financial interest in ensuring protocol security.

Ongoing Vigilance

The regulatory landscape for DeFi is evolving rapidly. The European Union’s Markets in Crypto-Assets (MiCA) regulation is already taking effect, and other jurisdictions are following suit. DeFi users should monitor regulatory developments in their jurisdictions and be prepared for platforms to implement Know Your Customer (KYC) procedures that were previously unheard of in decentralized finance.

Operational security should also extend to record-keeping. As reporting requirements increase, maintaining accurate records of all DeFi transactions, including dates, amounts, counterparties, and purposes, will become essential for compliance. Tax reporting obligations for DeFi activities are also tightening globally, making transaction documentation a necessity rather than an option.

Final Takeaway

The CANSEE Act represents a watershed moment for DeFi security. Whether or not this specific bill becomes law in its current form, the direction is clear: decentralized finance will increasingly be subject to the same regulatory standards as traditional finance. Users who proactively adopt strong security practices and stay informed about regulatory changes will be best positioned to navigate this evolving landscape. The era of unregulated DeFi is ending, and preparation is the best defense.

Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or investment advice. Always consult qualified professionals for guidance on regulatory compliance and security practices.