the Compliant Operations of Decentralized Entities Act of 2025; the CODE Act of 2025
Summary
The Compliant Operations of Decentralized Entities Act of 2025 (CODE Act) aims to regulate decentralized finance (DeFi) services to combat money laundering and enhance cybersecurity. It mandates the Secretary of the Treasury to develop a public-private partnership program to explore anti-money laundering solutions for DeFi. The Act also requires FinCEN to issue advisories and the Treasury to establish rules for DeFi services, including defining key terms and mandating risk-based compliance programs.
This legislation seeks to integrate traditional financial regulations into the emerging DeFi space. It addresses concerns about illicit activities and cybersecurity vulnerabilities associated with decentralized finance.
Ultimately, the CODE Act aims to balance innovation in the digital asset space with the need for regulatory oversight to protect national security and financial stability.
Expected Effects
The CODE Act will likely lead to increased regulatory scrutiny and compliance requirements for DeFi services operating in the United States. This could result in higher operational costs for these services as they implement anti-money laundering and cybersecurity measures.
It may also drive innovation in regulatory technology (RegTech) solutions tailored for DeFi. The public-private partnership program could foster collaboration between government agencies and industry stakeholders.
Furthermore, the Act could impact the accessibility and user experience of DeFi platforms, potentially affecting adoption rates and market dynamics.
Potential Benefits
- Enhanced Security: Improved cybersecurity measures can protect users and the broader financial system from illicit activities.
- Regulatory Clarity: Clear definitions and compliance requirements can provide legal certainty for DeFi service providers.
- Innovation in RegTech: The public-private partnership may spur the development of innovative regulatory technologies.
- Consumer Protection: Anti-money laundering and sanctions compliance programs can help protect consumers from fraud and illicit schemes.
- Financial Stability: By addressing risks in the DeFi sector, the Act can contribute to overall financial stability.
Most Benefited Areas:
Potential Disadvantages
- Increased Compliance Costs: DeFi services may face significant costs to implement and maintain compliance programs.
- Reduced Innovation: Stricter regulations could stifle innovation and experimentation in the DeFi space.
- Privacy Concerns: Enhanced identity verification and monitoring may raise privacy concerns for users.
- Centralization Risks: The need for regulatory gateways and external data inputs could lead to centralization of DeFi services.
- Competitive Disadvantage: US-based DeFi services may be at a competitive disadvantage compared to those operating in less regulated jurisdictions.
Most Disadvantaged Areas:
Constitutional Alignment
The CODE Act appears to align with the Commerce Clause (Article I, Section 8, Clause 3) of the US Constitution, which grants Congress the power to regulate interstate and foreign commerce. By regulating decentralized finance services, which often involve cross-border transactions, the Act falls under this purview.
Additionally, the Act's focus on national security and preventing money laundering aligns with the government's inherent powers to protect the nation and maintain financial stability. The necessary and proper clause (Article I, Section 8, Clause 18) allows Congress to enact laws needed to execute its enumerated powers.
However, the Act's potential impact on individual privacy and freedom of association could raise concerns under the First and Fourth Amendments, requiring careful consideration to ensure that regulations are narrowly tailored and do not unduly infringe on constitutional rights.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).