Massachusetts Senator Elizabeth Warren is once again smearing the cryptocurrency industry and trying to make America more dependent on big banks.
Warren vowed in February to reintroduce the Digital Assets Anti-Money Laundering Act, a proposal that went nowhere when she first introduced it with Kansas Senator Roger Marshall in December 2022. While the purpose of the proposal is to protect Americans from fraud, it is more likely to drive cryptocurrency business overseas and reduce consumer choice. It prohibits the use of digital asset mixers and requires self-hosted wallets – like the kind stored on your mobile phone – along with miners and validators to have an Anti-Money Laundering (AML) policy. Many of these entities may not be able to meet these requirements, meaning they may simply shut down or stop serving American users.
The proposal is wrong – at the right time. While recent high-profile frauds and thefts show the need for some crypto regulation and enforcement, the bill is a smear campaign against the industry that will make America more dependent on traditional banks. But he was simply wrong when he said that cryptocurrency is the “method of choice for international drug traffickers” and terrorists. In fact, only about $10 billion or less in cryptocurrency is involved in money laundering each year, compared to between $800 billion and $2 trillion laundered in conventional currencies.
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The bill is particularly harsh for decentralized finance (DeFi), including noncustodial, which requires platforms to record users’ personal information and send it to the government without warrant or probable cause. It’s like blaming the city because you were mugged on the sidewalk. The bill also classifies all miners, including mining for themselves instead of processing transactions for others, as money service businesses. It also ignores the fact that miners can provide other services unrelated to transactions.
Most absurdly, companies that develop such software must register as money service providers, implement Anti-Money Laundering policies and report customers to the Financial Crimes Enforcement Network. According to this logic, electronic stores like Best Buy and Micro Center should register as money service providers because the mobile phones they sell can be used for fraud.
Warren also failed to understand that blockchain and related technologies are not the same as cryptocurrencies and that not all cryptocurrencies are openly traded or can be used for purchase. For example, users of the Brave web browser, which blocks ads, can earn Basic Attention Tokens (BAT) by agreeing to watch ads and can then give them to content creators, who can exchange them with Brave for money paid by advertisers. It is a closed ecosystem, with tokens having no monetary value because they are tokens of time spent watching ads. It is laughable to manage a company such as Brave like a bank or broker. Will casino chips be regulated? Or frequent flier miles? Or the Inter-Stellar Credit (ISK) currency from the online game Eve Online?
It is clear that this has nothing to do with protecting consumers. However, it is designed to hobble cryptocurrency and crypto businesses with unreasonable regulatory burdens. In fact, collecting all this data on blockchain users and crypto owners can enable more crimes and fraud. The federal government is not immune from hacking. Additionally, the FBI’s success in recovering stolen cryptocurrencies or used for ransom payments shows that blockchain is not the weak link in the system. A better approach would be to focus on businesses involved in exchanging cryptocurrency for government-issued fiat currency, or on- and off-ramps. This is where ill money enters or leaves the blockchain, and they are also most clearly involved in money transmission and custodial services.
Entrepreneurs are also involved in making DeFi less vulnerable to criminal activity. The company offers software that allows blockchain businesses to implement Know Your Customer policies and verify customer/vendor identities without compromising privacy. However, this software solution is still expensive – and Warren’s bill still overreaches drastically.
The main effect of Warren’s bill may be to force many cryptocurrency businesses to close their doors or leave the United States, giving Americans few legal opportunities to participate in the industry. This will reduce competition in banking and other financial services to the benefit of the traditional, which – while they have their own AML and related regulations – do not face the same scrutiny. Additionally, companies that develop software for your local bank do not have to comply with AML regulations.
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Dropping the hammer on crypto in a big way could also lead to an increase in criminal activity by driving users and legitimate businesses and industries underground, just like how alcohol prohibition in the 1920s strengthened organized crime.
The Financial Action Task Force, an international body that monitors and advises governments on terrorist financing and money laundering, recommends that all crypto transactions should be scrutinized, regardless of risk factors. However, other countries did not take the Draconian approach. In the European Union, for example, hosted wallets must submit information for every transaction, while transactions between non-hosted wallets must only apply AML compliance for transactions involving 1,000 euros or more. The UK only requires reporting if the transaction presents a risk factor.
Lawmakers, including Warren, should remember that their job is to promote the common good, not to wage a crusade against an entire industry.
Brendan Cochrane is a partner at YK Law LLP, where he focuses on blockchain and cryptocurrency issues, and an adjunct professor at Suffolk University Law School teaching “Blockchain, Cryptocurrency and Law.” He is also the principal and founder of CryptoCompli, a startup focused on the compliance needs of cryptocurrency businesses.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.