Massachusetts Senator Elizabeth Warren is once again smearing the cryptocurrency industry and trying to make Americans 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 to Kansas Senator Roger Marshall in December 2022. While the bill’s goal is to protect against scams, it is more likely to drive cryptocurrency companies overseas and weaken consumer choice. It bans the use of digital asset mixers and requires self-hosted wallets — like the kind you keep on your cell phone — along with miners and validators to have anti-money laundering (AML) policies. Many of those entities may not even be able to enforce such requirements, meaning they should just shut down or stop serving US users.
The proposal is the wrong thing – at an opportune time. While recent high-profile frauds and thefts demonstrate the need for some crypto regulation and enforcement, the bill amounts to a smear campaign against the industry that would make Americans more dependent on traditional banks. But she is simply wrong when she says 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 in conventional currencies.
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The bill is particularly strict on decentralized finance (DeFi), including non-custodial finance, requiring platforms to capture users’ personal information and submit it to the government without a warrant or probable cause. It’s kind of like blaming the city for getting mugged on the curb. The bill also aggregates all miners, including those who mine for themselves as opposed to processing transactions for others, as money service companies. It also ignores the fact that miners can provide other services unrelated to transactions.
Most absurdly, companies developing the software would have to register as money service providers, adopt anti-money laundering policies, and report clients to the Financial Crimes Enforcement Network. By this logic, electronics stores such as Best Buy and Micro Center should register as money service providers because the cell phones they sell can be used to commit fraud.
Warren also seems oblivious that blockchain and related technologies are not the same as cryptocurrency 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 Token (BAT) by agreeing to view ads and then giving them to content creators, who can exchange them with Brave for the money the advertisers have paid. It is a closed ecosystem, where the tokens have no monetary value as they symbolize the time spent viewing ads. It’s laughable to regulate companies like Brave like banks or brokers. Will casino chips be regulated like this? Or frequent flyer miles? Or the Inter-Stellar Kredit (ISK) currency from the online game Eve Online?
It is clear that this has nothing to do with consumer protection. Instead, it is designed to hinder cryptocurrency and crypto businesses with an unreasonable regulatory burden. In fact, collecting all this data on blockchain users and crypto owners could allow for a lot more crime and fraud. The federal government is not immune to hacking. Moreover, the FBI’s success in recovering cryptocurrency that was stolen or used for ransom payments shows that blockchain is not the weak link in the system. A better approach would focus on the companies involved in exchanging cryptocurrency for government-issued fiat currency, or ramps. This is where ill-gotten money enters or exits the blockchain, and they are also most obviously involved in money transmission and custody services.
Entrepreneurs are also involved in making DeFi less vulnerable to criminal activity. Companies offer software that allows blockchain companies to implement Know Your Customer policies and verify customer/supplier identity without compromising privacy. However, these software solutions are still expensive – and Warren’s bill still stretches way too far.
The main effect of Warren’s bill could be to force many cryptocurrency companies to shut down or leave the United States, leaving Americans with few legal opportunities to participate in the industry. This will reduce competition in banking and other financial services in favor of traditional services, which – although they have their own AML and related regulations – are not controlled in the same way. In addition, the company that develops software for your local bank is not required to comply with AML regulations.
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Putting the hammer down so heavily on crypto could also result in an increase in criminal activity by driving away legitimate users and businesses and driving the industry underground, just as alcohol prohibition in the 1920s bolstered organized crime.
The Financial Action Task Force, an international body that monitors and advises governments on terrorism financing and money laundering, has recommended that all crypto transactions be monitored, regardless of risk factors. However, other countries do not take such a draconian approach. For example, in the European Union, hosted wallets will be required to submit information for every transaction, while transactions between non-hosted wallets will only need to implement AML compliance for transactions of $1,000 or more. The United Kingdom only requires reporting if the transaction has risk factors.
Lawmakers, including Warren, must remember that their job is to advance the public interest, not to crusade 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 who teaches Blockchain, Cryptocurrency and the Law. He is also the director and founder of CryptoCompli, a startup that focuses on the compliance needs of cryptocurrency companies.
This article is for general information purposes and is not intended to and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.