A historic digital asset bill supported by Senate Banking Chair Tim Scott is in jeopardy due to a schism between crypto and law enforcement organizations.
In recent months, groups representing police and prosecutors have privately raised concerns about a minor but critical piece of the cryptocurrency law, which Republicans hope to advance quickly once Congress returns from recess next week. However, crypto advocates who lobbied for the phrase remain certain about its inclusion.
The aforementioned clause would shield some cryptocurrency software developers or companies from prosecution for illegal activities carried out by third parties on platforms they construct. The National Sheriffs’ Association and the National District Attorneys Association, among other organizations, said in a series of previously undisclosed letters to lawmakers that the wording would make it more difficult for law enforcement to combat financial crime.
A significant potential issue for the underlying crypto bill is the law enforcement worries, which Senate Judiciary Chair Chuck Grassley (R-Iowa) has reiterated. A high-profile dispute between banks and cryptocurrency companies that has delayed legislation for months is being considered by lawmakers. However, in order to gain bipartisan support in a possible Banking Committee markup, Scott must now resolve a number of other issues, including the dispute among cryptocurrency software developers.
The battle serves as an example of how critics’ worries about digital assets being exploited as a means of financial crime and fraud continue to stand in the way of legislative initiatives that would support the industry’s legitimacy.
Sen. Catherine Cortez Masto, a former federal prosecutor and attorney general of Nevada, is one of the Democrats advocating for reforms to address law enforcement issues. The Nevada Democrat is “working with a wide variety of Senators, including Chairman Grassley, to ensure law enforcement and prosecutors have the enforcement tools they need,” according to Lauren Wodarski, a spokesman for the party.
However, the crypto sector and some Republicans, who claim that the current law has been unfairly targeted at crypto developers, continue to place a high priority on the clause.
According to Amanda Tuminelli, executive director of the DeFi Education Fund, a nonprofit organization supported by the industry, “it’s the most important part of the market structure bill, and I actually think it’s the thing that the industry has been the most united on.”
She stated that her group, which has been discussing the matter with politicians, is willing to amend the current wording to include a “rule of construction” that would instruct courts and agencies on how to interpret the clause. However, she continued, “we’re not open to changing the actual text of it.”
The senator “has been clear” that the phrase “is essential to delivering real rules of the road for digital assets,” according to a representative for Scott (R-S.C.).
According to spokesman Jeff Naft, the clause “corrects the misuse of” current legislation by “ensuring non-custodial software developers who never control customer funds are not treated as money transmitters, while preserving law enforcement authorities.”
The clause, which is modeled after independent legislation known as the Blockchain Regulatory Certainty Act, addresses a subset of the cryptocurrency space known as decentralized finance, or DeFi, which eliminates centralized middlemen like exchanges by using software to conduct lending and trading. It would remove the need for DeFi developers to register as money transmitters and adhere to anti-money laundering regulations if they have no control over the monies that flow via the platforms they build.
The Sheriffs’ Association stated that the “provision risks creating gaps in oversight and reducing access to critical information that federal, state, and local law enforcement rely on in financial crime investigations” in a letter to legislators last month. The idea “would further exacerbate the growing fraudulent and illicit activity that occurs on” cryptocurrency platforms, according to a second February letter from the NDAA, which represents state and local prosecutors. Additionally, the language would “materially limit prosecutors’ ability to pursue financial crime cases involving the movement of funds outside established regulatory frameworks,” according to a January warning from the National Association of Assistant United States Attorneys.
In their letters, all three law enforcement agencies made it clear that they are not inherently against the larger crypto initiative.
It’s unclear if lawmakers will be able to reach a consensus that appeases Democrats who are worried about the issue, such as Cortez Masto and Sen. Mark Warner (D-Va.), as well as the cryptocurrency sector.
The bill might move through the Banking Committee without Democratic support if senators can’t come to an agreement. This would be detrimental to the legislation’s future because it needs bipartisan support to pass the Senate. More Republicans who have less empathy for the cryptocurrency industry may become concerned about law enforcement.
In a statement, Sen. Cynthia Lummis (R-Wyo.), a prominent supporter of cryptocurrency who is assisting in the bill’s negotiations, stated that she is “continuing to work on a bipartisan basis with Sen. Cortez Masto on the Blockchain Regulatory Certainty Act.”
Software developers shouldn’t have to give up their constitutional rights to due process and fair notice simply because they publish software, according to her, since publishing code is protected First Amendment expression.
