Sen. Elizabeth Warren (D-Mass.) arrived late for a Senate Banking Committee hearing on the collapse of FTX on December 14.
As one of the committee’s most visible members—and an outspoken critic of cryptocurrency—it seemed unlikely she would miss the event, which featured celebrity investor Kevin O’Leary and TV star-turned-crypto-critic Ben McKenzie as witnesses.
Her delay could have been caused by a flurry of legislative activity. Earlier that day, Warren and Sen. Roger Marshall (R-Kansas) introduced the “Digital Asset Anti-Money Laundering Act of 2022,” which aims to increase financial requirements for cryptocurrency.
Warren ultimately arrived at the hearing, but when she spoke, it wasn’t about FTX but rather the subject of her bill: how cryptocurrency aids in international crime.
Crypto has evolved into the ideal tool for terrorists, ransomware groups, drug traffickers, or rogue regimes looking to launder money, according to her.
The industry immediately opposed her idea, calling it the most direct attack on the individual freedom and privacy of crypto users and developers we’ve yet seen.
What’s in the bill?
According to a Warren representative, throughout our entire financial system, we operate on a philosophy that says: the same sort of transaction, same kind of risks, the same set of laws. There is no justification for holding cryptocurrencies to a lesser standard that allows criminals to launder money and fund terrorism.
The core of the measure forbids financial institutions from adopting privacy tools like Tornado Cash and Monero and extends know-your-customer regulations to all participants in the ecosystem, including wallet providers, miners, and node administrators.
The bill’s benefits and drawbacks were explored by Patrick Daugherty, a lawyer who oversees Foley & Lardner’s digital assets and Web3 practice and lectures at Cornell Law School.
The Treasury Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commission are among the federal financial regulatory organizations that are given the authority to audit “money services enterprises” for compliance.
Daugherty referred to this as the “one correct step to make” given the failure of FTX, just as the Bernie Madoff incident led to the creation of a new section within the SEC to audit investment adviser
On the negative side, Daugherty believes the bill goes too far in its definition of a “money service business.” This could include miners, validators, and even wallet providers, according to Warren and Marshall. As Daugherty pointed out, this could apply to hardware manufacturers such as Ledger.
According to the bill, these entities would be required to identify clients and record their transactions in order to comply with anti-money laundering programs.
Banning privacy tools is a mixed bag for Daugherty. Following the Treasury Department’s crackdown on Tornado Cash in August, regulatory clarity is critical, but a total prohibition may be overkill.
What’s the opposition?
Warren has long been regarded as a bogeyman in the crypto industry. Her bill is not the first this year to seek to limit the role of cryptocurrency in money laundering. In March, she introduced legislation aimed at strengthening sanctions against Russia by imposing restrictions on the broader crypto ecosystem, which critics characterized as an overreach.
The recent bill, according to Coin Center’s Peter Van Valkenburgh, is unconstitutional in two ways. He wrote that the anti-privacy measures would violate the First Amendment by making it impossible for users to make anonymous payments, such as political donations. Furthermore, by “deputizing” software developers and miners to collect and report private information with a warrant, the bill may be deemed unconstitutional under the Fourth Amendment.
Overall, the measure rejects many of the fundamental principles of cryptocurrencies by weakening the ecosystem’s privacy features and treating its “decentralized” participants—such as miners and node operators—as centralized authorities in charge of the network’s operations.
These aspects of the plan, according to Daugherty’s interview with Fortune, might be considered as either a bug or a feature.
You will probably consider these as features if you don’t trust crypto assets at all, or if you have some philosophical opposition to them, he said.
What’s the upside?
The bill plugs loopholes created by cryptocurrency, according to Hilary Allen, an American University law professor who testified at the Senate Banking hearing last week.
She told that there was a perception in the industry that technology was completely unrelated to human endeavors. People manage technology and write the software that runs it.
Despite the fact that proponents might argue that participants like wallet providers and validators aren’t connected to transactions, Allen said they shouldn’t be free from money laundering regulations.
Everyone will take advantage of a legal loophole created by technology, she continued.
Because some miners, for example, are big corporations, Allen’s opinions show skepticism about the idea that organizations inside the crypto ecosystem are truly decentralized.
Crypto skeptics in Congress have stated that they want to prevent crypto from entwining with the conventional financial system, a process that has already started with firms like BNY Mellon entering the field. According to Allen, rigorous anti-money laundering regulations applied to the larger crypto ecosystem might keep it independent of conventional banking.
What about legal challenges?
It’s not surprising that the cryptocurrency business is using flimsy legal defenses to avoid accountability for adhering to reasonable anti-money laundering regulations, according to a Warren representative.
Allen referred to Coin Center’s position as “self-serving” in a similar manner, but there is still the unanswered question of what would occur if the bill was passed and contested in court.
There is a large cloud over the administrative state due to the Supreme Court’s rightward trend. The Supreme Court limited the power of federal agencies to regulate based on congressional permission in this year’s historic West Virginia v. Environmental Protection Agency ruling.
If the digital assets bill were to become law, it would not only be an administrative decision but also a real statute. Allen nonetheless stated that in order to implement the law, the agencies would need to engage in interpretation, which would probably be contested in court.
Next, what?
In order to reintroduce the bill during the upcoming congressional session, which will start in January, Warren and Marshall submitted it to the Senate Banking Committee.
The Senator Warren spokeswoman declared, Senator Warren will continue working in the next Congress to get this bipartisan legislation into law.
The law will be one more piece of legislation pertaining to cryptocurrency. Allen claimed that by emphasizing on national security, the law might attract support from both parties without pitting investor protection against the principles of the free market. It was referred to as “low-hanging fruit” by her.
It’s permitted for common cause to be established here, she said.
