Senate Bill Pits Crypto Against Nat’l Security
WASHINGTON D.C. – In a clash between the crypto community’s push for blockchain privacy and law enforcement’s responsibility for national security, Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) have sponsored an anti-money laundering (AML) bill aimed at closing loopholes in the use of cryptocurrencies for illicit activities.
Anti-money laundering bill
The “Digital Asset Anti-Money Laundering Act of 2022” was first introduced in December last year. The proposes that three federal bureaucracies – the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Treasury Department – each establish a “dedicated risk-focused examination and review process” to assess crypto
The bill further proposes that “The Financial Crimes Enforcement Network shall promulgate a rule classifying custodial and unhosted wallet providers, cryptocurrency miners, validators, or other nodes who may act to validate or secure third-party transactions, independent network participants, including MEV searchers, and other validators with control over network protocols as money service businesses.”
Law enforcement
While law enforcement agencies currently appreciate the traceability of blockchain transactions, introducing private blockchains [1][2] in the near future could render tracking and tracing nearly impossible. While some may harbor concerns about the shift to private blockchains, a true reckoning has yet to occur.
Sanctioning a permissionless blockchain, such as Tornado Cash, raised legal questions. However, it primarily aimed to counter the North Korean hacking cartel known as Lazarus Group, which allegedly used Tornado Cash. Unfortunately, legitimate users of Tornado Cash have been unable to access their funds as the Treasury Department deems them “tainted” and subject to an OFAC license for further use.
Blockchain privacy at stake
As blockchain technology's popularity increases, individuals increasingly demand privacy for their transactions. Startups like Zcash and Aleo blockchain are developer privacy-enhancing features allowing anonymous blockchain transactions.
Americans, in particular, value due process and the ability to conduct financial affairs without government oversight or permission, as highlighted by recent opposition to a potential central bank digital currency (CBDC) led by the Federal Reserve.
However, if blockchain transactions become untraceable, the extensive AML regulations established in the 1970s and counter-terrorist financing (CTF) processes implemented since the 2000s may lose effectiveness. This potential development could ignite a conflict between the crypto community, law enforcement, and national security agencies.
Anti-money laundering or anti-crypto?
Critics argue that Warren’s Digital Asset Money Laundering Act unjustly associates cryptocurrencies with illegal activities. In a report from the U.S. Treasury published earlier this year, even the Biden administration stated that illicit cryptocurrency use is only a fraction of overall decentralized finance transactions.
Warren’s declaration of leading an “anti-crypto army” has sparked controversy from critics such as Crypto Connect founder Hailey Lennon who labels the moniker as a “pro-CBDC army.”
Addressing the clash between on-chain privacy and financial surveillance poses a significant challenge. Existing AML/CTF rules and regulations primarily target centralized intermediaries like banks, while cryptocurrencies reduce or eliminate the need for these third parties. Reconciling the requirements of country-specific laws with borderless, permissionless, and immutable blockchain technology will always present complex hurdles for financial regulators.
