Elizabeth Warren is back with an Anti-Money Laundering act that would — among other things — make it mostly illegal for you to use your own crypto wallet.
Massachusetts Senator Elizabeth Warren is once again smearing the cryptocurrency industry and attempting 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 with Kansas Senator Roger Marshall in December 2022. While the proposal’s stated purpose is to protect Americans from scams, it is more likely to drive cryptocurrency businesses overseas and weaken consumer choice. It prohibits 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 impose such requirements, meaning they would simply need to shut down or stop servicing American users.
The proposal is the wrong one — at an opportune time. While recent high-profile frauds and thefts demonstrate the need for some crypto regulations 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 with money laundering each year, compared with between $800 billion and $2 trillion laundered in conventional currencies.
The bill is particularly harsh on decentralized finance (DeFi), including noncustodial ones, requiring platforms to record the personal information of users and submit it to the government without a warrant or probable cause. It’s a bit like blaming the city because you were mugged on the sidewalk. The bill also lumps together all miners, including those mining for themselves as opposed to 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 the software would be required to register as money service providers, adopt Anti-Money Laundering policies and report customers to the Financial Crimes Enforcement Network. By this logic, electronics stores like Best Buy and Micro Center should register as money service providers because the cell phones they sell could be used to commit fraud.
Warren also seems unaware that blockchain and related technologies are not the same as cryptocurrency and that not all cryptocurrencies are openly traded or usable for purchases. For example, users of the Brave web browser, which blocks advertisements, can earn Basic Attention Token (BAT) by agreeing to watch ads and can then give them to content creators, who can exchange them with Brave for the money the advertisers paid. It’s a closed ecosystem, with the tokens having no monetary value because they symbolize time spent watching ads. It’s laughable to regulate companies such as Brave like banks or brokerages. Will casino chips be so regulated? Or frequent flier miles? Or the Inter-Stellar Kredit (ISK) currency of the online game Eve Online?
It is clear that this has nothing to do with protecting consumers. Instead, it is designed to hobble cryptocurrency and crypto businesses with an unreasonable regulatory burden. In fact, collecting all this data on blockchain users and crypto owners could enable much more crime and fraud. The federal government is not immune from hacking. Moreover, the FBI’s success in recovering cryptocurrency that was stolen or used for ransom payments demonstrates that blockchain is not the weak link in the system. A better approach would focus on the businesses involved in exchanging cryptocurrency for government-issued fiat currency, or on- and off-ramps. This is where ill-gotten money enters or disappears from 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. Companies are offering software that allows blockchain businesses to implement Know Your Customer policies and verify customer/vendor identities without compromising privacy. However, these software solutions are still expensive — and Warren’s bill still drastically overreaches.
The main effect of Warren’s bill could be to force many cryptocurrency businesses to either 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 traditional ones, which — while they have their own AML and related regulations — don’t face similar scrutiny. In addition, the company that develops software for your local bank doesn’t have to comply with AML regulations.
Bringing the hammer down on crypto so heavily could also result in an increase in criminal activity by driving legitimate users and businesses away and the industry underground, much like how alcohol prohibition in the 1920s strengthened organized crime.
The Financial Action Task Force, an international body monitoring and advising governments on terrorist financing and money laundering, recommended that all crypto transactions be subject to scrutiny, regardless of risk factors. However, other countries are not taking such a Draconian approach. In the European Union, for instance, hosted wallets will be required to submit information for every transaction, while transactions between unhosted wallets will only need to implement AML compliance for transactions involving 1,000 euros or above. The United Kingdom only requires reporting if the transaction presents risk factors.
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