Elizabeth Warren is pushing the Senate to ban your crypto wallet

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 with Kansas Sen. Roger Marshall in December 2022. While the proposal’s stated purpose is to protect Americans from fraud, there is more likely to operate cryptocurrency businesses overseas and weaken consumer choice. It bans the use of digital asset mixers and requires self-powered wallets – like the kind you have on your mobile phone – along with miners and validators to have anti-money laundering (AML) policies. Many of these entities may not even be able to impose such requirements, meaning they simply need to shut down or stop serving US users.

The proposal is wrong – at an opportune time. While recent high-profile frauds and thefts show 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 in money laundering each year, compared to between $800 and $2 trillion laundered in conventional currencies.

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The bill is particularly strict on decentralized finance (DeFi), including non-custodial, requiring platforms to record personal information of users and send it to authorities 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 who mine for themselves as opposed to processing transactions for others, such as money services businesses. It also ignores the fact that miners can provide other services unrelated to transactions.

Most absurdly, companies developing 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 can 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 can be used for purchases. For example, users of the ad-blocking Brave browser can earn Basic Attention Token (BAT) by agreeing to view ads and can then give them to content creators, who can exchange them with Brave for the money the advertisers paid. It is a closed ecosystem, with tokens that have no monetary value because they symbolize time spent viewing ads. Regulating companies like Brave like banks or brokerages is ridiculous. Will casino chips be so regulated? Or frequent flyer miles? Or the currency Inter-Stellar Kredit (ISK) for 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 about blockchain users and crypto owners could enable much more crime and fraud. The federal government is not immune to hacking. Also, the FBI’s success in recovering cryptocurrency that was stolen or used for ransom shows that blockchain is not the weak link in the system. A better approach would focus on the businesses involved in the exchange of cryptocurrency for government-issued fiat currency, or on- and off-road operations. This is where ill-gotten money enters or disappears from the blockchain, and is also most clearly involved in money transfer 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 identities without compromising privacy. However, these software solutions are still expensive — and Warren’s bill still drastically overruns.

The main effect of Warren’s bill could be to force many cryptocurrency businesses to either close their doors or leave the US, 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 – do not face similar scrutiny. In addition, the company that develops software for your local bank does not have to comply with AML regulations.

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Bringing the hammer down on crypto so forcefully 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 empowered organized crime.

The Financial Action Task Force, an international body that monitors and advises governments on terrorist financing and money laundering, recommended that all crypto transactions be subject to scrutiny, regardless of risk factors. However, other countries do not take such a draconian approach. In the EU, for example, hosted wallets will be required to submit information for each transaction, while transactions between non-hosted wallets will only need to implement AML compliance for transactions involving €1,000 or more. The UK only requires reporting if the transaction presents risk factors.

Lawmakers, including Warren, should remember that their job is to advance the public, not to crusade against an entire industry.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.