4 Reasons Lawmakers Should Not Support Sen. Warren’s latest crypto bill

Senator Elizabeth Warren (D-Mass.) confirmed during a Senate committee hearing yesterday that she will reintroduce the controversial Digital Asset Anti-Money Laundering Act (DAAMLA) with one or more co-sponsors in the near future. It was first introduced last December and went nowhere. It was met with little fanfare and considerable criticism, partly because it was clearly unconstitutional.

As the senator’s previous press release explained, that bill sought to reduce national security risks by “closing loopholes in the existing anti-money laundering and countering the financing of terrorism (AML/CFT) framework and bringing the digital asset ecosystem into greater compliance with rules governing the rest of the financial system.” In Tuesday’s hearing, Warren repeated claims, with little evidence, that crypto empowers criminal actors far more than the little guy.

Bill Hughes is senior counsel and director of global regulatory affairs at ConsenSys.

The 2023 version of DAAMLA has reportedly been revised, but it still falls irreparably short in several significant respects. Lawmakers and their staff should look beyond the national security sales pitch, which is no doubt compelling, and give the substance of this bill as much scrutiny as the last version received from some quarters. Its rather remarkable implications are set out below.

If you want cutting-edge expansive compliance regimes, this is the bill for you. It requires the Financial Crimes Enforcement Network (FinCEN) to apply its rules, which currently only apply to financial institutions and money transmitters, to any US person who develops or uses certain basic cryptographic software.

Specifically, DAAMLA instructs FinCEN (whether they like it or not) to treat US developers of crypto software and even people who only run open source crypto software as “financial institutions” for the purposes of the US anti-money laundering (AML) regime. This includes software that mines or validates blockchain transactions, which is the global technical mechanism that secures blockchains like Ethereum.

In other words, this bill requires US persons who publish and operate certain types of software, whether as a business or just a hobby, to set up an AML program according to standards that generally apply to banks, among others.

Treating crypto developers and users as “financial institutions,” as that term is defined in FinCEN’s Bank Secrecy Act operative statute, would also force them to first obtain FinCEN’s permission before publishing or using crypto software via a registration regime. It follows that users and developers will be required to collect sensitive personal information from many people, namely everyone who uses the code, adding to the firehose of suspicious activity reporting that FinCEN is already drinking from.

FinCEN implicitly rejected this approach when it issued guidance on virtual currencies in 2019. This guidance remains operational. There is exactly zero indication that FinCEN has otherwise identified gaps in its mass collection of financial information.

As you might have suspected, no other free country intends to go down this road.

Warren’s bill also forces the US Treasury, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to spin up new compliance audits of AML programs by both financial institutions and software developers. Regular, hands-on scrutiny of countless thousands of registrants would be an enormous task, and it requires resources.

There is no evidence that DAAMLA is providing the additional staff and budget that would be required, other than to say that “such sums as are necessary” will be allocated. It similarly reflects no analysis of how burdensome compliance will be on the public in terms of time, money and manpower, or the extent to which this type of regulatory regime will kill off small players and serve as a barrier to entry for all but entrenched operators. .

For all the major changes DAAMLA would bring, it would not fix any crypto money laundering problem. US-based wallet providers, validators and miners as well as other software developers and users are not network gatekeepers that can meaningfully impact malicious actors exploiting blockchain.

Wallets, validators, and miners are built, distributed, and operated worldwide in almost every imaginable jurisdiction, often well beyond the reach of US authorities. As a functional matter, the network and its participants to some extent do not care whether the software or network service is American or developed and provided elsewhere.

If all US software wallets and nodes disappeared tomorrow, the network wouldn’t really skip a beat operationally. It would also continue to mature, albeit without significant US participation or influence.

All of this overlooks that these software tools do not “facilitate” any illegal transactions in any common use of that word. So-called “unhosted wallets” facilitate money laundering as much as your Google Chrome browser does. In fact, Google Docs and Gmail probably do more to “facilitate” sanctioned transactions than non-hosted wallets.

Maybe Google should start an AML program too?

DAAMLA is almost certainly unconstitutional in a number of important respects, particularly in its application to particular regulatory objectives. The bill appears to require software developers to register before publishing code – even freely available open source code.

Regulation of noncommercial publication of code, including by compulsory registration, is a “prior restraint” issue in light of the First Amendment, which the Supreme Court has repeatedly found to apply to programming languages.

Furthermore, mandatory AML programs will force software developers to write certain code to ensure that the developers can track and report on users of that code. American jurisprudence’s high demands on compelled speech can be a dangerous thing to legislate around. Requiring users of this software to only forward or confirm the transmitted messages that comply with government requirements would clearly constitute content-based censorship.

DAAMLA is equally notable for what it leaves out, namely the one AML tactic that has proven productive to date. Blockchain analysis technology is widely used by law enforcement to track illegal streams and find the crypto exchange that the launderer uses to exit the system.

Law enforcement is getting better at this, but needs more training and resources. Exchanges both in the United States and abroad, through which the vast majority of illegal flows pass, should be more responsive to stop these flows. Both the government and the public sector can work together better to share information so that illegal flows can be identified, stopped and restored. A bill that supported efforts along these lines would actually produce concrete results.

There is very little like Sen. Warren and the digital asset space see eye to eye. Both recognize that illicit finance is an important issue, but there is little agreement on the scale of the problem or how to address it through public policy. It’s little surprise that the crypto ecosystem’s reaction to DAAMLA has been full of criticism. Whether lawmakers can agree with that criticism requires considering the key implications outlined above. And for those who may be considering co-sponsoring this bill, it is important that they recognize exactly what they want to promote.