Senators Elizabeth Warren and Roger Marshall recently introduced the Digital Asset Anti-Money-Laundering Act, which aims to regulate digital assets and prevent their use in money laundering and terrorist financing. While the intentions behind the act are noble, it is unlikely to achieve its desired outcomes. In fact, there is a real risk that it could end up banning cryptocurrencies altogether.
The act proposes to subject digital asset transactions worth over $10,000 to the same Bank Secrecy Act regulations that apply to traditional financial institutions. This includes reporting requirements for suspicious activity, customer identification, and record-keeping.
While these measures may sound reasonable at first glance, they fail to account for the unique nature of cryptocurrencies. Unlike traditional financial institutions, cryptocurrency transactions are conducted on decentralized networks that are often pseudonymous. This means that while transactions are public, they are not necessarily tied to a real-life identity.
This has practical implications for the reporting requirements proposed by the act. For example, how do you identify a suspicious transaction when you don’t even know who made it? Attempts at linking real-life identities to cryptocurrency addresses have been met with limited success so far.
Moreover, not all cryptocurrencies are created equal. Some, like Bitcoin, are more transparent than others, while others, like Monero, are designed to be fully private and untraceable. If regulators were to focus too heavily on one particular cryptocurrency, it would simply drive money launderers and other bad actors to switch to a more anonymous alternative.
Another issue is that the act could impose significant compliance costs on the cryptocurrency industry. Startups and small businesses may find it difficult to navigate the complex regulatory landscape, and may end up shutting down altogether. This could stifle innovation and harm the broader economy.
A more concerning outcome, however, is that the act could end up banning cryptocurrencies altogether. If regulators decide that they are too difficult to regulate, they may simply opt to ban them outright. This would be a disastrous outcome for the many legitimate businesses and individuals who rely on digital assets for their day-to-day operations.
It is worth noting that cryptocurrencies are not inherently linked to money laundering or terrorist financing. While they have been used for illegal activities in the past, the vast majority of cryptocurrency transactions are completely legitimate. Banning or heavily regulating digital assets would be akin to throwing the baby out with the bathwater.
Regulators and lawmakers should instead focus on educating the public about the risks and benefits of cryptocurrencies. Properly regulated exchanges and other intermediaries can play a key role in preventing illicit activity without stifling innovation. Moreover, governments can work with cryptocurrency developers to implement privacy-enhancing measures that preserve the benefits of decentralization while reducing the risk of misuse.
The Digital Asset Anti-Money-Laundering Act, while well-intentioned, is unlikely to achieve its desired goals. Instead of imposing burdensome regulations that could harm the industry, lawmakers should work with stakeholders to develop solutions that strike a balance between innovation and security. Only then can we realize the full potential of digital assets.
Senators Elizabeth Warren and Roger Marshall are pushing legislation supposedly aimed at closing loopholes that bad actors may exploit to launder money through crypto assets. The Digital Asset Anti-Money Laundering Act treats software developers and transaction validators as financial institutions, rendering crypto assets useless and furthering a strategy to ban crypto. However, money laundering, the process of filtering ill-gotten gains through the traditional financial system, is already illegal, and law enforcement is adept at identifying offenders. Nonetheless, proponents of the legislation would have people believe that money laundering is a problem unique to crypto assets and is occurring at an unprecedented scale incapable of stopping.
The Warren-Marshall bill’s legislative strategy is not new and involves slapping a label people don’t like on something they don’t know, pursuing a long-term strategy of banning crypto under the guise of an anti-money laundering policy. Such a legislative approach undermines the existence of crypto and blockchain technology, has long been illegal across the world, and would collapse the crypto economy, which is the point.
The Digital Asset Anti-Money Laundering Act does more harm than good by requiring that those who develop software and validate transactions on a blockchain register as financial institutions or collapse the crypto economy entirely. While money laundering is not unique to crypto, steps Congress can take to address money laundering in crypto and traditional assets include passing legislation to increase penalties for money laundering of all types, creating a federal money transmission license to standardize projections, instituting a supervisory regime for digital currency exchanges, and increasing multi-jurisdictional cooperation, tools, and training for law enforcement.
Despite all the problems with the Warren-Marshall bill, its backers are committed to pursuing it and likely looking for a moving legislative vehicle to attach their legislation to. The proposed legislation is unnecessary to counter money laundering, and it does more harm than good. However, those interested in leading an anti-crypto army and seeing the industry collapse may find it just what they need.