Thu, 18 May 2023 at 7:08 pm BST
On Capitol Hill, Senator Elizabeth Warren (D-MA) and Senator Roger Marshall (R-KS), are pushing legislation that purports to close loopholes bad actors may exploit to launder money through crypto assets. But what the legislation – the so-called Digital Asset Anti-Money Laundering Act – actually does is further a strategy to ban crypto by treating software developers and transaction validators as financial institutions, in effect rendering crypto useless. Warren, after all, says she’s leading an “anti-crypto army.”
Money laundering, the process of filtering ill-gotten gains through the traditional financial system, is illegal. There’s some laundering of money using crypto assets, although most occurs using fiat currencies. Law enforcement has proven adept at identifying and holding accountable those who break money laundering laws. All of these facts are true, but you wouldn’t know that listening to the debate on Capitol Hill. Proponents of this dangerous new legislation would have you believe that money laundering is a problem unique to crypto assets, occurring at an unprecedented scale. And law enforcement is incapable of stopping it because of outdated laws.
John Rizzo is senior vice president for Public Affairs at Clyde Group where he provides strategic counsel and communications. He most recently served as the senior spokesperson at the U.S. Department of the Treasury covering digital assets, fintech, climate finance, financial stability, domestic finance and economic policy.
Crypto assets and the underlying blockchain technology that they are built on are novel. Still, the legislative strategy used to advance legislation to undermine them permanently is as old as America itself. The authors of this legislation have identified an illegal act that has salience with the American public and is broadly opposed, money laundering. They further recognize that blockchain technology and crypto assets are new concepts to people nationwide.
So, they slap the label Americans know they don’t like on the brand they don’t yet know and pursue a long-term strategy of banning crypto under the guise of an anti-money laundering policy. It’s the legislative equivalent of a Trojan horse, and those who care about the future of crypto assets need to quickly mobilize to defeat the bill, which was first introduced in 2022 and may soon be introduced in this new Congress.
A fair assessment of the Digital Asset Anti-Money Laundering Act clarifies that the legislation is both unnecessary and designed to further a policy banning crypto outright. Money laundering has long been illegal in the United States and throughout the world. Despite these prohibitions, there’s no question that the original attempts to stymie money laundering were imperfect, evidenced by subsequent Congressional and international efforts to strengthen anti-money laundering laws.
In assessing the Warren-Marshall bill, one must ask whether the legislation identifies legitimate gaps in the legal regime covering money laundering, whether the legislation does more harm than good, and if there are alternate ways to achieve the policy objective of cracking down on money laundering without undermining the very existence of crypto and blockchain technology.
On the first score, the idea that the Warren-Marshall bill identifies gaps in current anti-money laundering laws is undermined by the robust record of law enforcement’s success in identifying, arresting, and charging those using crypto assets to launder money. These law enforcement actions have stopped illicit actions worth hundreds of millions of dollars and include successful efforts to stop suspected criminals from using crypto-mixing services to conceal the source of their funds.
Moreover, a recent report by the U.S. Department of the Treasury on illicit finance risks in DeFi is clear that while money laundering using crypto assets does occur, those engaged in illegal activity still prefer to commit their crimes the old-fashioned way – through fiat currency. And it’s not because would-be money launderers do not understand crypto; it’s because laundering money using fiat currency and opaque jurisdictions is easier and more likely to avoid law enforcement detection than a traceable blockchain. Even the terrorist group Hamas has called it quits on taking donations in crypto.
If the Warren-Marshall legislation fails the necessary test, does it do more harm than good? After all, money laundering is terrible. Shouldn’t the legislation be passed even if it only helps on the margins? Here is where the harms of the legislation, namely requiring those that develop software and validate transactions on a blockchain to register as financial institutions, are so problematic. The problem is these individuals can’t practically register as a financial institution. The authors of this legislation know this and further know that requiring software developers and validators to engage in the same kind of multi-million dollar compliance regime that banks do would collapse the crypto economy, which, after all, is the point.
While it’s clear that money laundering is not a problem unique to crypto and that the Warren-Marshall legislation would do more harm than good, there’s no question that the optimal amount of money laundering in the global financial system is zero. And to that end, there are steps Congress can take to reduce money laundering in crypto and traditional assets.
For instance, Congress can pass legislation to create a federal money transmission license to standardize projections or institute a supervisory regime for digital currency exchanges overseen by the Commodity Futures Trading Commission. Increased penalties for money laundering of all types could serve as an increased deterrent. Finally, a leading study that examined how best to help law enforcement better crack down on crimes involving crypto identified multi-jurisdictional cooperation, tools, and training as primary needs, not anything remotely approaching the Warren-Marshall bill.
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 good than harm. But if you’re interested in leading an anti-crypto army and seeing the industry collapse, it might be just what you need.