Proposed Cryptocurrency Regulations in the U.S. Driven by Lawmakers’ Fears and Doubts – Cointelegraph Magazine

Truly bipartisan legislative efforts are rare in Washington, D.C. these days, but Democratic Senators Elizabeth Warren and Joe Manchin and Republican Senators Lindsey Graham and Roger Marshall have come together to co-sponsor a bill focused on cryptocurrency crime.

The Digital Asset Anti-Money Laundering Act of 2023 aims to close loopholes in the country’s anti-money laundering regulations, according to the senator. The bill would amend the Bank Secrecy Act and designate various digital asset providers as financial institutions.

The Bank Secrecy Act establishes programs, recordkeeping, and reporting requirements for national banks, federal savings associations, federal branches, and foreign banking institutions. Digital asset providers must comply with many of the same regulations as traditional banks.

Warren introduced the bill to the U.S. Senate on July 27, 2023, on behalf of herself and Senators Joe Manchin, Roger Marshall, and Lindsey Graham. The bill was later referred to the Senate Banking, Housing and Urban Affairs Committee. The bill was not voted on by the full Senate or sent to the U.S. House of Representatives for consideration. President Biden has not signed it and it is not a legal issue at this time.

The bill would add several types of cryptocurrency providers to U.S. regulators’ list of financial institutions. This includes non-hosted wallet providers, digital asset miners and validators or other nodes that validate third-party transactions, extractable value retrievers, miners, other validators or network participants that control the network protocol, and exchanges. Includes any other person who facilitates or provides services related to . , selling, storing or lending digital assets.

All of these organizations and individuals are subject to the same regulations that currently apply to U.S. financial institutions. The bill includes an exception for those who use distributed ledger, blockchain technology, or similar technologies for internal business purposes.

cryptocurrency Under Federal Review

If this bill becomes law, the U.S. Treasury’s Financial Crimes Enforcement Network will announce that any American who holds $10,000 in digital assets or holds one or more digital assets abroad will be required to file a return. Within the same period, the U.S. Treasury will establish controls to mitigate illicit financial risks associated with digital asset commingling and anonymity-enhanced cryptocurrencies.

Within two years of enactment, the Treasury Department, in consultation with the Conference of State Bank Supervisors, will establish a risk-focused investigation and review process for digital asset participants newly designated as financial institutions. They will determine whether efforts to stop money laundering and counter cryptocurrency-funded terrorism are adequate and whether cryptocurrency providers and facilitators comply with the new rules. Within the same period, the Securities and Exchange Commission and the Commodity Futures Trading Commission will consult with the Treasury Department on the same issue.

What about my favorite BTC kiosk?

The next part of the bill focuses on digital asset kiosks. Within 18 months of passage of the bill, FinCEN will require owners and managers of digital asset kiosks (ATMs) to submit and update the physical addresses of their kiosks every 90 days. Additionally, kiosk owners must verify the identity of each customer using a valid government-issued identification and collect the name and physical address of each counterparty for each transaction.

FinCEN issues reports on unregistered digital asset kiosks within 180 days. The report includes an estimate of the number of unregistered kiosks, their locations, and an assessment of the additional resources FinCEN may need to investigate them.

Within a year of the bill’s enactment, the U.S. Drug Enforcement Administration will issue a report setting out recommendations to reduce drug trafficking and money laundering associated with digital asset kiosks.

Impact on the Cryptocurrency Industry

Grant Fondo, co-chair of Goodwin’s digital currency and blockchain practice and former U.S. attorney, told the Magazine: “This bill would bring more players in the digital asset industry within regulatory control, some of which Congress considers not to be covered by the current regulatory regime.”

Fondo believes that if passed, this bill would have the practical effect of killing decentralized finance in the United States by imposing an unworkable regime on DeFi protocols. Fondo sees the bill as imposing a burden on validators and miners and questions how realistic it would be to impose bank-like requirements on software companies that verify blockchain transactions.

Hadas Jacobi, an attorney with the Reed Smith Financial Industry Group who previously served as the state’s financial enforcement regulator, agrees. According to Jacobi, the bill would apply Bank Secrecy Act requirements on a case-by-case basis to cryptocurrency participants rather than financial institutions.

“This bill could be interpreted to apply to programmers and other technology providers who create a framework for financial services operations rather than providing the services themselves,” Jacobi says.

Jacobi believes there is a need for legislative clarity in this area, but questions whether the bill’s main intent – the cryptocurrency sector’s threat to national security – is truly relevant. Jacobi says that while there is a need for on-the-ground regulation of cryptocurrency and digital asset service providers, digital assets do not pose a threat to national security.

“However, the general statement that digital assets pose a threat to U.S. national security is inaccurate and short-sighted. Bad actors in the digital asset space pose a global threat from a national security and financial stability perspective, but the digital asset industry and its underlying technology do not,” says Jacobi.

What politicians say

Senator Marshall said in a written statement that the bill addresses America’s concerns about national security.

“This bill is a matter of national security. Mastermind hackers from hostile countries such as Iran, Russia, and North Korea are committing billions of dollars worth of cybercrimes against the United States. They must be held accountable. The reforms outlined in our bill will help domestic financial institutions combat and protect digital assets using the proven methods they have followed for many years,” Marshall said.

Marshall said the bill expands Bank Secrecy Act responsibilities to include know-your-customer requirements for those affected, addresses the “big gap” with non-hosted digital wallets, and requires FinCEN to mitigate digital asset risks. He said he would direct financial institutions to issue guidance and strengthen it. Enforcing BSA compliance will expand BSA foreign bank account rules to include digital assets and mitigate illicit financial risks from digital asset ATMs.

Warren claims that US authorities have warned her that cryptocurrencies are being used by all types of criminals and hostile countries to evade US sanctions.

“Rogue states like Iran, Russia, and North Korea have been using digital assets to launder stolen funds, evade U.S. and international sanctions, and fund illicit weapons programs,” Warren said.

Warren made a statement focusing on North Korea’s missile program, suggesting the bill would help subvert those efforts.

“For example, it is estimated that nearly half of North Korea’s missile program is funded through cybercrime and digital assets. In 2022, illicit digital asset transactions will total $20 billion, an all-time high,” Warren wrote.

Manchin called on Democrats and Republicans to come together and vote on the bill. “Our bipartisan legislation reduces these security risks and requires cryptocurrency platforms to comply with the same anti-money laundering rules that banks must follow. I urge my colleagues on both sides of the aisle to support this common-sense legislation to protect Americans by preventing bad actors from using cryptocurrencies to finance their criminal activities,” Manchin says.

Fondo does not see how anti-money laundering laws can minimize risks to national security, but he recognizes how the legislation could solve problems associated with cryptocurrencies with enhanced anonymity.

Nonetheless, he wants these legislative efforts to be well considered before passing the bill. “No one wants terrorists and criminals to hide their financial transactions. But on the other hand, privacy is a rare commodity, so it is important to strike the right balance with national security,” he says, Fondo.

Jacobi fears excessive regulation will lead to redundancy and excessive costs, depleting the industry. She said the bill would direct FinCEN to regulate digital service providers in the money transfer business. Of course, she believes they have been doing so since 2013. Additionally, she said most state regulators have been investigating and registering them for almost as long.

“This law not only exposes the digital asset industry to resource-draining, duplicative enforcement actions, but also has the potential to upset the balance of America’s existing dual state and federal regulatory framework by creating duplication of oversight and investigation of money transfer businesses. “ says Jacobi.

Will the bill become law?

It’s anyone’s guess. The House of Commons is just getting back on its feet after weeks of struggling to elect a new speaker.

The U.S. Senate still requires a supermajority vote to approve almost any legislation, and in the meantime, members of Congress and President Joe Biden are laser-focused on geopolitical issues such as the Israel/Hamas conflict and the war in Ukraine.

Additionally, most U.S. federal-level politicians will enter the 2024 election season with control of the Senate, House of Representatives, and the presidency in their hands.

While the controversial bill will certainly be stalled until after the election, a potentially popular cryptocurrency bill could be palatable to candidates on both sides of the aisle heading to the president’s desk. If digital asset anti-money laundering laws become law, many cryptocurrency providers will have to learn how to comply with the same regulations as traditional financial institutions.

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Mitch Iven

Mitch is a writer who covers cryptocurrency, politics, the intersection between the two, and other unrelated topics. He believes cryptocurrencies are the future of finance and is honored to have the opportunity to report on them.