Threat of cryptocurrencies

Bipartisan bill to crack down on ‘crypto’ money laundering, terrorist financing reintroduced to US Senate

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Following a week of purportedly pro-crypto legislation being advanced by U.S. Congress, Senators Elizabeth Warren, Lindsey Graham, Joe Manchin, and Roger Marshall reintroduced legislation to strengthen anti-money laundering (AML) and counter-terrorist financing (CTF) regulations for the digital asset industry, including requirements for wallet providers and miners to identify customers better and increased enforcement powers for the Treasury.

Known as the Digital Asset Anti-Money Laundering Act, it aims to mitigate digital assets’ risks to national security by “closing loopholes and bringing the digital asset ecosystem into greater compliance” with AML/CFT frameworks governing the financial system.

Amongst other measures, the bill would require wallet providers and miners to identify customers better; direct the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to implement customer verification procedures for the digital asset industry; and issue guidance to banks on digital asset transactions, particularly those that have used privacy mixers to mask the identity of a user.

The legislation was initially introduced in December 2022 by Senator Elizabeth Warren (D-MA) and Senator Roger Marshall (R-KS), both vocal critics of the digital asset Wild West and its crypto cowboys. It garnered limited support at the time and was subsequently benched, but in the light of recent legislative movements in the House and further fallout from 2022’s crypto winter, the senators deemed it the right time to give it another shot.

“Crypto has become the payment method of choice for rogue nations, drug lords, ransomware gangs, and fraudsters to launder billions of dollars in stolen funds, evade sanctions, fund illegal weapons programs, and profit off of devastating cyberattacks,” Warren said. “This bipartisan bill is the toughest proposal on the table to crack down on crypto crime and give regulators the tools they need to stop the flow of crypto to bad actors.”

These sentiments were echoed by Marshall, a co-signer from across the aisle.

“This legislation is a matter of national security. Mastermind hackers from adversarial countries like Iran, Russia, and North Korea are committing cybercrimes against the United States to the tune of billions of dollars; they must be held accountable,” said Marshall. “The reforms outlined in our legislation will help us fight back and secure our digital assets by using proven methods that our domestic financial institutions have been complying with for years. Our commonsense, bipartisan legislation will crack down on crypto-criminals and sophisticated criminal cyber networks who use anonymity to spy, steal, and circumvent our nation’s laws.”

The move by Warren and company followed a week of supposed wins for the digital asset industry in the House of Representatives, with the advancement of several ‘crypto-friendly’ bills.

A roller coaster week for the industry

On July 26, the U.S. House Financial Services Committee advanced the Financial Innovation and Technology (FIT) for the 21st Century Act and the Blockchain Regulatory Certainty Act, aimed at providing more regulatory certainty for the industry. The following day the committee also advanced the Clarity for Payment Stablecoins Act, which provides several regulatory paths for approving and regulating stablecoin issuers.

All three bills, which can now progress to full House votes, were seen as benefiting the industry by providing less regulatory ambiguity, more legal routes to legitimacy, and reducing the authority of the ‘regulation-by-enforcement’ favoring Securities and Exchange Commission (SEC).

However, any celebrations from the libertarian sections of the digital asset industry were short-lived, the 2024 National Defense Authorization Act (NDAA) was approved by the Senate on July 27, with a last-minute amendment addressing privacy coins and coin-mixer services. The amendment was a bipartisan effort by pro-digital asset Senator Cynthia Lummis (R-WY) and Senator Kristen Gillibrand (D-NY), as well as the more skeptical Warren and Marshall.

The amendment gives the Treasury Department two years from the passage of the bill to work with financial institutions to craft appropriate reporting obligations and AML programs regarding digital assets.

Seemingly buoyed by the passage of the amended NDAA, Warren followed through on her February threat to reintroduce the Digital Asset Anti-Money Laundering Act.

Breakdown of the AML/CTF bill

The key feature of the Digital Asset Anti-Money Laundering Act, as explained by Warren in a July 28 press release, are as follows:

  • Extending Bank Secrecy Act (BSA) responsibilities, including Know-Your-Customer requirements, to digital asset wallet providers, miners, validators, and other network participants that may act to validate, secure, or facilitate digital asset transactions.
  • Addressing a gap with respect to “unhosted” digital wallets by directing FinCEN to finalize and implement its proposed December 2020 rule requiring banks and money service businesses (MSBs) to verify customer and counterparty identities, keep records, and file reports concerning certain digital asset transactions involving unhosted wallets or wallets hosted in non-BSA compliant jurisdictions.
  • Directing FinCEN to issue guidance to financial institutions on mitigating the risks of handling, using, or transacting with digital assets that have been anonymized using digital asset mixers and other anonymity-enhancing technologies.
  • Strengthening enforcement of BSA compliance by directing the Treasury Department to establish an AML/CFT compliance examination and review process for MSBs and other digital asset entities with BSA obligations, and directing the SEC and Commodity Futures Trading Commission (CFTC) to establish AML/CFT compliance examination and review processes for the entities they regulate.
  • Extending BSA rules regarding reporting of foreign bank accounts to include digital assets by requiring U.S. persons engaged in a transaction with a value greater than $10,000 in digital assets through one or more offshore accounts to file a Report of Foreign Bank and Financial Accounts (FBAR) with the Internal Revenue Service (IRS).
  • Mitigate the illicit finance risks of digital asset ATMs, by directing FinCEN to ensure that digital asset ATM owners and administrators regularly submit and update the physical addresses of the kiosks they own or operate and verify customer and counterparty identity.

Both the Digital Asset Anti-Money Laundering Act and the NDAA will need to be reconciled, with House versions reportedly on their way this fall.

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