Warren-Marshall Bill Assailed as a ‘Direct Attack’ on Crypto Users

Senators Say Law is Needed to Curb Money Laundering and Criminal Use of Cryptocurrencies

Its the greatest legislative threat to crypto ever.

Thats the conclusion drawn by Coin Center, the cryptocurrency industry think tank, after analyzing a bill introduced Wednesday by Sen. Elizabeth Warren (D-Mass.), and Sen. Roger Marshall (R-Kan.).

KYC Requirements

In an effort to bring crypto inside the regulatory regime governing TradFi, the bill would extend know-your-customer requirements to crypto wallet providers, miners, validators and other network participants that may act to validate, secure, or facilitate digital asset transactions. Such ventures would be designated money service businesses.

The Digital Asset Anti-Money Laundering Act would also ban financial institutions from using a Tornado Cash-style mixer or other anonymity enhancing technologies and from utilizing crypto that had gone through such protocols. The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security.

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In targeting anonymity, the senators are treading on one of the most cherished values in crypto financial privacy. Yet they argue the step is necessary to curb criminal use of cryptocurrencies.

Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism, Warren said in a prepared statement. The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions.

Personal Freedom

Yet Coin Center said this is a classic case of Washington overkill. [The bill] is the most direct attack on the personal freedom and privacy of cryptocurrency users and developers weve yet seen, said the non-profit, research advocacy organization. It would force anyone who helps maintain public blockchain infrastructure, either through software development or validating transactions on the network, to register as a Financial Institution (FI).

Warren and Marshall picked their moment well. The two senators introduced the bill a day after U.S. prosecutors charged Sam Bankman-Fried with eight counts of fraud, conspiracy, and violating campaign finance laws in connection with his management of FTX.

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The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission also accused Bankman-Fried of defrauding investors since 2019 by using customer assets to cover losses and margin calls at Alameda Research, the crypto hedge fund the 30-year-old entrepreneur controlled.

Coin Center said the bill would not prevent the next FTX. It called the proposed bill an opportunistic, unconstitutional assault on cryptocurrency self custody, developers, and node operators, as well as the most direct attack on the personal freedom and privacy of cryptocurrency users and developers weve yet seen.

Earlier this year, crypto die-hards decried the Digital Commodities Consumer Protection Act, a bipartisan bill backed by Bankman-Fried, for including provisions they argued would kill DeFi.

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Bankman-Fried and crypto lobbyists stressed this was not the aim of the bill and that such language would be amended by the time the bill reaches a final draft. Odds of that bills passage this year have evaporated after the collapse of FTX and scrutiny of everything related to Bankman-Fried, Fortune has reported, though the bill is expected to be reintroduced next year.

Coin Center referenced the DCCPA in its takedown of the Warren-Marshall bill Wednesday.

Weve been outspoken critics of legislation that unknowingly or unwittingly sweeps non-custodial infrastructure providers and software developers into the ambit of financial services surveillance and regulation, it wrote.

Noncustodial Entities

The Warren-Marshall bill is different.

The drafters intend to impose permissioning regulation upon software developers and node operators, as well as a long list of similar noncustodial entities, according to Coin Center. In other words, the bill has been deliberately crafted to make permissionless blockchains unavailable to Americans by forcing all validators and developers of these networks to gate and surveil their infrastructure.

Warren, a former professor of bankruptcy law at Harvard University, is one of the most outspoken critics of crypto among lawmakers and frequently highlights its use in fraud, cyber crime and sanctions evasion.

The bill has been deliberately crafted to make permissionless blockchains unavailable to Americans by forcing all validators and developers of these networks to gate and surveil their infrastructure.

Coin Center

A one-page document outlining the bill cites a report from crypto forensics firm Chainalysis. That report found that cryptocurrency-based crime hit an all-time high last year with illicit addresses receiving $14 billion up from $7.8 billion in 2020.

The same report notes, however, that growth in crypto crime was outpaced last year by growth in crypto usage overall. As such, illicit activitys share of cryptocurrency transaction volume has never been lower, accounting for less than a fifth of one percent of all crypto transactions in 2021, according to Chainalysis.

Lack of Action

Warren is the only senator to receive an F rating from the Crypto Action Network, a nonprofit funded by Coinbase. Roger Marshall was among many lawmakers who did not receive a grade due to lack of action regarding cryptocurrency.

Following the September 11, 2001 terrorist attacks, our government enacted meaningful reforms that helped the banks cut off bad actors from Americas financial system, Marshall said in a prepared statement. Applying these similar policies to cryptocurrency exchanges will prevent digital assets from being abused to finance illegal activities without limiting law-abiding American citizens access.