The Digital Asset Anti-Money Laundering Act is an opportunistic, unconstitutional assault on cryptocurrency self custody, developers, and node operators
Nothing about the bill would prevent the next FTX. In fact, it puts users at more risk.
The bipartisan Digital Asset Anti-Money Laundering Act, introduced today by Sens. Warren and Marshall, is the most direct attack on the personal freedom and privacy of cryptocurrency users and developers we’ve yet seen. 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). As FIs, they would be obligated to:
- identify and record the personal information of every person who uses their software or sends transactions over their internet-connected computers,
- develop risk-calibrated AML programs that block persons from using their software or network throughput if they suspect those people are moving funds related to crime, and
- file reports about their users without a warrant, government request, or probable cause as the trigger.
Additionally, every FI, including traditional FIs like banks, custodial crypto FIs, and these newly classified crypto infrastructure FIs, would be banned from making any transactions involving privacy tools (e.g. Tornado Cash or similar privacy software) or privacy preserving cryptocurrencies (e.g. Zcash, Monero, etc.), irrespective of any evidence of criminality related to those transactions.
We do not believe this bill is mistakenly drafted.
In the past we’ve 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 (for example state money transmission licensing legislation or the early drafts of New York’s BitLicense). In this case, the legislation is clear on its face: the drafters intend to impose permissioning regulation upon software developers and node operators, as well as a long list of similar noncustodial entities. 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. The intended result is to forbid Americans from having any technological guarantees of personal privacy or individual agency when making transactions online, irrespective of whether those transactions have anything to do with crime. To the extent cryptocurrencies could even continue to exist in a world where this bill becomes law, Americans’ ability to use them would be limited to a fully permissioned and surveilled environment.
This bill is focused exclusively on financial surveillance and does not address any of the issues of corporate control that led to the collapse of FTX. For years, Coin Center has been advocating for a federal regulatory framework for custodial cryptocurrency exchanges and we remain committed to working towards passage of such legislation. Perversely, however, this bill would effectively outlaw the very form of self-custody of digital assets that prevents the kind of counterparty risk to consumers exemplified in the FTX collapse. The bill will endanger rather than protect consumers who are interested in owning or using cryptocurrencies by forbidding them from having agency and control over their own assets.
If passed, the bill would face harsh constitutional scrutiny from the courts. Facially, it appears to call for significant and likely unconstitutional prior restraints on protected expression. It forces the developers of “unhosted wallet” software to register before publishing code and it forces network nodes to register before relaying blockchain-related information. Similarly, it appears to unconstitutionally compel speech based on content. It forces all of these speakers to only publish content that conforms to the strictures of the Bank Secrecy Act. It forces these speakers to hobble the privacy and security of their own software and data with backdoors, much in the way the FBI attempted to force Apple to hobble their own iOS security by compelling them to publish backdoored software. Further, it would make it impossible for users of these networks to make anonymous payments, including donations to political organizations and potentially other payments or messages that are essential to effective political assembly and therefore also protected under the First Amendment. The legislation may also be unconstitutional under the Fourth Amendment, as it deputizes software developers and miners to collect and report private information, without a warrant, about cryptocurrency users even though that information is not voluntarily disclosed by those users or in any way relevant to the business purpose of the developer or miner.
As we’ve written time and time again, a defining characteristic that separates America from illiberal regimes like North Korea, China, and Russia is our reverence for individual autonomy, privacy, and dignity. Physical cash is a technological bulwark of those rights and privileges in open societies because it preserves and enables the capability of transacting directly, citizen to citizen, without the need for approval from some corporation or state bureaucracy. Electronic transactions without cryptocurrency technologies do not promote those rights, rather they force citizens to rely on a class of centralized gatekeepers who can freely approve or censor every transaction and who can amass and abuse a comprehensive dossier of every citizen’s intimate activities. Only cryptocurrencies create systems of electronic cash through which the individual is once again empowered to make transactions directly and privately, even online.
The Digital Asset Anti-Money Laundering Act is a direct attack on technological progress and also a direct attack on our personal privacy and autonomy. Make no mistake, while proposed as a solution to potential money laundering and terrorist financing, the bill is in fact a repudiation of liberal values and a move towards the types of surveillance and control prized by authoritarians like Vladimir Putin, Xi Jinping, and Kim Jong-un. Unfortunately, the bill cannot be improved; it can only be opposed in its entirety. Coin Center will do everything in its power to protect the rights of Americans and defeat this unwarranted attack on individual privacy and autonomy.