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With only days left in the U.S. legislative session, a pair of senators want anti-money laundering rules enforced more broadly throughout the cryptocurrency sector with the aim of strengthening U.S. defenses against financial crime and sanctions evasion.

Pitched last week by Sens. Elizabeth Warren (D-MA) and Roger Marshall (R-KS), the Digital Asset Anti-Money Laundering Act, or DAAMLA, would newly require cryptocurrency miners, digital wallet creators, node operators who validate payments on the blockchain and other participants to adopt AML programs and flag suspicious activity by classifying them as money services businesses, or MSBs.

“These are essentially the software rails of crypto,” said Timothy Cradle, director of regulatory affairs for the Blockchain Intelligence Group. “It sounds like they want the entire crypto life cycle under the purview of the BSA [Bank Secrecy Act].”

DAAMLA would also direct U.S. officials to finalize a proposal that would require heightened verification and reporting of any cryptocurrency transaction to or from a digital wallet not hosted by a regulated exchange or involving any wallet—hosted or unhosted—in a jurisdiction with subpar controls against financial crime.

Financial institutions would meanwhile be barred from handling anonymity-enhancing “privacy coins” or serving mixers, tumblers and other entities that obscure the originator, beneficiary, source and destination of cryptocurrency payments from identification.

Broad intent

Opponents of expanded AML rules for cryptocurrency, including Blockchain Association Executive Director Kristin Smith, described Warren and Marshall’s bill as a breach of privacy and an attempt to drive the industry out of the U.S. altogether.

But the collapse of FTX, the arrest of founder Samuel Bankman-Fried and news of the money laundering investigation into rival Binance, the world’s largest exchange, have hardened congressional posture towards virtual asset service providers and cryptocurrency in general.

“Crypto ushered in a whole new dimension of fraud and threats to national security,” Senate Banking Committee Chairman Sherrod Brown (D-OH) said at the beginning of a hearing on FTX last Wednesday.

“It’s easier to steal people’s money,” Brown said. “That’s what we saw with FTX, and that’s what we’ll continue to see as long as we let crypto firms write their own rules.”

Warren and Marshall introduced the bill Dec. 14, weeks after the Justice Department—which has long viewed the purported lack of scrutiny of cryptocurrency as a national security issue—asked federal lawmakers to clarify in legislation that any platform through which users can send or receive cryptocurrency triggers the same AML rules as traditional money services businesses.

DAAMLA also appears to reflect the position of the Treasury Department, which in October assessed a $29 million penalty against Bittrex, a Seattle-area exchange, for violating U.S. sanctions and AML rules, two years after penalizing the Ohio-based founder of mixing services Helix and Coin Ninja $60 million for similar infractions.

The department’s Office of Foreign Assets Control imposed sanctions on a cryptocurrency mixing services for the first time in May and again in August, designating Blender.io and then Tornado Cash for handling hundreds of millions of dollars of cryptocurrency tied to North Korean state-sponsored hackers.

Framed within the context of national security, Warren and Marshall’s legislation, which generally adheres to guidance first issued by the Financial Action Task Force in July 2019, has an outside chance of being included on a must-pass, omnibus spending bill before Congress adjourns Friday.

Failing that, the proposal could, if reintroduced, end up competing with or complementing other legislative plans for cryptocurrency in the next Congress. Other AML-related bills, including the Enablers Act and SAFE Banking Act, have also yet to secure inclusion in broader legislation.

Some of DAAMLA’s provisions would classify blockchain transaction validators as MSBs, imposing requirements that may prove difficult or impossible to implement.

“There’s no company behind them to do the recordkeeping or respond to law enforcement requests,” said Cradle, who separately warned that digital wallet providers and coin miners may end up losing access to banking services after being categorized as MSBs.

Other provisions would give regulators discretion to intensify or relax reporting requirements, he said.

Narrow focus

The lean, seven-page bill would direct the federal government to consult with state regulators in crafting a dedicated AML assessment and review process for newly classified money services businesses within two years, and the Securities and Exchange Commission and Commodity Futures Trading Commission to do the same for the platforms they oversee.

Whereas earlier legislation sought to define how cryptocurrency and other digital assets function within the economy and for purposes of federal supervision, Warren and Marshall left those details to regulators to sort.

“This bill is focused on making sure digital assets are included in a comprehensive anti-money laundering framework, not on making distinctions whether they’re a commodity, a security or another sort of currency,” said Ryan Gurule, policy director for the Financial Accountability and Corporate Transparency Coalition, an advocacy group in Washington, D.C.

Sen. Patrick Toomey (R-PA) circulated draft legislation in April that would regulate stablecoins for safety-and-soundness purposes, set up a licensing system governing their creation and permit federally insured banks to issue them, but the bill has yet to advance farther.

Another potential bill aimed at protecting users of stablecoins, which function like privately issued cryptocurrencies but with values pegged to the U.S. dollar or other mainstream banknotes, was discussed but never introduced by Reps. Maxine Waters (D-CA) and Patrick McHenry (R-NC) after broader bipartisan support failed to materialize.

Contact Fred Williams at fwilliams@acams.org