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Competing proposals to combat illicit transactions involving cryptocurrency or fentanyl trafficking advanced in the U.S. House and Senate last week, setting up a potential partisan showdown when lawmakers return from recess in September.

Bipartisan changes to the National Defense Authorization Act, or NDAA, passed by the Senate on Thursday would require the Treasury Department to set up tailored examinations for cryptocurrency exchanges and other institutions that handle virtual assets for compliance with anti-money laundering rules and review “the adequacy of [their] reporting obligations.”

“This would require cryptocurrency platforms to abide by the same anti-money-laundering rules that banks have to follow,” Sen. Joe Manchin (D-WV) said in a statement supporting the bill, which also drew support from the Washington, D.C.-based Bank Policy Institute, a trade group that represents large banks in the U.S.

The changes, contained in a two-page amendment sponsored by Sen. Cynthia Lummis (R-WY) would further require Treasury to gauge the financial crime-related threat posed by cryptocurrency mixers, tumblers and other anonymity-enhancing technologies.

Cryptocurrency exchanges must already register with Treasury’s Financial Crimes Enforcement Network, or FinCEN, obtain licenses from the U.S. states in which they operate, and comply with AML rules. Whether the tailored examinations Manchin and Lumnis envision for the cryptocurrency industry would lead to additional obligations is unknown.

“It’s important when determining which laws will apply to the digital assets industry to closely look at, and really understand digital assets and related technologies,” said Joshua Ashley Klayman, senior counsel at Linklaters in New York. “There’s considerable nuance, and I don’t as a general matter believe that grafting existing rules onto digital assets is necessarily a good fit.”

The Senate’s mammoth defense spending bill also folds in a proposal pitched by Sen. Tim Scott (D-SC) that would direct Treasury’s Financial Crimes Enforcement Network to issue guidance on flagging payments linked to the trafficking of fentanyl and other synthetic opioids in suspicious activity reports, and then prioritize any SARs filed on the activity for review.

The House’s version of the “FEND Off Fentanyl Act,” which Rep. Michael McCaul (R-TX) introduced in May, won approval from the Financial Services Committee last month.

Across the aisle

While Scott and McCaul’s legislation enjoys bipartisan as well as bicameral support, Republicans on the House Financial Services Committee took a more unilateral approach to reining in cryptocurrency’s appeal to money launderers.

The committee on Thursday approved a 42-page proposal by Chairman Patrick McHenry (R-NC) for regulating stablecoins—cryptocurrencies with values based on the U.S. dollar—for AML purposes, and a 219-page proposal to split supervision of digital asset trading between the Securities and Exchange Commission, or SEC, and Commodities Futures Trading Commission.

But absent a legislative vehicle with strong momentum such as the Senate’s NDAA, both bills must survive stiff opposition from House Democrats who argue that the measures unfairly benefit industry and lack consumer protections.

“The bill [McHenry’s] fails to address major flaws, such as closing a loophole that would allow companies like Facebook to start issuing their own money,” Rep. Maxine Waters (D-CA), ranking member of the House Financial Services Committee, said during a contentious hearing Thursday.

Waters accused McHenry at the hearing of “pulling the plug” on bipartisan legislation and “advancing a far weaker proposal that will not become law—it needs work.”

Case-by-case

In the absence of legislative clarity, federal courts have applied existing securities and commodities laws on a case-by-case basis.

“When the SEC and other regulators were bringing enforcement actions where people just settle, that’s one thing,” Klayman said. “But now see powerful market players fighting back in court—so not only will the final verdicts take years, they won’t provide this clear, broad, teachable moment the regulator may be going for, as each outcome is highly likely to be facts-and-circumstances dependent.”

One such company, Coinbase, the largest cryptocurrency exchange in the United States, is fighting accusations that the SEC made in a civil complaint last month that transactions on the platform constitute unregistered securities trading, and that it violated registration, disclosure and consumer protection standards by facilitating them.

The SEC’s case against Coinbase and parallel action against Cayman Islands-based Binance, the world’s largest cryptocurrency exchange, rest on the agency’s interpretation that federal statutes render trading platforms and certain cryptocurrencies subject to securities law.

On Monday, in a third civil action brought by the SEC, this time against bankrupt platform Terraform Labs, U.S. District Judge Jed Rakoff explicitly rejected another judge’s earlier, narrower interpretation that digital assets qualify as “securities” only when marketed to direct, institutional buyers, not when sold to retail, secondary purchasers.

“The defendants embarked on a public campaign to encourage both retail and institutional investors to buy their crypto-assets by touting the profitability of the crypto-assets and the managerial and technical skills that would allow the defendants to maximize returns on the investors’ coins,” Rakoff stated in his ruling.

Contact Fred Williams at fwilliams@acams.org