The Digital Asset Anti-Money Laundering Act: A Bipartisan Effort to Regulate Crypto Crime

In a rare display of bipartisanship, Democratic Senators Elizabeth Warren and Joe Manchin, along with Republican Senators Lindsey Graham and Roger Marshall, have co-sponsored a bill aimed at addressing crypto crime. The Digital Asset Anti-Money Laundering Act of 2023 seeks to close loopholes in the nation’s Anti-Money Laundering rules by designating digital asset providers as financial institutions and subjecting them to similar regulations as traditional banks.

The bill, which was introduced by Senator Warren on July 27, 2023, on behalf of herself and Senators Manchin, Marshall, and Graham, aims to ensure that the same rules apply to financial transactions involving digital assets. Warren stated on Twitter, “So my new, bipartisan Digital Asset Anti-Money Laundering Act will make the crypto industry follow the same anti-money-laundering standards as banks, brokers, & Western Union.”

Regulating the Crypto Industry

The legislation would expand the list of financial institutions regulated by U.S. authorities to include various types of cryptocurrency providers. This includes unhosted wallet providers, digital asset miners and validators, and other entities involved in the exchange, sale, custody, or lending of digital assets. These organizations and individuals would be required to comply with the same regulations currently applied to traditional financial institutions.

However, the bill does include exceptions for those who use distributed ledger or blockchain technology for internal business purposes, recognizing the importance of these technologies for innovation and efficiency in the financial industry.

Review and Examination Process

If the bill becomes law, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) would have 18 months to announce that any U.S. person with $10,000 in digital assets or one or more digital assets overseas must file a report. Within the same timeframe, the Treasury would establish controls to mitigate unlawful financial risks associated with digital asset mixers and anonymity-enhanced cryptocurrencies.

Within two years of the bill’s enactment, the Treasury, in consultation with the Conference of State Bank Supervisors, would create a risk-focused examination and review process for the newly designated digital asset participants. This process would assess the efforts to combat money laundering and crypto-funded terrorism, as well as ensure compliance with the new regulations. The Securities and Exchange Commission and the Commodity Futures Trading Commission would also consult with the Treasury on these matters.

Impact on Digital Asset Kiosks

The bill also addresses digital asset kiosks, such as Bitcoin ATMs. Within 18 months of the bill’s passage, FinCEN would require kiosk owners and administrators to register their kiosks and update their physical addresses every 90 days. They would also need to verify the identity of each customer using government-issued identification and collect information about each counterparty to each transaction.

Within 180 days, FinCEN would issue a report on any unregistered kiosks, including their locations and an assessment of additional resources needed for investigation. The U.S. Drug Enforcement Agency would also issue a report within a year, identifying recommendations to reduce drug trafficking and money laundering associated with digital asset kiosks.

Industry Impact and Concerns

Industry experts have expressed concerns about the potential impact of the legislation. Grant Fondo, co-chair of Goodwin’s digital currency and blockchain practice, believes that the bill could have the practical effect of stifling decentralized finance (DeFi) in the U.S. by imposing unworkable regulations on DeFi protocols. He also questions the feasibility of applying bank-like requirements to software companies validating blockchain transactions.

Hadas Jacobi, an attorney at Reed Smith, agrees that regulatory clarity is needed in the crypto space but questions whether the legislation’s primary intent, the crypto sector’s threat to national security, is relevant. Jacobi argues that while bad actors in the industry pose global threats, the digital asset industry and its underlying technology do not inherently threaten national security.

What the Politicians Say

Senator Marshall argues that the bill is a matter of national security, as cybercriminals from adversarial countries are committing cybercrimes against the United States using digital assets. He believes the reforms outlined in the legislation will help secure digital assets and hold these criminals accountable.

Senator Warren highlights the use of digital assets by rogue nations like Iran, Russia, and North Korea to launder stolen funds, evade sanctions, and fund illegal weapons programs. She emphasizes that the act will help combat these efforts, citing North Korea’s missile program, which is estimated to be funded in part by cybercrime and digital assets.

Senator Manchin urges both Democrats and Republicans to come together and support the bill, emphasizing its aim to curtail security risks and require cryptocurrency platforms to follow Anti-Money Laundering rules.

While the bill has been introduced and referred to the Senate Committee on Banking, Housing, and Urban Affairs, it has not been voted on by the entire Senate or sent to the U.S. House of Representatives for consideration. It has not yet become law.

As the debate around crypto regulation continues, it remains to be seen how this bipartisan effort will progress and what impact it will have on the crypto industry.