US Senator Elizabeth Warren is currently gathering support for an unprecedentedly tough law against cryptocurrencies. In principle, anyone who does something for crypto should be considered a financial institution.
And she strikes again: Democrat Elizabeth Warren is considered one of the harshest Bitcoin critics in US politics. She confirms this reputation with a new legislative proposal.
On the senator’s website you can read that she has won five other representatives on the Senate Banking Committee to support her bill against money laundering through digital assets. Together with Warren, there are already 20 senators, mostly from Democrats. The bill also has the support of several institutions, including the Bank Policy Institute, the Massachusetts Bankers Association, the Major County Sheriffs of America, the National Consumers League, and others.
The law is intended to close loopholes and ensure that the digital currency ecosystem complies with general rules against money laundering. This is necessary, says Warren, to prevent terrorists, rogue states, drug lords, ransomware gangs and fraudsters from laundering money through cryptocurrencies. That sounds like a noble undertaking. But as soon as you look into the details, you can’t help but feel shivers down your spine.
Wallet developers should also be regulated
At its core, the law is about applying the Bank Secrecy Act (BSA) entirely to cryptocurrencies. The BSA imposes certain obligations on “financial institutions,” such as verifying and storing the identity of customers, taking measures to prevent money laundering, and reporting suspicious transactions. This law already applies to exchanges and other fiduciary crypto service providers, which is only fair overall.
If Warren and her colleagues have their way, this is not enough. They want to eliminate the key boundary that previously distinguished service providers subject to regulation from other players: the trust. Instead of just targeting custodians, “wallet providers, miners, validators and other actors in the network” should also be subject to the BSA. In particular, “the massive gap regarding unhosted wallets” needs to be closed, as these circumvent anti-money laundering rules.
This brings us to the point that doesn’t just hurt a little: According to the draft law, an “unhosted wallet” means “software or hardware that makes it possible to store public and private keys that are used to transfer digital assets securely digitally signed so that the stored values are the property of the wallet owner and are independently controlled by him.” An “unhosted wallet” is simply a wallet that allows what is most beautiful about cryptocurrencies: that everyone and can store each digital value autonomously.
According to the draft law, the providers of such wallets should be included in the list of financial institutions obliged to comply with the Bank Secrecy Act. These can be software developers who offer the wallets for free download, companies that sell hardware wallets, or those who operate servers through which wallet transactions are propagated or received.
In addition, miners, validators “and other nodes that contribute to validating or securing the transactions of a third party” should also be considered financial institutions, as should “any other person who provides or offers a service related to the exchange, sale, custody or lending of digital assets.”
So basically everyone: whoever forwards transactions with a Lightning node, who propagates transactions with a full node, who sends hashes to a mining pool, who puts money into a liquidity pool at Uniswap or other DeFi apps. Just anyone who makes any contribution to crypto.
Of course, there is more than just a little explosive in this.
“The law makes no secret of it”
The law is “an opportunistic, unconstitutional attack on self-custody of cryptocurrencies and on developers and node operators,” says the Coin Center, which advocates for the interests of the crypto industry in Washington. It is “the most direct attack on the personal freedom and privacy of crypto users and developers that we have experienced to date.”
Anyone helping to maintain public blockchain infrastructure, whether as a developer or validator, would be required by the law to register as a financial institution. He or she must determine and document the identity of the users, develop and implement anti-money laundering programs “that prevent users from using their software or the network if they suspect them of sending funds of criminal origin.” , and report suspicious transactions to the supervisory authority. Financial institutions are also prohibited from using tools to improve privacy, such as mixers or privacy coins.
The senator is crossing a red line for the Coin Center. “The law makes no bones about it: It is intended to impose access regulation on software developers and node operators, as well as another long list of non-fiduciary entities.” In other words, it was “intentionally written to make permissionless blockchains for Americans.” no longer accessible by forcing validators and developers of these networks to lock and monitor their infrastructure.” It seeks to “prohibit Americans from enjoying a technological guarantee of personal privacy and individual agency when they make online transactions.”
The law disguises itself as an instrument against money laundering and terrorist financing. In fact, it is “a rejection of liberal values and a step towards the kind of surveillance and control that characterizes autocrats like Vladimir Putin, Xi Jinping and Kim Jong-Un.” The Coin Center concludes that everything will be done to achieve this to protect Americans from this law. Hopefully with success.