Sen. Elizabeth Warren announced that she would add decentralized finance to a new version of her "impossible" 2022 crypto anti-money-laundering law.
Sen. Elizabeth Warren wants to ensure that when crypto anti-money-laundering regulations are written later this year, they don't leave a "giant loophole" called decentralized finance.
Speaking at the Senate Banking Committee's Crypto Crash hearing on Feb. 14, the outspoken crypto critic said she and a Republican colleague plan to reintroduce last year's Digital Asset Anti-Money Laundering Act.
The 2022 version sought to ban mixers, require anti-money laundering reports from individuals using unhosted wallets, and designate every miner, validator and node operator as a money services business that must register with the U.S. Treasury Department's Financial Crimes Enforcement Network.
And while she didn't explicitly state that the 2023 version would target decentralized finance and DAOs, she did say that "some in the crypto industry say that anti-money laundering rules can work so long as they exempt so-called 'decentralized entities' — the crypto exchanges, lenders and other financial intermediaries that run on code. She said:
"In other words, they want a giant loophole for DeFi written into the law so they can launder money whenever a drug lord or a terrorist pays them to do so."
What's Impossible?
Feeding a question to witness Lee Reiners, who's a strong crypto critic and policy director of the Duke Financial Economics Center, Sen. Warren asked why crypto is the currency of choice for "drug lords, human traffickers and countries like North Korea and Iran." He replied:
"Crypto pseudonymity makes it ideally suited for bad actors. And when you couple that with the fact that crypto transactions are not subject to the same AML ... statutes that traditional financial transactions are subject to, that just makes it ideally suited for people that want to do bad things."
Saying that banks, credit unions, stockbrokers, gold dealers and Western Union have found ways to make AML reporting rules work, Sen. Warren took issue with what she called the crypto's claim that it's "all but impossible" to apply AML rules to the whole industry.
"This is not a new claim," she said, pointing to the banking industry's tooth-and-nail fight against the Bank Secrecy Act of 1970's AML reporting requirement. Sen. Warren added:
"They complained that it would be impossible to comply. And then, after the law went into effect, they made it work. Now, the crypto industry explains that they are amazingly innovative and creative, but they just couldn't possibly figure out a way to comply with the same anti-money laundering rules that everybody else follows."
The rules should be simple, she said: "Same kind of transaction, same kind of risk means the same kind of rules."
It Doesn't Work That Way
However, that argument requires a basic misunderstanding of how blockchains work. Leaving aside that breaking the pseudonymity of transactions effectively breaks crypto payments, Sen. Warren's bill would require AML reports from industry participants who couldn't possibly have access to that information, it would make crypto transactions cost a fortune and take days or weeks for those who could access the necessary information.
As Warren's 2022 bill would demand MSB registration from "custodial and unhosted wallet providers,cryptocurrency miners, validators, or other nodes who may act to validate or secure third-party transactions, independent network participants, including MEV searchers, and other validators with control over network protocols as money service businesses."
Making anyone with a node server on their desk go through the MSB registration process is, in the end, less of a way to bring AML into crypto than a way to ban crypto without saying that out loud.
By the Numbers
Pointing to 2022's record-breaking illicit transaction numbers, Sen. Warren said, "big time financial criminals love crypto."
It was, she said, "the payment method of choice for international drug traffickers, who raked in over $1 billion [and] North Korean hackers who stole $1.7 billion and funneled that money into their nuclear program."
Then there is ransomware's nearly $500 million, she said, using blockchain intelligence firm Chainalysis' 2023 Crypto Crime Report. She added:
"The crypto market took in $20 billion last year in illicit transactions. And that's only the part we know about."
It's worth noting that Chainalysis' report said that in 2022, just 0.24% of crypto transactions were associated with illicit addresses.
