Senators propose bill to end privacy in crypto

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Illustration: Sarah Grillo/Axios

Americans would have no refuge in blockchains for financial privacy under legislation introduced by two US senators.

Why it matters: One of the main drivers for the creation of cryptocurrency was to give people a cash-like experience on the internet, with digital currency that could be passed from user to user. another, just like cash.

Like cash, privacy isn’t perfect with most cryptocurrencies, but both are more private than transactions with debit or credit cards that are explicitly tied to an identity.

Leading the news: Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) introduced the Digital Assets Anti-Money Laundering Act of 2022 on Wednesday.

What they’re saying: Our common sense bill will make it harder for criminals to fund their criminal activities, like trafficking illicit fentanyl through the dark web, which can harm innocent people in Kansas, the senator said Marshall in a statement.

Zooming out: The problem is that cryptocurrency was designed to be a bearer asset, in that a person’s identity would not be tied to the digital assets they hold.

In other words, a person could store it themselves, using software that people usually describe as a “wallet”. Legislation calls them “non-hosted” wallets. The legislation would require anyone facilitating transactions on a blockchain, such as validators or miners who process them, to register as a financial institution and give certain guarantees to people using the network for higher-value transactions.

The Other Side: “The legislation is clear on the face of it,” research director Peter Van Valkenburgh wrote for Coin Center, a nonprofit focused on crypto policy issues. “The intended result is to prohibit Americans from having technological safeguards of personal privacy.”

In October, Coin Center sued the US Treasury for imposing sanctions on Tornado Cash, a privacy tool that runs on Ethereum.

Quick take: This is such far-reaching legislation that it’s hard to imagine how existing blockchains would continue to operate in the United States.

It would, however, be “simple” to launch entirely new channels designed to comply. Participating in the management of such a chain would cost much more, however, so it is unlikely to be as decentralized as Bitcoin or Ethereum.

Flashback: The legislation is reminiscent of a Trump-era non-hosted wallet rule from the Financial Crimes Enforcement Network (FinCEN).

This rule covered fewer participants, however, stopping at requiring checks from banks and money-services businesses before they would allow high-value transactions by sending cryptocurrency to personal wallets.

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