Anti-money laundering bill targeting cryptocurrency introduced in US Senate

Frankly my dear, I do give a DAAML

A bipartisan bill introduced in the US Senate could finally bring the cryptocurrency industry to heel by, among other things, extending existing banking regulations to cover digital currencies and designating cryptocash sellers as money service businesses. 

The Digital Asset Anti-Money Laundering (DAAML) Act [PDF] was introduced yesterday by Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) with the expressed goal of killing the use of cryptocurrencies as a way to launder money and finance terrorism. 

"The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions," Warren said. 

While not directly saying the arrest of disgraced former FTX CEO Sam Bankman-Fried was the impetus for the bill, Warren did tell CNN that the bankruptcy of "a major crypto platform" and its CEO's prosecution meant digital assets were being increasingly scrutinized across the political spectrum. What better time to take action than when crypto crimes are front and center, she opined.

Crime

"Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism," Warren said.

One doesn't need to look hard to find support for that claim: In 2020, a Bulgarian man who ran a crypto exchange was convicted of using it to launder money for fellow criminals, and last year a $150m crypto laundering ring in Hong Kong was busted by the Chinese government. 

Two men from Estonia were arrested and charged last month with stealing and laundering $575m in crypto through a Ponzi scheme, and FTX's Bankman-Fried has also been charged with laundering digital funds, among other things.

That said, there are plenty of people using cryptocurrency for non-criminal means: spending, trading, and so on.

The bill gives authority over the creation and enforcement of its proposed rules to the US Treasury Department's Financial Crimes Enforcement Network (FinCEN) by directing it to extend Bank Secrecy Act (BSA) requirements, like know-your-customer rules, to cryptocurrencies.

BSA requirements in DAAML include requiring US citizens transacting more than $10,000 in digital assets stored in an offshore account to report it through Foreign Bank and Financial Accounts rules enforced by the IRS.

The BSA also requires "digital asset wallet providers, miners, validators, and other network participants that may act to validate, secure, or facilitate digital asset transactions," to be classified, and regulated, as money service businesses (MSB). 

As part of designating crypto actors as MSBs, the bill also requires FinCEN to establish an anti-money laundering task force and combat the financing of terrorism (AML/CFT) compliance process for MSBs. 

As an additional way to prevent the anonymous exchange of crypto assets, the bill would also prohibit financial institutions "from using or transacting with digital asset mixers" that pool cryptocurrencies and then redistribute them to help obfuscate users and hide the origins and destination of funds. 

DAAML also takes action against cryptocurrency ATMs by requiring the machines owner to regularly update kiosk location maps and verifying customer identity. 

What about offline crypto wallets?

In a summary of the bill, Senator Marshall's office said unhosted crypto wallets, meaning any that are controlled by an individual – such as cold storage on a flash drive, or in an offline wallet – are a serious regulatory gap that needs closing. 

Such wallets "allow individuals to bypass AML and sanctions checks," the pair said in the summary, and the bill takes action to ensure such wallets aren't black holes for regulators. 

DAAML directs FinCEN to implement proposed 2020 rules "which would require banks and MSBs to verify customer and counterparty identities, keep records, and file reports in relation to certain digital asset transactions involving unhosted wallets or wallets hosted in non-BSA compliant jurisdictions."

In other words, if this bill passes through the Senate as well as the House, the illusion that cryptocurrency is automatically and simply anonymous will finally, and possibly permanently, be dispelled. 

Don't count on it happening quickly, though: given we're already in mid-December it's unlikely the bill will get a hearing before Congress adjourns for the year on December 21. In that case, DAAML would need to be reintroduced when the 118th Congress convenes in early January. ®