The new U.S. Digital Asset Anti-Money Laundering Act proposes: VASPs may be regarded as financial institutions

**Compiled by |Author|**Mitch Eiven

Date: December 6, 2023

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True bipartisan legislation is rare in Washington, D.C. these days, but Democratic Senators Elizabeth Warren and Joe Manchin and Republican Senators Lindsey Graham and Roger Marshall have successfully co-sponsored a proposal against cryptocurrency crimes.

Senators said the proposal for the Digital Assets Anti-Money Laundering Bill of 2023 aims to fill a hole in the country’s anti-money laundering rules. The proposal would amend the Bank Secrecy Act and treat some digital asset providers as financial institutions.

The Bank Secrecy Act sets out procedures, record-keeping and reporting requirements for national banks, federal savings associations, federal branches and foreign banking agencies. In the proposed proposal, digital asset providers would be required to comply with many of the same regulations as traditional banks.

Warren submitted the proposal to the U.S. Senate on July 27, 2023, on behalf of herself and Senators Joe Manchin, Roger Marshall, and Lindsey Graham. The proposal was then submitted to the Senate Committee on Banking, Housing and Urban Affairs. The proposal has not been voted on by the entire Senate and has not been sent to the U.S. House of Representatives for consideration. President Biden has also not signed it, and the proposal has not yet become law.

The proposal would add several types of cryptocurrency providers to the list of financial institutions by U.S. regulators. These include non-custodial wallet providers, digital asset miners and validators or other nodes that validate other third-party transactions, miner extractable value searchers, other validators or network participants with control over the network protocol, and those who facilitate or provide services related to the trading, sale, custody, or lending of digital assets.

All of these organizations and individuals will be subject to the same regulations that currently apply to U.S. financial institutions. The proposal also includes exceptions for those who use distributed ledgers, blockchain technology, or similar technologies for internal business purposes.

Cryptocurrency is under federal scrutiny

If the proposal becomes law, the U.S. Treasury Department’s Financial Crimes Enforcement Network will announce within 18 months of its enactment that any U.S. person who owns $10,000 in digital assets or one or more digital assets overseas must file a report. At the same time, the U.S. Treasury Department will establish controls to mitigate illicit financial risks associated with digital asset mixers, anonymous enhanced cryptocurrencies.

Within two years of the proposal, the Ministry of Finance, in consultation with banking regulators, will create a risk-focused inspection and review process for those digital asset participants newly designated as financial institutions. They will determine whether efforts to stop money laundering and combat cryptocurrency-financed terrorism are adequate, as well as whether cryptocurrency providers and service providers are complying with the new rules. At the same time, the SEC and the Commodity Futures Trading Commission will consult with the Treasury on exactly the same matters.

Regulation of Digital Asset Kiosks

The next part of the proposal focuses on digital asset kiosks. Within 18 months of the adoption of the proposal, FinCEN will require digital asset kiosk (ATM) owners and administrators to submit and update the physical address of their kiosk every 90 days. Kiosk owners are also required to verify each customer’s identity with a valid government-issued identification, and they must collect the name and physical address of each counterparty to each transaction.

FinCEN will publish a report on any digital asset kiosks that have not yet been registered within 180 days. The report will include an estimate of the number of unregistered kiosks and their locations, as well as an assessment of the additional resources that may be required for FinCEN to investigate these kiosks.

Within a year of the enactment of the legislation, the DEA will issue a report with recommendations to reduce drug trafficking and money laundering activities associated with digital asset kiosks.

Impact on the Crypto Industry

Grant Fondo, co-chair of Goodwin’s digital currency and blockchain business and a former assistant U.S. attorney, told the magazine, “The proposal seeks to bring more players in the digital asset industry under regulatory control to fill a gap that some in Congress believe are not covered by the current regulatory regime.” ”

Fondo argues that if the proposal passes, it will impose an unworkable regime on DeFi protocols, thereby stifling decentralized finance in the United States. Fondo argues that the legislation places a burden on validators and miners, and questions whether it is realistic to impose bank-like requirements on software companies that verify blockchain transactions.

Hadas Jacobi, a lawyer with Reed Smith Financial Industry Group, who previously worked for New York State’s financial law enforcement regulator, agrees. According to Jacobi, the proposal would apply the requirements of the Bank Secrecy Act to cryptocurrency participants who are not financial institutions on a case-by-case basis.

“The bill can be read to apply to programmers and other technology providers who create frameworks for financial services operations, rather than providing services themselves,” Jacobi said.

Although Jacobi believes that there is a need for legislative regulation in this area, she questioned whether the main intent of the legislation (a threat to national security in the crypto industry) is relevant. She said that fixed-point regulation of cryptocurrency and digital asset service providers is necessary, but digital assets do not threaten national security. "Blanket claims that digital assets pose a threat to U.S. national security are both inaccurate and insightful. From the perspective of national security and financial stability, bad actors in the digital asset space pose a global threat, but the digital asset industry and its underlying technology do not. ”

What Politicians Are Saying

Senator Marshall said in a written statement that the proposal addresses U.S. national security concerns.

"This legislation is a matter of national security. Hackers from hostile countries such as Iran, Russia, and North Korea are committing cybercrimes against the United States, causing billions of dollars in losses, and they must be held accountable. The reforms spelled out in our legislation will help us fight back, and we will protect our digital assets by using proven methods that domestic financial institutions have adhered to for years. ”

Marshall said the legislation would expand the scope of the Bank Secrecy Act’s responsibilities to include “know-your-customer” requirements for those affected, would address “significant gaps” with non-custodial digital wallets, would guide FinCEN to issue guidance on financial institutions to mitigate digital asset risks, would strengthen enforcement of BSA compliance, expanded the BSA rules for foreign bank accounts to include digital assets, and would mitigate the risk of illicit financing of digital asset ATM.

According to Warren, US authorities have warned that cryptocurrencies are being used for various types of crimes and are being used by hostile countries to evade US sanctions. "Countries such as Iran, Russia, and North Korea use digital assets to launder money, evade U.S. and international sanctions, and fund illegal weapons programs. ”

Warren hinted that the proposal would help neutralize those threats, and her remarks focused on North Korea’s missile program. "For example, it is estimated that nearly half of North Korea’s missile program is funded by cybercrime and digital assets. In 2022, the total value of illicit digital asset transactions reached a record high of at least $20 billion. ”

Manchin asked Democrats and Republicans to come together and vote for the proposal. "Our bipartisan legislation will reduce these security risks and require cryptocurrency platforms to comply with anti-money laundering rules that banks must follow. I urge bipartisan colleagues to support this legislation to protect Americans by preventing bad actors from using cryptocurrencies to fund their criminal activities. ”

Fondo does not believe that the AML Act minimizes national security risks, but does recognize that the proposal may address issues related to cryptocurrencies that enhance anonymity.

Nevertheless, he would like to see that legislative work be well thought out before the proposal was adopted. “No one wants terrorists and criminals to cover up their financial dealings. But on the contrary, privacy is a rare commodity, so it’s important to strike the right balance between privacy and national security,”

Jacobi worries that over-regulation will lead to redundancy and excessive costs, which in turn will deplete the entire industry. She said the proposal would instruct FinCEN to regulate digital service providers as money transfer businesses, although she believes they have done so since 2013. In addition, she said, most state regulators have been reviewing and registering them for almost as long. "This proposal has the potential to upset the balance of the existing dual state and federal regulatory regime in the United States, as it would create redundant regulation and scrutiny of money transmission operations, not to mention exposing the digital asset industry to resource exhaustion and duplication of enforcement actions. ”

Will the proposal become law?

No one can say for sure. On the congressional side, the House of Representatives has only just recovered after weeks of struggling to elect a new speaker. The U.S. Senate still needs an absolute majority to approve almost all legislation, while congressmen and President Joe Biden have been highly focused on geopolitical issues such as the Israel/Hamas conflict and the war in Ukraine.

In addition, most U.S. politicians at the federal level are about to enter the 2024 election season, and control of the Senate, House of Representatives, and the president will be fiercely contested. The controversial legislation will certainly drag on until after the election, but a potentially popular cryptocurrency proposal could be welcomed by candidates from both parties and end up on the president’s desk. If the Digital Asset Anti-Money Laundering Act becomes law, many cryptocurrency providers will have to learn how to comply with the same regulations as traditional financial institutions.