Dec 16, 2022 - Economy

Senators propose bill to end privacy in crypto

Illustration: Sarah Grillo/Axios

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

Why it matters: A major driver for the creation of cryptocurrency was to give people a cash-like experience on the internet, with a digital currency that could be passed from one user to 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.

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

What they're saying: “Our common-sense bill will make it harder for criminals to finance their criminal activities, like the trafficking of illicit fentanyl through the dark web, that can harm innocent Kansans,” Sen. Marshall said in a statement.

Zoom out: At issue is the fact that cryptocurrency was designed to be a bearer asset, insofar as a person's identity wouldn't be tied to the digital assets they held.

  • In other words, a person could store it themselves, using software that people usually describe as a "wallet." The legislation refers to these as "unhosted" wallets.
  • The legislation would require anyone facilitating transactions on a blockchain — such as the validators or miners that process them — to register as a financial institution and make certain guarantees about people using the network for higher value transactions.

The other side: "The legislation is clear on its face," Research Director Peter Van Valkenburgh wrote for Coin Center, a non-profit focused on crypto policy issues. "The intended result is to forbid Americans from having any technological guarantees of personal privacy."

  • In October, Coin Center sued the U.S. Treasury over putting 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 at all.

  • It would be "simple," however, for entirely new chains to launch designed to comply. Participation in running such a chain would be much more expensive however, so it's unlikely to be as decentralized as Bitcoin or Ethereum.

Flashback: The legislation hearkens back to a Trump-era unhosted wallet rule out of the Financial Crimes Enforcement Network (FinCEN).

  • That rule covered fewer participants however, stopping at requiring checks from banks and money services businesses before they permitted high dollar value transactions from sending cryptocurrency to personal wallets.
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