In wake of a string of high-profile scandals that rocked the international cryptocurrency space to the tune of a near $2 trillion loss in global market cap, the United States government is continuing its crackdown on illegal cryptocurrency operations with newly passed legislation. In a bipartisan effort, the U.S. Senate has sought to bring anti-money laundering (AML) and counter-terrorism financing (CFT) regulations governing cryptocurrency exchanges up to the same level as those which traditional American financial institutions are required to follow. Senators Elizabeth Warren (D-Mass) and Roger Marshall (R-Kan.), along with Senators Joe Manchin (D-W.Va.) and Lindsey Graham (R-SC), have led the charge to reintroduce the Digital Asset Anti-Money Laundering Act – a groundbreaking bill that aims to effectively close several currently-identified loopholes, increase financial security for users, and boost transparency across the sector.
Bipartisan changes to the National Defense Authorization Act, or NDAA, passed by the Senate on Thursday would require the Treasury Department to set up tailored examinations for cryptocurrency exchanges and other institutions that handle virtual assets for compliance with anti-money laundering rules and review “the adequacy of [their] reporting obligations.” While cryptocurrency exchanges are already required to register with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), a gross lack of concrete regulation governing the sector coupled with the relative anonymity that can be provided by the market as a whole makes it an attractive option for criminals of different varieties to avoid detection while laundering funds and/or evading economic sanctions. To combat this growing threat, the Digital Asset AML Act would extend Bank Secrecy Act (BSA) responsibilities, including Know-Your-Customer requirements to all network participants including digital wallet providers, miners and validators by directing FinCEN to designate these actors as money service businesses (MSBs), improve oversight on customer verification to limit the use of un-hosted digital wallets which allow individuals to bypass AML and sanctions checks, and prohibit financial institutions from using or transacting with digital asset mixers which further promote the anonymity of illicit actors.
“Crypto has become the payment method of choice for rogue nations, drug lords, ransomware gangs, and fraudsters to launder billions of dollars in stolen funds, evade sanctions, fund illegal weapons programs, and profit off of devastating cyberattacks,” said Senator Elizabeth Warren, who had long been skeptical of cryptocurrency becoming a tangible payment form unless it could be better regulated for the protection of investors. In backing the measure, it appears that Warren has become a resounding voice in the ongoing battle to make popular digital assets more secure and subsequently viable across the United States. “This bipartisan bill is the toughest proposal on the table to crack down on crypto crime and give regulators the tools they need to stop the flow of crypto to bad actors.”1 Senator Roger Marshall has backed the claims of his Democratic counterpart, stating:
“This legislation is a matter of national security. Mastermind hackers from adversarial countries like Iran, Russia, and North Korea are committing cyber crimes against the United States to the tune of BILLIONS of dollars; they must be held accountable. The reforms outlined in our legislation will help us fight back and secure our digital assets by using proven methods that our domestic financial institutions have been complying with for years. Our commonsense, bipartisan legislation will crack down on crypto-criminals and sophisticated criminal cyber networks who use anonymity to spy, steal, and circumvent our nation’s laws.”1
Given the current state of legislative limbo, federal courts are having to rely on sheer judgment in applying existing securities and commodities laws to cryptocurrency exchanges, doing so on a case-by-case basis. Until there is more legal clarity to define such things as what digital assets qualify as securities and specifically what responsibility crypto exchanges have to anti-money laundering efforts, analysts expect countless legal battles to wage on. Time will tell whether the new legislation proposed by the Senate will ultimately provide sufficient clarity.
It is also worth noting that the passing of bipartisan changes to the NDAA in late July also saw American lawmakers seeking to upgrade the detection and mitigation of fentanyl trafficking across America. The illicit drug trade remains a pervasive threat to national security and economic stability across the United States, and while the trade has historically been dominated by plant-based drugs (marijuana, heroin, cocaine) and synthetic substances (methamphetamine), the last decade has seen a shift towards more mainstream adoption of synthetic opioids like fentanyl and its analogs – i.e. substances similar in chemical structure to fentanyl, but are more difficult to detect with routine toxicology testing. This is due in large part to the fact that these synthetic options are generally cheaper, easier, and quicker to produce. In June, Senator Tim Scott (D-SC) introduced the FEND Off Fentanyl Act, a bill would direct Treasury’s Financial Crimes Enforcement Network to issue guidance on flagging payments linked to the trafficking of fentanyl and other synthetic opioids in suspicious activity reports, and then prioritize any SARs filed on the activity for review.2 The sheer addition of the Act to the Senate version of the Fiscal Year 2024’s NDAA is a critical step that brings it closer to becoming law, and one that could bring about a lasting impact across the country and arguably beyond.
- “Warren, Marshall, Manchin, Graham Renew Push for Bipartisan Legislation to Crack down on Crypto’s Use in Money Laundering, Drug Trafficking, and Financing of Terrorism and Rogue Nations: U.S. Senator Elizabeth Warren of Massachusetts.” Elizabeth Warren, 28 July 2023.
- Williams, Fred. “US Senate Passes Cryptocurrency AML Legislation, House Diverges.” Money Laundering, 1 Aug. 2023.