US Lawmakers Try Familiar Tactics To Impose Sweeping Crypto Surveillance Regime

Immediately after Hamas’ terrorist attack on Israeli civilians, crypto’s biggest opponents in Congress cited dubious, and since debunked, claims about the group’s financing to introduce legislation that would impose broad and counterproductive Anti-Money Laundering (AML) rules on crypto. One of the bill’s proponents, Senator Elizabeth Warren, had previously sought to exploit turmoil in the crypto market following the collapse of exchange FTX in order to advance her efforts to end personal financial privacy at every level, claiming at the time that “crypto has become the preferred tool for terrorists, for ransomware gangs, for drug dealers, and for rogue states that want to launder money.”

Objectively, this statement is largely nonsense. Numerous studies and reports, including from the US Treasury Department, find that crypto does not amount to a significant source of money laundering or terrorist financing, coming nowhere close to the total transactions conducted in fiat currency such as the US dollar. But fearmongering about illicit activity, particularly that of terrorism, is a tried-and-true tactic of politicians seeking to undermine or eliminate personal freedoms. That’s precisely how the current surveillance regime was imposed on traditional finance.

Banks that operate in or interact with the United States are compelled to act as de facto law enforcement agents by monitoring and reporting on the activity of clients. The sweeping legal and regulatory regime, consisting of AML and other rules stemming from the Bank Secrecy Act, impose significant and costly burdens on financial institutions, while undermining individual privacy rights, and yet have produced no appreciable benefit for crime fighting.

The reality is that AML regulations are as costly as they are ineffective. They are expensive, intrusive, and disproportionately harm poor people according to the World Bank, yet do not reduce crime. This is why financial crime expert Ronald Pol concluded that global anti-money laundering efforts might just be “the world’s least effective policy experiment.”

Unfortunately, it’s an experiment that threatens to entangle one of the most significant innovations in recent decades.

The fundamental problem is that cryptocurrency exists in large part to escape these kinds of invasive controls, not for the sake of wrongdoing, but for convenience and efficiency. Contrary to claims from the likes of Senator Warren, side-stepping the rigid traditional financial system through the use of crypto serves many legitimate purposes, particularly for transactions where regulations are the most stifling, like those that cross national borders.

For migrant workers, crypto means a faster and more reliable means to send remittances to family. For refugees forced to hastily flee a war like Russia’s invasion of Ukraine, crypto means the ability to carry life-saving funds on something as small as a thumb drive. There are countless other such examples.

There’s nothing suspicious or untoward about those who want to escape the incredibly burdensome rules and regulations that add multitudes of unnecessary complexity to simple financial tasks.

Unfortunately, there’s no shortage of proposals to impose the failed surveillance policies in traditional finance on an industry built around technology that didn’t exist – wasn’t even contemplated – when those policies were crafted. In a recent letter, for instance, the US Treasury Department recommended that “DeFi service providers, noncustodial wallet providers, miners, and validators” be treated the same as banks.

It would be bad enough for the invasive surveillance regime to fully envelope crypto, but placing burdens on actors that bear no reasonable resemblance to financial institutions, and for which they have zero capability of compliance, would effectively ban Americans, and citizens of any nation foolish enough to succumb to the inevitable pressure tactics for others to follow suit, from the industry. As Landon Zinda of Coin Center notes, “many of the entities Treasury proposes regulating as financial institutions are engaged merely in the publication of software and are not in any trusted or agency-like relationship with the users of their software.”

We’ve seen this sort of overreach before. It wasn’t enough that Tornado Cash, a smart contract which mixed Ethereum transactions to prevent tracking, was blacklisted by the US Treasury Department as an alleged national security threat – it’s disturbingly telling that the mere exercise of privacy is enough to be considered threatening to the state – but Dutch law enforcement went as far as to prosecute (read: persecute) the contract’s coder.

There is a fundamental conflict between the public’s frequently demonstrated demand for privacy and the demands of law enforcement to peek into every financial transaction on a whim for the sake of combatting money laundering and terrorism. In traditional finance, that conflict has been decidedly won by governments. While there are glimmers of hope in recent media coverage of collateral damage in the form of ever more frequent closures of the bank accounts of innocents, dismantling the deeply entrenched surveillance system is unlikely even despite its demonstrated ineffectiveness.

Crypto has offered an alternative, with a ‘trustless’ system where decentralisation empowers the individual to self-custody assets and engage in safe transactions without need for a third-party. That makes it a threat to both traditional finance and the perceived interests of law enforcement, which is distinct in important ways from being a threat to law or the law-abiding. Efforts to impose controls on crypto thus have backing from both of those powerful interests and makes them unlikely to stop any time soon.

The financial regime created by the political class no longer serves the needs of consumers whose interests are given lower priority, if considered at all, than the desires of law enforcement to be fully unencumbered in their quest to catch criminals – a task for which their preferred policies have nonetheless proven unhelpful.

The US government is drowning in mandated reports from banks, the vast majority of which lead to no law enforcement action. Millions of innocent Americans are spied on without purpose, and growing numbers are punished with account closures and other burdens as cautious banks seek to avoid regulatory scrutiny.

It’s said that while history may not repeat itself, it often rhymes. We see that unfolding now as US politicians target the cryptocurrency industry with a familiar playbook. However, an industry with decentralisation at its core may prove much harder to tame. US politicians can’t defeat crypto, but they could significantly impair the ability of their own citizens to benefit from the technology.

Brian Garst
Brian Garst is the Vice President for the Center for Freedom and Prosperity, which works to promote tax competition, financial privacy and fiscal sovereignty.