The Breakdown - The Anti-Crypto Army Attacks via AML!

Episode Date: December 13, 2023

Elizabeth Warren's assault on the industry under the guise of cracking down on crime continues. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Tuesday, December 12th, and today we are talking about the latest attack from the anti-crypto army. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends. Well, we are starting today with a thread from friend of the show Alex Thorne, the head of firm-wide research at Galaxy Digital, who was writing yesterday about our main topic, the latest

salvo from Elizabeth Warren's anti-crypto army. Alex writes, this bill from Senator Warren massively expands the Bank Secrecy Act, imposing bank-like K-YC rules on non-custodial software products, including free and open-source software, and it's gaining steam with five new co-sponsors. This would be disastrous for Bitcoin and crypto in the USA. Specifically, the bill calls for dramatically expanding the Bank Secrecy Act to cover open source software, including non-custodial wallets, miners, and validating nodes. As non-custodial and decentralized software cannot plausibly perform centralized compliance functions, Warren's bill would effectively outlaw crypto in America, take miners or validators as an example. These

entities passively add transaction data to the blockchain. While they can exclude known-sanctioned addresses, they are structurally incapable of knowing the identity of every user. It would be impossible for miners or validators to perform K-YC on every public blockchain transaction. Indeed, it cannot even be said that these entities even have a customer to know. Warren's bill also seeks to impose the Bank Secrecy Act on non-custodial wallets, many of which are free and open source. To be clear, there is no such thing as unhosted digital wallets. These are just wallets, requiring non-custodial open source software to perform bank-like compliance is the big attack. Bitcoin's enemies have always threatened. It's impossible for Bitcoin core, for example, to comply with

this, so it amounts to an effective ban of Bitcoin in the USA. These rules effectively ban crypto in America, and they fundamentally undermine the core innovation itself, P-to-P digital cash. If you believe humans should have the right to transact without an intermediary, you must oppose this bill. Call your senators, this is the big fight. So today we are going to dig into exactly what this bill is, and more, as Alex has pointed out, around why it is such a dramatic problem. So, getting a little bit more detail, Senator Elizabeth Warren has added more support for her crypto anti-money laundering bill in the Senate. Now, last week, of course, ended with Warren putting illicit finance in crypto front and center in Washington. During a Senate hearing, Warren

set up J.P. Morgan CEO, Jamie Diamond, to state that illicit finance is the only use case for crypto. And if he were the government, he'd quote-unquote close it down. Warren followed this up with an appearance on CNBC, where she claimed that crypto thefts fund half of the North Korean nuclear missile program. Now, this is something that I talked a lot about on my Friday show last week with Scott Melker. The claim that she's drawing from is, one, not an on-chain analytics firm or anything like that, but just someone who's aggregating the total amount of value that has been lost to hacks assumed to be from or sponsored by the state of North Korea, and compares that total to the total amount that North Korea spends on its nuclear weapons program. There is no evidence

given to say that those illicit funds are being used for the nuclear weapons program, it's simply a comparison of the total aggregate amounts and amounts to about 45% of the total that North Korea spends on that nuclear missile program. That's not to say that hacked crypto isn't funding that, but just to point out that when Warren is saying, crypto is being used to fund half of North Korea's nuclear missile program, there's simply no evidence actually being offered that that's the case. Now, following last week's display, Warren has announced five Democrat senators or joining the anti-crypto army as coast, sponsors for her digital asset anti-money laundering bill. Senators Warnock, Butler, and Van Hollen

all sit on the Senate Banking Committee, which will be tasked with marking up the draft bill before it goes to a vote. Senators Hickenlooper and Lujan add additional support in the broader Senate. Van Hollen explained his support for the bill in a statement, saying, the lack of basic legal safeguards around crypto opens up Americans to countless risks. What's more, crypto has become the payment method of choice for terrorist organizations, drug cartels, and authoritarian regimes in order to fund their illicit activities. Crypto should be governed by the same transparent rules as traditional banks to protect Americans and help ensure it isn't used to facilitate illegal behavior by criminal enterprises and rogue nations.

End quote. So, this bill has been presented as Warren's elixir for curing the age-old problem of illicit finance. Through countless Senate hearings and public comments, Warren has boiled down the massively complex issue of terrorist financing and sanctions evasion to a problem that is unique to crypto, and wouldn't you know it, she has just the bill to solve it? The bill also got a shot in the arm last month when Treasury officials asked specifically for some of the expanded power contemplated by the bill. Now, notably, this bill is much more broad than the alternative proposal put forward by a group of national security-focused lawmakers.

Warren's bill would expand the Bank Secrecy Act to cover the crypto industry. And by cover the crypto industry, we mean everything in the industry, from large exchanges right on down to tiny self-hosted wallet startups and at-home validators that would be saddled with new reporting requirements. Basically, everyone involved in any sort of crypto transaction would be required to submit suspicious activity reports similar to banks and financial institutions. The issue, as Alex Thorne pointed out, is that much of the crypto infrastructure doesn't have access to that level of user data to say nothing of the resources to stand up massive compliance departments.

Critics have said this approach to tackling the problem of illicit finance would likely cripple the domestic industry. Other more cynical folks have said that that's exactly the point. Now, while industry figures are unified on the opinion that Warren's choice of solution is unworkable, there is broad recognition that the current status quo isn't going to stick around and that something needs to be done and that there will be some new set of rules around illicit finance and crypto. Patrick McHenry, the chairman of the House Financial Services Committee, said recently, we want to identify workable policies for Bank Secrecy Act AML as it relates to digital assets. We want to make sure that the regime works and is effective, and I think we need

a broader policy effort to make that work. Unfortunately, McHenry recently announced that he would be retiring from Congress at the end of next year and is rumored to be looking to make deals to advance a pair of permissive crypto-regulation bills in the House. Warren's lawmaking efforts in the Senate will ultimately go nowhere if she can't garner support in the Republican-controlled House. That means that McHenry will likely act as the final negotiation partner before any legislation can move forward. Now, notably, Warren's bill was first introduced way back in December of last year. From the start, it was already clear how much of an overreach the bill was, more focused on domestic surveillance than national security. Coin senders Peter

van Falkenberg wrote at the time, we do not believe this bill is mistakenly drafted. In this case, the legislation is clear on its face. The drafters intend to impose permissioning regulation upon software developers and node operators, as well as a long list of similar non-custodial entities. In other words, the bill has been deliberately crafted to make permissionless blockchains unavailable to Americans

by forcing all validators and developers to these networks to gate and surveil their infrastructure. The intended result is to forbid Americans from having any technological guarantees of personal privacy or individual agency when making transactions online, irrespective of whether those transactions have anything to do with crime. To the extent cryptocurrencies could even continue to exist in a world where this bill becomes law, Americans' ability to use them would be limited to a fully permissioned and surveilled

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Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVIB.D.A. Cracken. Now, frankly, this intention that Van Valkenberg is talking about shines through in the way that Warren has presented her bill under an ever-changing rationale. In October, for example, the bill was necessary to combat the funding of Hamas in the wake of tragic events of that month. Once the data backing claims that Palestinian terrorist groups received $130 million in crypto funding had been discredited and publicly disavowed, Warren changed tack. Now she is focused on the threat of North Korea, and the equally questionable claims

that half of their nuclear weapons program is funded directly by crypto hacks. Warren's underlying aim to hinder the U.S. crypto industry is made clear in the way she talks about the bill. In yesterday's press release, she said, our bipartisan bill is the toughest proposal on the table cracking down on crypto's illicit use and giving regulators more tools in their toolbox. In other words, Warren is not promoting the bill as the most effective, the best at getting the intention job done without disrupting an industry. She's promoting it as the toughest crackdown. Now the crypto industry, as you might imagine, is roused.

Dan Held wrote, U.S. Senator Warren lied about crypto being used by Hamas and North Korea. Now she's sponsoring a bill that will effectively ban crypto in the United States. Never forget that these people hate you. We will fight back. We will win. Niraj Agrawal from Coin Center writes, The Digital Asset Anti-Money Laundering Act is a direct attack on technological progress and also a direct attack on personal privacy and autonomy.

Make no mistake. While proposed as a solution to potential money laundering and terrorist financing, the bill is in fact a repudiation of liberal values and a move towards the type of surveillance and control prized by authoritarian like Vladimir Putin, Xi Jinping, and Kim Jong-un. Unfortunately, the bill cannot be improved. It can only be opposed in its entirety. Coin Center will do everything in its power to protect the rights of Americans and defeat this unwarranted attack on individual privacy and autonomy. Lawyer Burdenal's rights, without going into the details of this particular bill, as someone with

one foot in data privacy and one foot in crypto and financial regulations, it is legitimately insane how much we as a citizenry have accepted warrantless surveillance and the obligatory dissemination of highly sensitive financial information to third parties in an age of zero-day exploits and daily data breaches. A majority of the U.S. population's social security numbers and bank account details wouldn't be available for purchase on the dark web for the cost of a cup of coffee if those details weren't required for even minor daily transactions. I would bet if there was an empirical study of increased costs borne by citizens for forced third-party monitoring and damage done to those citizens due to criminals having access to information that wouldn't have ever been

collected in the 1970s versus criminals captured as a result of these forced information disclosures, the former would vastly outweigh the latter. It's past time for a hard reset on how we view privacy. Wright's bankless co-host Ryan Schott Adams, they've been unmasked. Elizabeth Warren wants a totalitarian financial surveillance state. The bill she's proposing with Senator Marshall makes it illegal for citizens to run an Ethereum validator or a defy front end. The darkest path for America, and it has bipartisan support. Now, one thing that a lot of people have noted, is that Warren does not have a great track record when it comes to actually passing legislation. However, as Paradigm Government Affairs lead Alexander Greve points out, that's not exactly the

point. He writes, it's seen a lot of bad takes on the Warren bill. One, criticize the merits or lack thereof of the bill. Don't resort to add hominem attacks against the author. It undercuts reasoned opposition that other members might listen to. Take the high road even if our opponents won't. Editor's note, this is very true, but also oh so hard when it comes to a continuous opponent like Elizabeth Warren. But Alexander is right, listen to him, and go on to number two. Quote, this bill isn't going to pass, but parts of it, verbatim text or thematic points, could be incorporated into other bills. Three, Warren doesn't actually try to pass laws herself. She tries to shift the Overton window on a given subject through the discussion of legislation. Result of

her push, more discussion of crypto and illicit finance, more members taking a negative stance towards crypto. Four, this is an opportunity for the crypto community. Think this bill is a terrible and unworkable approach, and it absolutely is, come up with constructive ideas that could actually tamp down on illicit finance while preserving crypto's openness and share them with pro-crypto offices. They're looking for ways to push back on this bill too. Give them the ammo to do so. Now, what's so hard about every battle that we've had to fight on this front is that as much as Alexander's advice to give productive ideas makes sense on the face of it and resonates with a reasonable person who wants to see progress on this space, it's very difficult.

when these bills aren't being introduced in good faith. Ever since the first fight we had around this with the infrastructure bill a few years ago, it's been clear that the playbook for crypto's opponents is to say something that seems, again, on the face of it, very reasonable. Hey, shouldn't crypto have to behave by the same rules that banks and other financial intermediaries do? While at the same time, radically redefining what a financial intermediary is, in such a way that definitionally it means that crypto can exist in America if those rules were to go into effect. It's a catch-22 that's meant to seem like an accident, but actually isn't accidental at all.

It is at this point very clearly an extremely explicit strategy to give the U.S. government as much power as it sees fit to bring to heal any type of actor within the crypto industry. The pushback from more quote-unquote reasonable parties around these things has always been, no, of course, we're not actually trying to cut off access to crypto entirely, no, of course we won't actually enforce that as such, and yet still they want the power to be able to define anyone, including a node operator or a self-hosted wallet as an intermediary, just so that they could if they chose to. And so what is left for the crypto industry? But to assume that it's actually just an out-and-out attempt at control. This is why counter legislation,

such as that introduced by Tom Emmer, which tries to make it clear that these categories of actors are not financial intermediaries is so important. So I don't know. Maybe the quote-unquote compromise is to get mass support for that bill, which makes it clear that node operators and self-hosted wallets and all of these other non-customer information having entities can't provide customer information if we're also going to support this type of bill, but I don't think that's happening anytime soon. There's a reason that crypto is for crime has been the most enduring fud in the industry. For one, as small as the percentages are of crypto that actually goes to crime as shown by on-chain analysts like chain aliasis, when it does go to crime, it is very splashy,

very headline-worthy, very notable. Two, it is a long-standing tradition, especially recently in the U.S. to use the fear of crime, particularly international terroristic type crime, as the crowbar with which to pry open the door to more power. It's no surprise at all that that same toolkit would be applied to crypto. But as Alex said right at the beginning, it's not something we can countenance. It is something we need to push back on. And so hopefully you feel a little bit more informed than you did coming into this show. I will certainly keep you posted around any important developments as they happen. Until next time, be safe and take care of each other. Peace.