Casey Wagner

Sens. Elizabeth Warren and Roger Marshall have recruited nine new Democratic co-sponsors for their Digital Asset Anti-Money Laundering Act of 2023, a bill some industry advocates say could effectively kill crypto in the US. 



Two committee heads joined the effort and signed onto the legislation: Homeland Security Chair Gary Peters, D-Mich., and Judiciary Chair Dick Durbin, D-Ill. The other new co-sponsors are Sens. Tina Smith, D-Minn.; Angus King, I-Maine; Jeanne Shaheen, D-N.H.; Bob Casey, D-Pa.; Richard Blumenthal, D-Conn.; Michael Bennet, D-Colo.; and Catherine Cortez Masto, D-Nev.



Warren and Marshall reintroduced the <a href="https://www.warren.senate.gov/imo/media/doc/Digital%20Asset%20Anti-Money%20Laundering%20Act%20of%202023.pdf">bill</a> last month after an <a href="https://blockworks.co/news/dueling-crypto-anti-money-laundering-bills">initial version of the text was unsuccessful last congressional session</a>.&nbsp;



The legislation aims to bring “crypto participants” — defined in the bill as wallet providers, miners and validators — under compliance requirements for financial institutions. If the bill passes, these entities will have to file reports for any transactions exceeding $10,000 and report any activity that could signify money laundering or tax evasion.&nbsp;



Warren called the legislation “a bill that would close loopholes in anti-money laundering rules, cutting off drug suppliers and cartels from using crypto to facilitate their illegal business,” she said in a July <a href="https://www.warren.senate.gov/newsroom/press-releases/warren-marshall-manchin-graham-renew-push-for-bipartisan-legislation-to-crack-down-on-cryptos-use-in-money-laundering-drug-trafficking-and-financing-of-terrorism-and-rogue-nations#:~:text=In%20May%202023%2C%20a%20hearing,anti%2Dmoney%20laundering%20rules%2C%20cutting">statement</a>.&nbsp;



The bill’s adversaries argue that these requirements are too strict and difficult to impose on these parties.&nbsp;



“The bill effectively removes validators and miners from the US to the detriment of consumer safety and security,” Cody Carbone, vice president of policy at the Chamber of Digital Commerce said.&nbsp;



Also in the Senate is the Crypto Asset National Security Enhancement Act of 2023, <a href="https://blockworks.co/news/bipartisan-bill-defi-project-controllers">introduced in July</a> and similar to Warren and Marshall’s text. The Crypto Asset National Security Enhancement Act of 2023, as of now, has more bipartisan support. It is sponsored by Sens. Jack Reed, D-R.I.; Mark Warner, D-Va.; Mike Rounds, R-S.D.; and Mitt Romney, R-Utah.&nbsp;



“Luckily, [the Digital Asset Anti-Money Laundering Act of 2023] still remains a largely partisan effort and does not have support to be enacted,” Carbone added.



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Senate money laundering bills continue to duel, Dems get 9 new sponsors

Shalini Nagarajan

Coinbase has notified a segment of its Indian user base about a possible service suspension, leading to worries that the exchange may shut down operations in India.



However, the company emphasized that this warning was specifically sent to Indian users residing abroad who no longer align with the exchange&#8217;s criteria.



According to Coinbase&#8217;s official site, its services are not currently offered in India.



“It is possible that during the course of a recent routine review of our systems, some accounts may have been identified that no longer meet our updated standards,” a Coinbase spokesperson told Blockworks on Monday, declining to comment on what the new standards are.



“We will therefore be disabling these accounts, and allow customers to update their information at a later date.”



After The Economic Times, an Indian media outlet <a href="https://economictimes.indiatimes.com/tech/technology/coinbase-is-stopping-all-services-for-indian-users/articleshow/103558801.cms">reported</a> on Sept. 11 that Coinbase would end its services for registered users in India — a claim that was mostly inaccurate — the company clarified the situation.



A spokesperson from Coinbase added that impacted users either withdraw their balances or move them to different crypto platforms until Sept. 25.



Coinbase requires users to meet certain compliance standards, mainly based on know-your-customer (<a href="https://blockworks.co/tag/kyc">KYC</a>) and anti-money laundering (<a href="https://blockworks.co/tag/aml">AML</a>) laws, which include ID verification and sometimes proof of residence. The exchange may also have undisclosed internal criteria.



A source familiar with the matter told Blockworks that <a href="https://blockworks.co/tag/coinbase">Coinbase</a> is not halting services in India. They clarified that the exchange&#8217;s email was specifically directed at Indian users accessing the platform from outside the country.



Earlier this year, India&#8217;s finance ministry <a href="https://blockworks.co/news/india-crypto-kyc-aml">declared</a> that AML measures are now applicable to cryptocurrency companies, mandating their compliance with the broader financial sector.&nbsp;



Crypto companies in India are now obligated to provide KYC information upon request by authorities.&nbsp;



Additionally, crypto businesses are legally obligated to report any suspicious transactions to India&#8217;s Financial Intelligence Unit, ensuring greater accountability to the government.



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Coinbase deactivates select Indian accounts over standard requirements

Bill Hughes

The EU’s new anti-money laundering regulation risks upending their current lead in crypto rulemaking.



The lead —&nbsp;largely due to the recently passed Markets in Crypto Asset (MiCA) legislation —&nbsp;generally takes the right path by focusing on crypto asset issuers and intermediaries. It smartly exercises restraint with regard to regulating new DeFi protocols, pseudo-entities such as DAOs, and other novel features of the peer-to-peer crypto network space.



This heavily-debated strategy makes sense, according to an overwhelming majority of opinion, because the peer-to-peer environment, and DeFi especially, requires more study and thought before regulation is prescribed.&nbsp;



But the new anti-money laundering regulation, currently undergoing final negotiations, unfortunately looks like it is going to take a different approach.



This new regulation aims to reduce risks of money laundering, terrorist financing, and other illicit finance generally. A worthy aim, no doubt.&nbsp;



The problem is that the current draft of these AML laws would meaningfully undercut the future potential for blockchain in the EU.



These AML provisions are akin to taking a car, removing its engine, and fastening a team of horses to prevent speeding.



<h2 class="wp-block-heading">Mandating intermediaries</h2>



It is striking how antithetical this approach is to everything the EU is trying to accomplish through <a href="https://blockworks.co/news/mica-could-get-crypto-banked" target="_blank" rel="noreferrer noopener">MiCA</a>.&nbsp;&nbsp;&nbsp;



Simply said, the Parliament’s proposed regulation would greatly reduce the usefulness of blockchain for EU businesses.&nbsp;&nbsp;



It would limit the amount a business can spend or receive for goods and services using peer-to-peer crypto to 1,000 euros — unless either a crypto asset service provider intermediates the transaction or the counterparty to the business “can be identified.”&nbsp;



This restriction severely hampers commercial efficiency gains and is an unforced error for the EU economically.&nbsp;



The new legislation dramatically expands the scope of AML compliance to basically every business in the EU, not just those that arguably present risks of money laundering.&nbsp;&nbsp;



Such compliance would require all sorts of new types of businesses that want to accept crypto payments to follow know-your-customer procedures that are incredibly expensive and time consuming, as well as burdensome and privacy-invading for customers.&nbsp;



Requiring intermediaries for blockchain-based commerce will also erase any efficiencies gained by the technology. One of the clearest value propositions that peer-to-peer blockchain transactions present is to allow every business —&nbsp;not just individuals — to avoid a toll-taking, time-wasting intermediary.&nbsp;



Having an intermediary serve as recordkeeper is redundant: The blockchain itself serves this purpose.&nbsp;



Blockchain analytics and the chain’s immutable ledger already tells you almost everything you need to know to track funds across the network. It is even becoming more widely recognized that unhosted wallets are not all that private, as their activity history is a matter of public record.&nbsp;&nbsp;



There are many other practical problems with this mandatory intermediation that would push businesses away from peer-to-peer transactions.&nbsp;&nbsp;



Exchange rates would cause some transactions to be lawful when agreed to — but unlawful when executed. A cap on payment in crypto would also require multiple payment methods depending on the amount. Unsolicited customer payments above the prescribed cap could not be stopped or avoided by a business because of how transactions work on the network.&nbsp;



These burdens and risks on both businesses and customers would make transacting peer-to-peer an unacceptable liability for many businesses.



<h2 class="wp-block-heading">Front-running MiCA 2</h2>



The Parliament’s proposed AMLR is unworkable for crypto in at least one more respect that requires attention, and that is its attempt to directly regulate DAOs and DeFi.&nbsp;&nbsp;



Regulating DeFi right now would be a troubling change.&nbsp;



The EU has already decided to address major questions about DAOs and DeFi in what has been called “MiCA 2,” which would be drafted after extensive study over the course of many months. A proposed AMLR provision obligating DAOs and DeFi protocols to comply with AML obligations would frontrun that work.&nbsp;&nbsp;&nbsp;



How the AMLR would purportedly regulate these areas is also rife with problems.&nbsp;



A threshold matter is that the AMLR does not even define “DAOs” or “DeFi” protocols. It just requires such entities to comply if they are engaged in “crypto-asset services” and are controlled “directly or indirectly” by identifiable natural persons or legal entities.



But the AMLR does not adequately explain what “identifiable” or “indirect control” means, and what constitutes a “crypto asset service” remains concerningly vague.&nbsp;



This provision runs the risk of requiring DAOs and protocols that pose absolutely no threat of money laundering to implement burdensome AML programs. As just one example, it sets the stage for the <a href="https://blockworks.co/news/linksdao-to-buy-scottish-golf-course" target="_blank" rel="noreferrer noopener">golfing DAO</a> that acquires golf courses and offers golfing perks to surveil its golf enthusiast members.&nbsp;



Perhaps the most troubling issue is that the scope of these obligations does not appear to be limited geographically.&nbsp;&nbsp;



Consider DAOs and DeFi protocols from far-flung regions that have a minimal EU footprint.&nbsp; Must they all comply with this requirement?&nbsp; As far as anyone can tell, one EU-based DAO member or DeFi protocol participant may be enough to require compliance.



<h2 class="wp-block-heading">The Trilogues can fix these problems&nbsp;</h2>



Although they have many competing priorities during the upcoming trilogues, the EU Council, Commission, and Parliament (also known as the Trilogues) should dedicate meaningful energy to debating these issues.&nbsp;



After all views are shared, it is the simplest and best option to not include these provisions in the final regulation. Instead, both Parliament and Council should continue to engage with the Commission and industry to develop a regulatory framework that does not unduly inhibit the benefits of blockchain networks.



When you look beyond digital assets as an investment class and to the underlying technology of peer-to-peer blockchain, you see that it is young and that its future globally is bright.&nbsp;



By taking a step back and giving parties the time to find correct, consensus-driven answers, the EU would ensure that its recent policy gains are not inadvertently squandered and would further consolidate its position as the leading jurisdiction in the peer-to-peer blockchain space.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Bill Hughes is the Senior Counsel and Director of Global Regulatory Matters for ConsenSys, the leading Ethereum blockchain software company. Bill focuses on the diverse and ever evolving crypto global regulatory landscape, and the legal and public policy issues with which ConsenSys and the broader crypto ecosystem is grappling. Bill joined ConsenSys after serving as an Associate Deputy Attorney General at the Department of Justice, where he managed, among other things, the Department’s work on prospective regulations, legislative proposals, and policies across a broad spectrum of legal and operational issues. He worked closely with the White House and other federal agencies on regulatory and policy initiatives and coordinated the DOJ&#8217;s law enforcement response to COVID-19-related consumer fraud and money laundering. Bill began his career as a clerk for a federal judge in New York and litigating with the firm of Sullivan &amp; Cromwell LLP. Bill received his JD from the University of Virginia School of Law and his BA from Vanderbilt University.</div>


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The EU’s Anti-Money Laundering Strategy Is a Mistake

Sebastian Sinclair

Japan is expected to introduce new anti-money laundering measures designed to better track crypto transactions as it continues to move in lockstep with other nations across the region.



The country’s cabinet intends to implement the new measures come June 1, which would see the enforcement of what’s known as the travel rule, <a href="https://japantoday.com/category/crime/japan-to-enforce-crypto-anti-money-laundering-steps-from-june" target="_blank" rel="noreferrer noopener">Japan Today</a> reported on Tuesday.



It requires financial institutions to pass certain information between them, with the goal of transaction traceability — to prevent, detect and prosecute money laundering and other financial crimes.&nbsp;



It also requires the names, addresses and other financially identifiable data to be included in each step of a given transaction. The rule was later adapted for virtual asset service providers.



An intergovernmental organization, known as the Financial Action Task Force (FATF) — responsible for enforcing the rule — found Japan’s previous attempt at adoption in 2021 to be deficient.



Japan has continued to ratchet up its standards on crypto regulation for roughly two years in response to criticisms levied against it. Those criticisms also included the FATF’s public shaming of Japan’s &#8220;<a href="https://asia.nikkei.com/Business/Finance/Money-laundering-watchdog-gives-Japan-a-failing-grade" target="_blank" rel="noreferrer noopener">inadequate progress</a>&#8221; on the issue when it came to digital assets.



As a result, a significant investor protection bill was approved by the <a href="https://blockworks.co/news/japan-passes-legal-framework-for-stablecoins">Japanese legislature</a> in June of last year, establishing a legal structure for stablecoins and defining them as digital currencies.&nbsp;



Under the law, the issuance of stablecoins is exclusively reserved for recognized financial entities, including registered banks, money transfer agencies, and trust companies.



Around the same time, the country also sought changes to its <a href="https://blockworks.co/news/japan-to-revise-foreign-exchange-law-targeting-crypto-over-sanctions-evasion">Foreign Exchange Act</a> in a bid to clamp down on crypto transactions thought to be making their way into the hands of sanctioned Russian nationalists.



Coincidentally, as Japan strengthens its AML rules for crypto, Hong Kong is anticipated to <a href="https://blockworks.co/news/hong-kong-to-lift-crypto-ban">ease restrictions</a> on virtual asset providers previously barred from serving retail crypto investors.



Though, like Japan and much of the regions across Asia, Hong Kong and others continue to advance more aggressive policies in the wake of a brutal year for digital assets and the demise of FTX — a particular <a href="https://www.bbc.com/news/business-63898729" target="_blank" rel="noreferrer noopener">sore spot</a> for <a href="https://blockworks.co/tag/singapore" target="_blank" rel="noreferrer noopener">Singapore</a>.



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Japan to Tighten Crypto Anti-Money Laundering Rules Next Month

<div id="highlights-block_62ea1fe19f59a" class="highlights">
 <ul>
 <li>Robinhood didn’t put up a dedicated phone number for consumer complaints, violating customer safeguard measures</li>
 <li>The settlement with Robinhood is the regulator’s first crypto enforcement</li>
 </ul>
 
</div>



New York’s financial regulator has imposed a $30 million penalty on <a href="https://cms.blockworks.co/tag/robinhood/" target="_blank" rel="noreferrer noopener">Robinhood’s</a> cryptocurrency division for failing to devote sufficient resources to its compliance programs.



The damages imposed were due to significant violations of anti-money laundering, cybersecurity and investor protection regulations, the New York State Department of Financial Services (NYFDS) <a href="https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202208021" target="_blank" rel="noreferrer noopener">said</a> on Tuesday.



On top of the penalty, Robinhood Crypto has to retain an independent consultant to evaluate its compliance with the regulator’s corrective efforts. This marks the NYDFS’ first crypto-related enforcement action.&nbsp;



Upon investigation, it found the crypto arm was inadequately staffed and failed to transition from a manual transaction monitoring system to one more appropriate for the firm’s size and transaction volumes. The cybersecurity program, meanwhile, didn’t address operational risks and didn’t fully comply with the department’s regulations, the financial watchdog said.&nbsp;



“As its business grew, Robinhood Crypto failed to invest the proper resources and attention to develop and maintain a culture of compliance—a failure that resulted in significant violations of the department’s anti-money laundering and cybersecurity regulations,” Adrienne Harris, superintendent of financial services, said in a statement.



The regulator alleged that despite flaws in the trading app’s programs, Robinhood certified compliance with the department in violation of the law. It also disregarded a consumer protection requirement by failing to put up a distinct and dedicated phone number on its website for complaints.



Not all legal experts are convinced that the regulatory action is in the best interest of consumers. Collins Belton, Managing Partner at Brookwood P.C., noted that one of NYDFS&#8217; complaints is that Robinhood exercised compliance resources across company divisions rather than maintaining an independent team focused on crypto.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I’m not sure forcing them to staff an identical compliance unit that largely does the same thing it’s existing units does is a win for consumer protection or efficiency. This seems like adding a lot of cost for something that maybe *would* be better as an enterprise wide program&mdash; Collins Belton (@collins_belton) <a href="https://twitter.com/collins_belton/status/1554478274381844487?ref_src=twsrc%5Etfw">August 2, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Robinhood <a href="https://www.sec.gov/Archives/edgar/data/0001783879/000162828021013986/robinhoods-1a1.htm" target="_blank" rel="noreferrer noopener">said</a> in July last year that it expected to pay a $30 million fine to the NYDFS and would engage a monitor. It also warned international expansion could come with increased compliance costs. 



&#8220;We are pleased the settlement in principle reached last year and previously disclosed in our public filings is now final,&#8221; Cheryl Crumpton, Robinhood&#8217;s associate general counsel of litigation and regulatory enforcement, said in an emailed statement. 



&#8220;We have made significant progress building industry-leading legal, compliance, and cybersecurity programs, and will continue to prioritize this work to best serve our customers,&#8221; she added.



The firm <a href="https://cms.blockworks.co/robinhood-lays-off-23-of-staff-a-day-before-earnings-report/" target="_blank" rel="noreferrer noopener">slashed 23%</a> of its workforce this week, but the impact on its crypto trading division isn’t clear.



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Regulators Ring-up Robinhood for $30M Fine

Ben Strack

<div id="highlights-block_6245ad3087822" class="highlights">
 <ul>
 <li>The proposal called for crypto firms to reveal info about the sender and receiver of crypto transfers</li>
 <li>Coinbase executive said the measures would unleash a surveillance regime on exchanges, stifle innovation and undermine self-hosted wallets</li>
 </ul>
 
</div>



Two European Parliament committees have voted in favor of measures requiring crypto companies to collect and share data on certain transactions.



The Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs <a href="https://www.europarl.europa.eu/cmsdata/246608/ECON-LIBE%20Voting%20Session%20-%2031%20March%20(amendments)%20RESULTS.pdf" target="_blank" rel="noreferrer noopener">voted</a> to expand anti-money laundering requirements in the crypto space.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BREAKING: The ECON &amp; LIBE committees of the EU Parliament voted in favor of the FTR compromises D &amp; E that crack down on “unhosted” wallets. Entire regulation draft to be voted on later today, but will certainly go through. Breakdown of the vote &amp; more updates in this thread.&mdash; Patrick Hansen (@paddi_hansen) <a href="https://twitter.com/paddi_hansen/status/1509536318585454597?ref_src=twsrc%5Etfw">March 31, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Spokespeople for the committees did not immediately return a request for comment.



European Union ambassadors <a href="https://www.consilium.europa.eu/en/press/press-releases/2021/12/01/anti-money-laundering-council-agrees-its-negotiating-mandate-on-transparency-of-crypto-asset-transfers/" target="_blank" rel="noreferrer noopener">agreed on a mandate</a> in December to negotiate with the European Parliament on a proposal to extend the scope of fund transfer rules to include certain cryptoassets.&nbsp;



The proposal aimed to require crypto service providers, such as exchanges, to collect and share information about the sender and beneficiary of these asset transfers — a practice that payment service providers currently do for wire transfers.



Legislators hoped to ensure traceability of transfers between crypto service providers and so-called “unhosted wallets” so as to be able to better identify possible suspicious transactions and potentially block them.



An unhosted wallet is a term used by the <a href="https://www.fatf-gafi.org/" target="_blank" rel="noreferrer noopener">Financial Action Task Force</a> and <a href="https://www.fincen.gov/" target="_blank" rel="noreferrer noopener">Financial Crimes Enforcement Network</a> and adopted by other government and regulatory bodies. It means that an individual maintains their own private keys — known in the crypto industry as a “wallet” or “self-hosted wallet” to delineate between assets controlled by a financial institution acting as a custodian and an individual.



Requirements to check if the information on the payer or payee is accurate is to be imposed on crypto transfers that exceed 1,000 euros, according to <a href="https://www.europarl.europa.eu/doceo/document/CJ12-PR-704888_EN.pdf" target="_blank" rel="noreferrer noopener">a draft report</a>.



Slovenian Finance Minister Andrej Šircelj said in December that the proposal was an important step toward “closing the gaps in our financial systems that are malevolently used by criminals to launder unlawful gains or finance terrorist activities.”



Markus Ferber, who has served in the European Parliament since 1994 and is a member of the European People’s Party (EPP), took to Twitter Thursday to share his opposition to the proposal.



“We need to take AML risks in crypto seriously, but should not ban unhosted wallets,” Ferber tweeted. “This would be the equivalent of banning cash — unnecessary and disproportionate!”



Fellow European Parliament member Paul Tang responded to Ferber’s tweet, noting that passing the proposal would not ban anything.&nbsp;



“Instead we oblige verification to prevent crime and corruption through unhosted wallets,” Tang wrote. “Crime and corruption aren&#8217;t innovation, I&#8217;m sure a law-and-order party like the German EPP would agree?”



Paul Grewal, chief legal officer at crypto exchange Coinbase, wrote in <a href="https://blog.coinbase.com/making-your-voice-heard-ahead-of-thursdays-critical-eu-vote-f03730e83e5c" target="_blank" rel="noreferrer noopener">a March 27 blog</a> that “bad facts make bad law,” noting the EU’s upcoming vote.



“If adopted,” he wrote, “this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets.”



Patrick Hansen, head of strategy and business development at Unstoppable Finance, said in a Twitter post that formal meetings about these measures, known as “trilogue,” could take a couple of months.&nbsp;



“We have lost a battle, but this is far from over,” he said.



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