Casey Wagner

Macauley Peterson

As the second day of FTX-related testimony kicked off on Capitol Hill Wednesday, a group of bipartisan senators released their latest legislative plans for cracking down on money laundering in crypto.



Sens. Elizabeth Warren, D-Mass., and Roger Marshall, R-Kan., introduced the “<a href="https://www.warren.senate.gov/imo/media/doc/DAAML%20Act%20of%202022.pdf" target="_blank" rel="noreferrer noopener">Digital Asset Anti-Money Laundering Act Of 2022</a>,” a bill that would reclassify crypto companies, including wallet providers and miners, as money services businesses.&nbsp;



The bill also prohibits financial institutions from engaging with cryptocurrency mixing services, privacy coins or “other anonymity-enhancing technologies,” according to the draft legislation.&nbsp;



The legislation comes as members of Congress attempt to get to the bottom of how FTX imploded last month through a series of hearings. The House Financial Services Committee heard from newly-appointed FTX CEO <a href="https://blockworks.co/news/ftx-managed-critical-accounting-via-slack-new-ceo-testifies" target="_blank" rel="noreferrer noopener">John Ray</a> Tuesday.&nbsp;



Ray testified that the restructuring team discovered mismanagement and duplicity that makes the exchange’s fraud “worse than Enron.” He added that there is evidence FTX was commingling funds, and the exchange <a href="https://blockworks.co/news/ftx-managed-critical-accounting-via-slack-new-ceo-testifies" target="_blank" rel="noreferrer noopener">handled accounting</a> and invoices through messaging app Slack and accounting service QuickBooks.&nbsp;



The <a href="https://www.banking.senate.gov/hearings/crypto-crash-why-the-ftx-bubble-burst-and-the-harm-to-consumers" target="_blank" rel="noreferrer noopener">Senate Banking Committee</a> gathered four witnesses Wednesday, including actor-turned-author Ben McKenzie and FTX spokesperson Kevin O’Leary. O’Leary testified he received $15 million from Bankman-Fried, in addition to $3 million “to cover taxes.”&nbsp;



“The collapse of FTX is nothing new,” O’Leary said. “While this situation is painful for shareholders, employees, account holders…In the long run, it does not change this industry’s promise.”



Others were less optimistic. McKenzie, whose book deriding all of crypto as a fraud is expected to be released in 2023, likened investing in cryptoassets to gambling on poker. Fellow witness Hilary Allen, a professor at American University’s Washington College of Law, questioned whether any entity in the industry is truly decentralized.&nbsp;



“To be clear, decentralization won&#8217;t protect us from future crypto fraud, because even if DeFi is technologically decentralized, it is not economically decentralized,” Allen said. “If one person owns 90% of the governance tokens that control the software, which is quite common in DeFi, then they could cause it to perpetuate shady behavior.”



The draft of the bill, released Wednesday, comes days after the Bahamian government indicted and arrested FTX founder Sam Bankman-Fried. The former CEO <a href="https://blockworks.co/news/us-attorney-sbf-perpetrated-largest-financial-fraud-in-american-history" target="_blank" rel="noreferrer noopener">faces a number of charges</a>, including wire fraud and money laundering.&nbsp;



US Attorney Damian Williams referred to Bankman-Fried’s crimes as “one of the biggest financial frauds in American history” during a <a href="https://blockworks.co/news/us-attorney-sbf-perpetrated-largest-financial-fraud-in-american-history" target="_blank" rel="noreferrer noopener">press conference</a> detailing the indictment Tuesday.&nbsp;



Bankman-Fried’s extradition to the US is underway, Williams added.&nbsp;



With Congress set to adjourn in the coming weeks, Sens. Warren and Marshall will have to reintroduce the bill during the next session to advance the measure.



<h3>News analysis by Macauley Peterson</h3>



It looks like we’re finally going to see an ideological fight over some of crypto’s first principles. The battle lines are drawn. The industry now has to make its case to politicians and regulators for why features such as self-custody, decentralization, disintermediation, and privacy are valuable traits that empower individuals and improve the efficiency of our financial system.



It’s easy to bring in expert witnesses that begin their inquiry into the technology with the rhetorical question, “Am I crazy, or is this all a total scam?” and then get the testimony that all of crypto is a scam. But it’s not terribly informative to the public.&nbsp;



Nor is trying to learn about DeFi from someone who seriously asserts it’s “quite common” for one person to own 90% of the governance tokens — that’s a wild exaggeration.



While it’s fine to question certain assumptions about decentralization, and in fact we should challenge crypto projects to demonstrate the veracity of their claims to the decentralized label, we also can examine public blockchains and see how those claims stack up to reality.



The Digital Asset Anti-Money Laundering Act Of 2022, would compel the Financial Crimes Enforcement Network (FinCEN) to classify “custodial and unhosted wallet providers, cryptocurrency miners, validators, or other nodes who may act to validate or secure third-party transactions, independent network participants, including MEV searchers, and other validators with control over network protocols as money service businesses.”



Current guidelines stipulate that <a href="https://www.fincen.gov/fact-sheet-msb-registration-rule" target="_blank" rel="noreferrer noopener">money services businesses</a> have to be businesses —&nbsp;it’s right in the name — individuals who are frequently among the “network participants” mentioned are generally exempt from being considered money transmitters, and for good reasons.



A “wallet provider” is a software developer publishing code. “Unhosted” is a political term for self-custody — the whole purpose of wallets. It would be like asking Louis Vuitton to register as a money transmitter for giving individuals a piece of folded leather that they can use to transport dollars.



Sen. Warren just wants Congress to declare it otherwise, presumably because she doesn’t see the value in taking a more nuanced approach.



The bill sees privacy tools — or “anonymity-enhancing technologies” as it calls them — as <a href="https://blockworks.co/news/the-purpose-and-perils-of-crypto-privacy-tools" target="_blank" rel="noreferrer noopener">serving no purpose other than</a> to facilitate money laundering.



That perspective is only valid if you uncritically assume that all crypto is a fraud and a scam.



Which is both intellectually dishonest and fundamentally incorrect.



As written now, it would go a long way towards enshrining a dystopian surveillance state when it comes to individuals transacting on blockchains.



Even crypto-skeptic law professor and political adviser <a href="https://blockworks.co/news/legal-scholar-rohan-grey-gives-mixed-opinions-on-recent-occ-developments" target="_blank" rel="noreferrer noopener">Rohan Grey</a> is <a href="https://twitter.com/rohangrey/status/1603083714648772608" target="_blank" rel="noreferrer noopener">concerned</a>.



<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">Making payments anonymously is not inherently criminal. Too many progressives, in their zealousness against truly bad actors, are letting the surveillance state into their minds and their politics. It&#39;s really bad. Private greed and bureaucratic surveillance are twin enemies.&mdash; Rohan Grey (@rohangrey) <a href="https://twitter.com/rohangrey/status/1603083714648772608?ref_src=twsrc%5Etfw">December 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The bill, which would direct the Treasury Department to “promulgate a rule that prohibits financial institutions from…handling, using, or transacting business with digital assets that have been anonymized by the technologies described…,” would strongly curtail the ability of law-abiding citizens to protect their privacy on public blockchain networks — a form of <a href="https://blockworks.co/news/crypto-mixers-and-privacy-coins-can-they-resist-censorship" target="_blank" rel="noreferrer noopener">censorship</a>.



It’s ultimately a question of fundamental rights in a liberal democratic society. As CoinCenter’s Peter van Valkenburgh <a href="https://twitter.com/valkenburgh/status/1603062350520664064" target="_blank" rel="noreferrer noopener">put it</a>, crypto transactions provide a counterweight to electronic transactions which “force citizens to rely on a class of centralized gatekeepers who can freely censor every transaction and amass and abuse a comprehensive dossier of every citizen’s intimate activities.”



<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">2/ Physical cash is a technological bulwark of those rights and privileges in open societies because it preserves and enables the capability of transacting directly, citizen to citizen, without the need for approval from some corporation or state bureaucracy.&mdash; Peter Van Valkenburgh 🫡🦬🚲🌐🥐 | 🚫💳🕵️🌽🛢️🚗 (@valkenburgh) <a href="https://twitter.com/valkenburgh/status/1603062349409447937?ref_src=twsrc%5Etfw">December 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Physical cash is important in open societies to maintain citizens’ rights and privileges. And as all assets become digitized, only cryptoasset networks provide a digital cash analog.



Sens. Warren and Marshall overlook the rights of ordinary citizens, instead treating all actors in the crypto space as dangerous and in need of constraint. That’s largely a function of misunderstanding and poor guidance, but it’s also a challenge to the basic argument for why crypto matters. And it’s that argument that opponents of the measure will have to make, forcefully.



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Actors and TV Personalities Testify as Warren Introduces Anti-privacy Crypto Bill

Sebastian Sinclair

Three US Senators have urged Fidelity to stop its 401(k) sponsor partners from offering bitcoin exposure — likening crypto investing to “catching lightning in a bottle.”



In a Monday <a href="https://www.durbin.senate.gov/imo/media/doc/letter_to_fidelity_investments_ceo.pdf" target="_blank" rel="noreferrer noopener">letter penned</a> to Fidelity CEO Abigail Johnson, Democrat Senators Elizabeth Warren, Dick Durbin and Tina Smith argue that crypto markets have become riskier following <a href="https://blockworks.co/news/ftx-bankrupt-hacked-investigated-a-timeline-of-events" target="_blank" rel="noreferrer noopener">FTX’s sudden collapse</a>, making bitcoin unsuitable for retirement plans.



The Senators described the crypto industry as “full of charismatic wunderkinds, opportunistic fraudsters and self-proclaimed investment advisors promoting financial products with little to no transparency.”



“As a result, the ill-advised, deceptive, and potentially illegal actions of a few have a direct impact on the valuation of bitcoin and other digital assets,” they said.&nbsp;Durbin <a href="https://blockworks.co/news/us-politicians-donate-bankman-fried-cash-to-charity" target="_blank" rel="noreferrer noopener">received</a> $2,900 in campaign contributions from disgraced FTX CEO Sam Bankman-Fried, money he reportedly says will be donated to charity.



The letter follows similar pleas in <a href="https://www.warren.senate.gov/newsroom/press-releases/warren-questions-fidelity-on-plans-to-allow-bitcoin-investments-for-401k-plans" target="_blank" rel="noreferrer noopener">May</a> and <a href="https://www.durbin.senate.gov/imo/media/doc/durbin_bitcoin_72622.pdf" target="_blank" rel="noreferrer noopener">July</a>. Senators Warren and Smith have previously cited the cryptocurrency sector’s murky valuations as reason for caution, labeling investing in digital assets a “speculative gamble.”



Boston-based Fidelity began allowing employees to put as much as 20% of their retirement savings into bitcoin exposure this fall.



The crypto industry considered the move a strong sign of shifting institutional sentiment toward the 12 year old asset class, although bitcoin has shed some 60% of its value since Fidelity flagged the 401(k) move in late April.



Fidelity, which overall <a href="https://fidelityinvestments2020news.q4web.com/press-releases/news-details/2022/Fidelity-Q3-2022-Retirement-Analysis-Despite-Continued-Volatility-Retirement-Fundamentals-Remain-Sound/default.aspx" target="_blank" rel="noreferrer noopener">boasts</a> some $9.6 trillion in assets under administration, is the largest individual retirement plan (IRA) provider in the US — supporting more than 35 million IRA, 401(k) and 403(b) retirement accounts. As of 2020, FIdelity <a href="https://www.nytimes.com/2022/04/26/business/crypto-401k-fidelity.html" target="_blank" rel="noreferrer noopener">controlled</a> more than a third of the retirement fund market in the US, maintaining $2.4 trillion in 401(k) assets.



“Any investment strategy based on catching lightning in a bottle, or motivated by the fear of missing out, is doomed to fail,” the Senators said. 



“By many measures, we are already in a retirement security crisis, and it should not be made worse by exposing retirement savings to unnecessary risk.”



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Senators Once Again Ask Fidelity to Stop Offering Bitcoin in 401(k)s

Bessie Liu

<div id="highlights-block_6358476ad8bcb" class="highlights">
 <ul>
 <li>Over 200 government officials have left their public service posts to move into senior positions at crypto startups, the lawmakers say</li>
 <li>Many of these individuals later serve as “advisers, board members, investors, lobbyists, legal counsel, or in-house executives,” in the the crypto industry</li>
 </ul>
 
</div>



A number of prominent US lawmakers say they’re increasingly concerned about the growing number of financial regulators taking crypto jobs.&nbsp;



Sen. Elizabeth Warren, D-Mass., and Rep. Alexandria Ocasio-Cortez, D-N.Y., were among those who penned a slew of <a href="https://punchbowl.news/wp-content/uploads/10.24-Letters-to-Regulators-re-Crypto-Revolving-Door.pdf?utm_source=Sailthru&amp;utm_medium=email&amp;utm_campaign=10/25/22%20%20Punchbowl%20News%20AM&amp;utm_term=Punchbowl%20AM%20and%20Active%20Subscribers%20from%20Memberful%20Combined" target="_blank" rel="noreferrer noopener">letters</a> Oct. 24 to a number of US financial watchdogs.



“We write seeking information about the steps your agency is taking to stop the revolving door between our financial regulatory agencies and the cryptocurrency (crypto) industry,” they wrote.&nbsp;



More than 200 government officials, per the lawmakers, have left public service jobs in favor of digital asset firms, where they’ve taken up senior positions including “advisers, board members, investors, lobbyists, legal counsel, or in-house executives.”



<blockquote class="wp-block-quote">Added the letter: “Just as powerful Wall Street interests have long exercised their influence over financial regulation by hiring former officials with knowledge of government’s inner workings, crypto firms appear to be pursuing the same strategy in order to secure ‘a regulatory system to the industry’s exact specifications.’”</blockquote>



Other politicians who signed on include Sheldon Whitehouse, Jesús García and Rashida Tlaib.&nbsp;



The lawmakers asked for information related to ethics and transparency on revolving door hires under a Nov. 7 deadline.&nbsp;



“Our financial regulators are tasked with ensuring the safety and fairness of our financial markets,” the letter said. “The rapid rise of the crypto market has presented regulators with new questions about how these assets will be regulated.”



Warren has long been a critic of the cryptocurrency industry. Earlier in September, the senator, alongside other lawmakers, wrote <a href="https://cms.blockworks.co/scammers-use-of-meta-platforms-draws-us-political-ire/" target="_blank" rel="noreferrer noopener">a letter</a> expressing their concern that Facebook was becoming a “<a href="https://www.menendez.senate.gov/imo/media/doc/letter_to_meta_on_cryptocurrency_scams.pdf" target="_blank" rel="noreferrer noopener">breeding ground</a>” for crypto fraud.



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Crypto’s ‘Revolving Door’ Hires Are Raising Eyebrows Among US Lawmakers

Shalini Nagarajan

<div id="highlights-block_62d5a0cee917b" class="highlights">
 <ul>
 <li>“The overall US crypto mining industry is likely to be problematic for energy and emissions,” lawmakers wrote</li>
 <li>They flagged that crypto miners have caused increased electricity costs for small businesses and residents</li>
 </ul>
 
</div>



Sen. Elizabeth Warren and other lawmakers have called on federal regulators to instruct cryptocurrency miners to disclose their emissions and energy use.



The Democratic lawmakers laid out “disturbing” findings from an investigation into the environmental impact of crypto mining in a <a href="https://www.warren.senate.gov/imo/media/doc/2022.07.15%20Letter%20to%20EPA%20and%20DOE%20Re%20Cryptomining%20Environmental%20Impacts.pdf" target="_blank" rel="noreferrer noopener">letter</a> to the US Environmental Protection Agency and the Department of Energy on Friday.



Seven companies including Riot, Bitdeer, Bit Digital and Stronghold have the collective capacity to use nearly the same amount of electricity required to power all residences in Houston, Texas — the fourth most populous city in the US — their data found.



“Our investigation suggests that the overall US crypto mining industry is likely to be problematic for energy and emissions,” the lawmakers wrote. They believe disclosing this information would support public policy decisions such as monitoring energy use and providing data on national and regional grid loads.



The letter highlighted lawmakers’ concerns that cryptocurrency mining in the US has <a href="https://www.nbcnews.com/tech/tech-news/us-becomes-largest-bitcoin-mining-center-china-ban-rcna2956" target="_blank" rel="noreferrer noopener">exploded since the crackdown in China</a> — once the world’s biggest mining hub — with the nation’s global mining share rising nearly ten-fold in the past four years.



They also raised concerns about how mining has triggered a jump in electricity costs for small businesses and residents. For instance, residents in Plattsburgh, New York saw prices <a href="https://crsreports.congress.gov/product/pdf/R/R45863/3" target="_blank" rel="noreferrer noopener">jump by $300</a> in the winter of 2018 after bitcoin miners found electricity there “abundant and cheap.”&nbsp;&nbsp;&nbsp;



Some miners have been struggling with the crypto market downturn. Compass Mining recently faced accusations by hosting firm Dynamics Mining over an alleged <a href="https://cms.blockworks.co/compass-mining-searches-for-direction-after-top-execs-resign/" target="_blank" rel="noreferrer noopener">failure to pay an electricity bill</a>, but the firm denied these claims.



The lawmakers also wrote that the total annual global electricity consumption associated with Bitcoin and Ethereum is estimated to be around 300 TWh (terawatt-hours) in May 2022, similar to the annual electricity usage in the UK.&nbsp;



“And this electricity usage has major emissions consequences: the energy used to mine Bitcoin and Ethereum in 2021 resulted in almost 80 million tons of carbon dioxide emissions,” they said.



The environmental impact of bitcoin mining is the subject of debate, with some miners <a href="https://cms.blockworks.co/crypto-mining-company-welcomes-sec-environmental-reporting-proposal/" target="_blank" rel="noreferrer noopener">welcoming further scrutiny</a>.



Ethereum’s energy consumption is expected to drop by 99.95% <a href="https://cms.blockworks.co/ethereum-ropsten-testnet-successfully-merged-to-proof-of-stake/" target="_blank" rel="noreferrer noopener">following The Merge</a>, as soon as September.



Democrats have <a href="https://cms.blockworks.co/cryptocurrency-mining-is-poisoning-our-communities-us-rep-says/" target="_blank" rel="noreferrer noopener">previously written</a> to the US environmental regulator in May, describing among other concerns how the amount of emissions produced by bitcoin mining is equivalent to that of a small country like Greece. But the lobby group Bitcoin Mining Council <a href="https://cms.blockworks.co/bitcoiners-protest-democrats-misleading-letter-sent-to-epa/" target="_blank" rel="noreferrer noopener">poked holes</a> in that letter, saying it held several inaccuracies — such as a claim that “a single Bitcoin transaction could power the average US household for a month.”



In June, the New York legislature <a href="https://cms.blockworks.co/new-york-passes-bill-restricting-carbon-fueled-crypto-mining-operations/" target="_blank" rel="noreferrer noopener">passed a bill</a> that would temporarily ban new bitcoin mining operations that use proof-of-work authentication methods for blockchain transactions. That bill could have been signed into law or vetoed by Governor Kathy Hochul, but she declined to commit and said her team would look at the proposal closely in the coming months.



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Seven Crypto Miners Show ‘Disturbing’ Energy Use, Lawmakers Say

<div id="highlights-block_6233928d89526" class="highlights">
 <ul>
 <li>The bill was introduced during Thursday’s Senate Banking Committee hearing on digital assets and crime</li>
 <li>Russia’s invasion of Ukraine has highlighted the need for greater oversight, Warren said</li>
 </ul>
 
</div>



Sen. Elizabeth Warren, D-Mass., revealed a new bill Thursday aiming to prevent crypto companies from doing business with sanctioned entities. 



The Digital Assets Sanctions Compliance Enhancement Act, introduced during a Senate <a href="https://www.banking.senate.gov/hearings/understanding-the-role-of-digital-assets-in-illicit-finance" target="_blank" rel="noreferrer noopener">hearing</a> on the role of digital assets in illicit finance, would give President Biden the go-ahead to slap secondary sanctions on those that transact with sanctioned individuals, companies or governments. It would apply to any sanctions imposed by the US — most pressingly, Russian ones. 



“Crypto provides a new payment option for criminals and cheats, and it&#8217;s how those who attack our systems with ransomware collect their money with the least risk that they will be caught,” Warren said during the hearing. “In fact, according to one of our witnesses who&#8217;s here with us today about three-quarters of the money collected in ransomware attacks last year went to Russia-linked actors.”



Iran, North Korea and Venezuela all have turned to crypto in an effort to evade sanctions, Jonathan Levin, co-founder of blockchain tracker Chainalysis, said during the hearing.



The bill is co-sponsored by 10 other senators, including Sen. Mark Warner, D-Va. Warner was part of the bipartisan group that worked to include cryptocurrency tax provisions in the infrastructure bill last September.



Witnesses — Levin, Michael Mosier, former acting director and current deputy director and digital innovation officer of the Financial Crimes Enforcement Network (FinCEN) and Michael Chobanian, founder of KUNA Exchange and president of the Blockchain Association of Ukraine — said it <a href="https://cms.blockworks.co/impossible-for-russia-to-evade-sanctions-with-crypto-fincen-rep-says/" target="_blank" rel="noreferrer noopener">would be difficult</a> for Russians to circumvent all sanctions with crypto.



“I’m the person who is behind all the numbers, I know how this happens, and it’s impossible, physically impossible, to transfer large amounts of money from fiat into crypto,” Chobanian said.&nbsp;



The levels of requisite liquidity to run serious amounts of Russian government capital via digital assets is a pipe dream, according to Mosier.



&#8220;The crypto industry claims that Russians can’t use crypto to hide their wealth ​​because the $3 trillion crypto market is too small and too transparent for that to work,” Warren said, adding that blockchain-hopping and shuffling funds between tokens could be a workaround.



“You can always split the money up into wallets…but that doesn&#8217;t remove the record of where the money actually sits,” Levin said.&nbsp;



Nonetheless, the crisis in Ukraine has underscored the need for more transparency in the blockchain space, according to Warren.



“That&#8217;s why I&#8217;m introducing today my Digital Asset Sanctions Compliance Enhancement Act,” she said. “This is a bill that would authorize the president to sanction foreign cryptocurrency firms that are doing business with sanctioned Russian entities.”



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