Decrypting The Proposed Digital Asset Anti-Money Laundering Act of 2023

I. Introduction

In the rapidly evolving and novel world of cryptocurrency, legal and regulatory developments have the potential to shape the trajectory of the industry just as much as companies and consumers, if not more. The proposed Digital Asset Anti-Money Laundering Act of 2023, in particular, appears capable of ushering in significant changes in the way key players in the crypto space operate. The recently reintroduced bill sponsored by U.S. Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) is a pointed legislative response to rising concerns about the illicit use of digital assets. The scope and potential implications of the statute here are widespread and deserve analysis.

II. Statutory Overview: Key Provisions 

At its core, the statute aims to address regulatory gaps and create a robust framework governing digital assets. The key parts of the statute include: 

1. Extension of BSA Responsibilities: The act would extend Bank Secrecy Act (BSA) requirements, including Know-Your-Customer requirements, to digital asset wallet providers, miners, validators, and network participants involved in the validation, security, or facilitation of digital asset transactions. 

2. Unhosted Digital Wallets: The act proposes directing the Financial Crimes Enforcement Network (“FinCEN”) to finalize and implement a rule it first proposed in December 2020. This proposed rule would mandate that banks and money service businesses (MSBs) verify customer and counterparty identities, maintain records, and file reports on transactions involving unhosted wallets (as well as those hosted in non-BSA compliant jurisdictions). 

3. Guidance on Anonymity-Enhancing Technologies: FinCEN would also be instructed to issue guidance to financial institutions on mitigating risks associated with handling, using, or transacting with digital assets anonymized using mixers and other anonymity-enhancing technologies. 

4. BSA Compliance Enforcement: The Act would broaden BSA compliance enforcement, directing the Department of Treasury to establish an AML/CFT examination and review process for MSBs and other digital asset entities with BSA obligations. The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) would likewise be tasked with establishing AML/CFT compliance examination and review processes for entities under their regulatory purview. 

5. Reporting of Foreign Bank Accounts: BSA rules regarding reporting of foreign bank accounts would be extended to include digital assets. Thus, U.S. persons engaged in transactions exceeding $10,000 in digital assets through offshore accounts would be required to file a Report of Foreign Bank and Financial Accounts (FBAR) with the Internal Revenue Service. 

6. Mitigating Risks of Digital Asset ATMs: FinCEN would be directed to ensure that digital asset ATM owners regularly submit and update physical addresses, along with verifying customer and counterparty identities. 

III. Implications for the Crypto Industry 

If the Digital Asset Anti-Money Laundering Act successfully navigates the legislative process and becomes law (a big if in today’s political climate), it is poised to be one of the biggest legal developments in the crypto space to date. The statute would affect a broad spectrum of players in the industry, from wallet providers to miners and validators, and represent a major step in the direction of comprehensive regulation. The Act, in other words, could mark a pivotal turning point for the crypto sector, moving it away from the relative Wild West atmosphere characterized by a lack of standardized oversight. For example, some commentators have observed that if the Act existed in 2022, it could have averted the collapse of FTX, since most if not all of FTX’s non-U.S. transactions with U.S. participants would have been reportable to the FinCEN, Treasury, SEC, and CFTC. [1]. 

The Act, of course, is not without its detractors. The Act’s stringent regulations raise concerns for some about stifling innovation and compromising privacy, two vital considerations the crypto space. Thus, interest groups like the Chamber of Digital Commerce are actively opposing the legislation arguing that, if it passes, it will have the unintended consequence of deterring domestic digital activity and forcing it offshore to jurisdictions with less adequate security and oversight. [2].  Still other commentators are complaining (not credibly, in our view) that the Act is geared solely to helping big banks.

Ultimately, if the Act does pass, the onus will be on regulators to exercise their discretion and strike the right balance between adequate regulatory oversight and fostering technological advancement. Industry players will also need to proactively and regularly seek advice from counsel in order to stay apprised of enforcement trends and ensure they remain in compliance.