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Senate Illicit Finance Hearing; Warren Bill; MiCA Update Post-Amendment

Senate Banking Committee Hearing on the Role of Digital Assets in Illicit Finance


American flags aside a government building.

What happened?


The Senate Banking Committee held another hearing on digital assets on Thursday. The Committee heard from Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis, Inc.; Michael Mosier, Former Acting Director of Financial Crimes Enforcement Network (FinCEN); Michael Chobanian, Founder of KUNA Exchange, President of Blockchain Association of Ukraine; and Mr. Shane Stansbury, a law professor at Duke University.

These witnesses addressed what role cryptocurrencies play in illicit finance.


The hearing generally had a positive, constructive tone, which bodes well for the industry. In his written statement, Ranking Member Toomey (R-Pa.) highlighted the “tremendous potential benefits” of cryptocurrencies and distributed ledger technology. He stressed that it is critical that U.S. “lawmakers and regulators should do nothing to harm America’s longstanding tradition of fostering technological innovation.” He also expressed concern that a lack of regulatory clarity surrounding digital assets in the United States is pushing innovators abroad. Toomey called for a digital-asset specific regulatory framework to be enacted to ensure development of this technology in the US.


The witnesses stressed time and again that illicit transactions are the exception, not the rule in crypto. In his statement, Michael Mosier wrote that “cryptocurrencies can be used in crime, but we’d be naive to think they are not also powerful tools to empower and protect the innocent.”


The Committee also heard from Michael Chobanian, a Ukrainian crypto exchange founder, who talked about how he has been able to raise more than $50 million to help Ukrainians suffering from Russia’s invasion.


What does this mean?


Chobanian and Ukraine’s use of crypto evidenced the benefits of the technology in a visceral and tangible way. Each day, more and more lawmakers seem to be taking an open-minded “second look” at the crypto and DeFi ecosystem. This hearing was another step in the right direction: a less uncertain environment for cryptocurrencies in the United States.


Nevertheless, there will be many hurdles. Senator Warren used the hearing to announce her new Digital Asset Sanctions Compliance Enhancement Act, which will be one of them.


Warren Introduces the Digital Asset Sanctions Compliance Enhancement Act of 2022

What happened?


During Thursday’s hearing, Senator Warren introduced the Digital Asset Sanctions Compliance Enhancement Act.


At face value, the purpose of the bill is to prevent Vladimir Putin and Russian elites from using digital assets to undermine the international community’s economic sanctions, notwithstanding the fact several Biden administration officials have gone on the record stating that digital assets do not present a major gap in the sanctions regime. As FBI Director Chris Wray said at a Senate Intelligence Committee hearing this week:

The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others. We are, as a community and with our partners overseas, far more effective on that than I think sometimes they appreciate. We have built up significant expertise both at the FBI and with some of our partners, and there have been some very significant seizures and other efforts that I think have exposed the vulnerability of cryptocurrency as a way to get around sanctions.

Unfortunately, the bill wouldn’t help enforce sanctions but would, among other things, make open-source software developers liable for any sanctions violation that might occur using their software, even if the developers have no knowledge of or involvement in the sanctions violation. The idea could be thought of as akin to holding every Linux developer liable for any sanctions violation that could occur if Linux software played any part in the violation. Our friends at Coin Center wrote an excellent breakdown of the bill and its deficiencies, which we encourage you to read.


What does this mean?


First things first, the bill doesn’t seem to have any momentum at the moment, so it’s not yet time to panic.


The issue with this bill is not in the power that it grants to the President; the President is already empowered to sanction any individual operating a crypto exchange that is helping Russians to evade sanctions.

Rather, the issue is in the overly broad definition of who qualifies as a “digital asset transaction facilitator.” The bill defines that term as “any person, or group of persons, that significantly and materially facilitates the purchase, sale, lending, borrowing, exchange, custody, holding, validation, or creation of digital assets on the account of others, including any communication protocol, decentralized finance technology, smart contract, or other software, including open-source computer code.”


All other U.S. sanctions laws obligate U.S. persons to avoid interacting with or facilitating interaction with sanctioned individuals and entities. In contrast, this bill would uniquely hold U.S. persons liable for any potential sanctions violation using something they created but don’t control, such as open-source computer code. It would be like holding Microsoft liable for any sanctions violation facilitated by the use of Windows (which isn’t even open-source, but you get the idea). As Coin Center’s Peter van Valkenburgh tweeted, “In short, Senator Warren's bill has incredible and sweeping powers to harm innovation and human rights.


Worse, it directs the executive to wield those powers against technologists who are, by every account, undermining rather than supporting the despicable Russian invasion.”

Here’s to hoping we’ve reached peak panic on this issue. We’ll keep an eye on it.


MiCA Latest


On Monday, a European Parliament (EP) committee voted down an amendment to the EU’s crypto regulatory package that could have acted as a de facto ban on PoW networks in Europe (here’s the rundown from Monday).


Following the adoption of the broader Markets in Crypto-Assets Regulation (MiCA) without the amendment, the text will now advance to the EP’s “trilogue negotiations” in April 2022. This is the final legislative step to approve MiCA at EU level, which also includes the member states and their positions, in addition to staff at the European Commission as expert mediators in the process.


However, in response to their amendment failing on Monday, there is still a chance that the Social-Democrats and Greens may veto the decision to go to trilogues and ask for a follow-up vote in the EP plenary, which would delay the process. If the veto proceeds, additional amendments to MiCA will be allowed, which could complicate MiCA even further.


If the vote proceeds to trilogues without a plenary vote brought by a veto, we expect that the trilogue negotiations will conclude by the end of 2022. However, a veto may delay the final adoption of MiCA to Q1 2023. This would mean that MiCA would likely enter force in Q1 2024. Whatever the outcome, it is likely that the key sticking points during the trilogues will be the environmental impact of PoW-based crypto-assets and the authority in charge of MiCA’s supervision and enforcement.