In the midst of the Senate hearing investigating the fall of the cryptocurrency exchange FTX, Senator Elizabeth Warren (D‑MA) introduced a new bill—the Digital Asset Anti-Money Laundering Act of 2022—seeking to heighten the financial surveillance of individuals. Although the bill does little to nothing to address the issues behind FTX, it would levy a hefty blow to financial privacy for American citizens.

Self-Hosted Wallets

The bill first seeks to classify self-hosted wallets as money service businesses. For those unfamiliar, self-hosted wallets are merely the digital equivalent of a wallet in your pocket or purse. Although one may enjoy certain comforts and conveniences from using a third-party service like Coinbase to custody cryptocurrencies, self-hosted wallets allow individuals to have full ownership of their cryptocurrency. More so, where much of the financial surveillance in the United States depends on what’s known as the third-party doctrine, self-hosted wallets offer individuals protection from government surveillance and censorship.

Yet Senator Warren’s bill would put an end to that protection by ordering the Financial Crimes Enforcement Network (FinCEN) to finalize its infamous wallet rule. That rule originally came just days before Christmas in 2020 when FinCEN opened a brief comment period. If established, the wallet rule would have forced companies to report know-your-customer (KYC) information, among other things. However, the rule generated so much public backlash that Representative Warren Davidson (R‑OH) later introduced a bill—the Keep Your Coins Act—specifically to protect Americans from such policies. Yet, it seems Senator Warren seeks the opposite.

Were that not enough, the bill seeks to classify cryptocurrency miners, validators, and network participants as money service businesses as well—worsening many of the still unfixed issues in the Infrastructure Investment and Jobs Act.

Mixers

The bill also sets its sights on cryptocurrency mixers. Again, for those unfamiliar, mixers offer individuals the opportunity to enhance their privacy when using cryptocurrencies on public blockchains where transactions are visible for anyone to see. Mixers, as the name suggests, mix funds and then return them to the customer for a fee—a valuable service when using a publicly transparent ledger. Both the Department of Justice and Chainalysis have noted that mixers do not make funds impossible to trace for law enforcement purposes. Instead, they just offer the opportunity to improve one’s financial privacy.

Not content with the chance of that occurring, however, Senator Warren’s bill would prohibit banks and other financial institutions from using mixers or handling cryptocurrencies that have been run through mixers in the past. This type of prohibition brings up many of the concerns that came up earlier this year with the sanctions placed on Tornado Cash—an open-source mixer. For instance, it’s not clear how the law would be enforced. Are cryptocurrencies permanently blacklisted after being sent through a mixer? Or will a certain number of public transactions make them “legal” again? More so, how is the public expected to comply with these rules? As it is currently written, the bill’s requirement is akin to forcing financial institutions to trace the life of every penny before accepting deposits.

Forced Reporting

One other notable piece of the bill is the requirement for Americans to report to FinCEN if they transact more than $10,000 in cryptocurrency if at least one party in the transaction is outside the United States. The Infrastructure Investment and Jobs Act already changed the law to soon force individuals to report on one another when using $10,000 or more in cryptocurrency. However, it appears Senator Warren’s bill would require a second report to be filed on top of that for cross-border purposes—an interesting strategy given the Infrastructure Act continues to face legal challenges.

Many issues come out of this proposal. First, cryptocurrencies do not discriminate based on geographic location. In fact, there is often zero indication of where a transaction is taking place as blockchains are borderless by design. Therefore, it’s unclear how citizens are expected to comply here. But even if compliance was possible, this measure is fundamentally at odds with the Constitution. No American should be forced to report their private, financial transactions to the government if the government is unable to provide a warrant.

Conclusion

There are many issues to talk about regarding FTX and its management, but this bill adds nothing to the conversation. It merely uses the dust from the company’s collapse as a cover for increasing financial surveillance.