On Wednesday, Senator Elizabeth Warren (D-Mass.) introduced the “Digital Asset Anti-Money Laundering Act,” which would impose sweeping surveillance and registration requirements on almost all participants in blockchain networks – including software developers, miners and wallet creators. The bill would also effectively ban privacy-enhancing technologies in blockchain networks. The bill is a disaster for digital privacy and civil liberties.
Marta Belcher is the president and chair of the Filecoin Foundation and the Filecoin Foundation for the Decentralized Web and general counsel and head of policy at Protocol Labs. She is also special counsel to the Electronic Frontier Foundation and a member of the Zcash Foundation Board. Her views are her own.
The bill would require nearly all blockchain network participants to register as financial institutions
The bill would require almost all participants in blockchain networks to register as money service businesses, including not only miners and wallet creators but also software developers. Those who would need to register as money service businesses under the bill’s shockingly expansive language include miners, validators, nodes, both custodial and "self-hosted" cryptocurrency wallet providers and, as a catch-all, any “independent network participants” who have “control over network protocols.”
Anyone who fits into one of these categories (i.e., basically any blockchain network participant) would need to register with the government as a money service business, develop and maintain complicated anti-money-laundering programs, collect the personal information of every person who uses their software and automatically file reports with the government about users’ transactions over a certain amount (regardless of whether those transactions are suspicious).
See also: The Coming Privacy Wars
In short, the bill would grind the entire blockchain ecosystem in the U.S. to a halt, including chilling the ability of software developers to work on these technologies and preventing Americans from interacting with permissionless blockchains. It is simply too onerous for individual network participants like developers and miners to comply with the rules for money service businesses.
In fact, compliance is not only onerous but in many cases impossible. For example, money service businesses are required to verify the identity of all users and report information about those users’ transactions to the government. For many blockchain network participants, this is simply not possible. For example, bitcoin miners have no way of knowing the identity of the users whose transactions they are facilitating and developers of open-source software have no way of knowing the identities of those who ultimately use their software.
This is by design: The precise reason that blockchain technology is important, from a civil liberties perspective, is that it imports the privacy of cash into the online world. This new bill seeks to flip the entire purpose of blockchain on its head, turning it into a permissioned technology in which all users are surveilled by centralized gatekeepers.
The bill would effectively ban privacy-enhancing technologies in blockchain networks
In addition, the bill effectively bans privacy-enhancing technologies in blockchain networks. The bill would prohibit all financial institutions from handling, using or transacting with digital asset mixers, privacy coins and “any other anonymity-enhancing technologies.” The list of financial institutions prohibited from interacting with privacy-enhancing technologies includes the broad group of blockchain network participants that would be classified as money-service businesses under the bill – meaning that developers, miners, validators and custodial and self-hosted wallet creators would all effectively be prohibited from interacting with privacy-enhancing technologies, including privacy coins.
In introducing the bill, Sen. Warren used the refrain that privacy-enhancing technology facilitates crime. This is wrong, and it’s exactly the line of reasoning we hear from critics of end-to-end encryption and Tor (which enables anonymous web browsing). That a technology could be used to violate the law does not mean that there is something wrong with that technology. Criminals have long used cash to commit crimes, but we don’t call for a ban on cash as a result. For the same reason, we don’t call for a ban on cars, even though they can be used as getaway vehicles. In the 1980s, studios tried to make VCRs illegal because they could be used for copyright infringement – and they almost succeeded. Like cars and VCRs, privacy-enhancing technologies serve an important purpose and should not be banned merely because they could be misused.
That purpose is protecting civil liberties. Sen. Warren seems to have forgotten that privacy and anonymity are not bad or illegal; in fact, they are essential for civil liberties. Privacy is especially important for financial transactions, which provide an intimate window into our lives – what organizations we donate to, what books and products we buy, who we support and where we go. The ability to transact privately allows people to engage in First Amendment-protected political activities, including protesting, donating to advocacy organizations and engaging in activities that may be sensitive or controversial. That blockchain technology imports the privacy protections of cash into the online world is a feature, not a bug.
The U.S. government has long been targeting blockchain networks to expand the reach of its financial surveillance, including adding the Tornado Cash mixer to the U.S. sanctions list earlier this year. Imposing sweeping reporting requirements on nearly every blockchain network participant and effectively banning privacy-enhancing technologies in blockchain networks through this latest bill would create a near-total surveillance regime for blockchain transactions.