Democratic Senator Elizabeth Warren is seldom reserved with her distaste for the crypto industry.
I won’t claim that her criticisms are entirely invalid (though I’ll cover those later), but they’ve become predictable to the point of comedy. Her reputation in the crypto community has entered the ranks of people like Peter Schiff, who have so firmly established themselves as crypto skeptics that they can no longer be expected to abandon the role. Not even when faced with logic or evidence.
Of course, there are two key differences between these individuals.
Firstly, Schiff simply doubts crypto’s investment potential, whereas Warren challenges the ethics of the technology itself.
Secondly, Warren drafts Federal law for the United States. Schiff does not.
It shouldn’t surprise anybody, then, that Warren is now behind one of the greatest, unreasonable, and uncalibrated legislative threats the crypto industry has ever seen. One which reads as if it were designed to hurt as many blockchain network participants as possible rather than to actually help anybody.
Today we review the senator’s “Digital Asset Sanctions Compliance Enhancement Act of 2022”. What’s in it, why was it written, and why should crypto be worried?
Background of the Bill
In the aftermath of Russia’s invasion of Ukraine, the U.S. and its allies enforced the largest economic sanctions against Russia in world history. However, keen not to fumble their attempt, regulators quickly began questioning if digital assets presented any loopholes for Russian oligarchs to bypass these restrictions.
Naturally, Senator Warren was the first to try tackling the issue. Reports emerged earlier this month that she was drafting a bill to potentially place secondary sanctions on international crypto exchanges. It would give exchanges an ultimatum: choose not to transact with sanctioned people or else forfeit access to the US market.
Not an unreasonable or unprecedented measure. Exchanges have long been required to run background checks on their users to combat illicit finance. Covering remaining gaps in AML/KYC controls on international exchanges would help block Russian access to both major crypto market liquidity and fiat on/off ramps.
However, when the first draft of the bill was introduced to Congress on Thursday, its provisions went much further than that.
Targeting “Transaction Facilitators”
The bill, co-authored and signed by about 10 other Democrats besides Warren, calls for giving the President authority to prohibit transactions in property belonging to any foreign person identified as a “digital asset transaction facilitator” or trading platform.
Who qualifies as a digital asset transaction facilitator? Almost everyone involved with upholding Bitcoin, Ethereum, or other blockchain networks. Section 2, subsection 4A of the bill states:
“The term ‘‘digital asset transaction facilitator’’ means 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.”
Section 3 expands on this group to include those who provide “technological support” to sanction parties by “facilitating transactions that evade such sanctions.”
This language reeks of the same issues pertaining to last year’s infrastructure bill, over which the crypto community caused an uproar. The bill imposed burdensome tax reporting requirements on cryptocurrency “brokers” – defined as “anyone who effectuates transfers of digital assets.”
As Coinbase CEO Brian Armstrong and others had noted at the time, those who “effectuate” transactions technically include everyone from miners, to validators, to developers.
At the time, there was at least floor testimony affirming that the bill’s language was not meant to be applied in such a broad manner. However, Warren’s bill explicitly names both validators and software devs as targets – not merely for tax reporting but for possible property sanctions from the U.S. government.
To clarify, Bitcoin has at least 15,000 nodes “validating” every network transaction on a regular basis. Moreover, Ethereum is set to have over 300,000 validators when it upgrades to Ethereum 2.0 in a few months, as every current beacon chain validator is running a full node.
All of these network participants, alongside various base chain and smart contract developers, would technically be liable under this section of the legislation if a sanctioned individual happens to use their technology. This is merely for upholding networks which – according to blockchain data platform Chainalysis – are overwhelmingly used for legal purposes.
While it’s clear how easily a bill like this could discourage innovation and participation with all things blockchain, it’s not so obvious that it will help punish Putin’s government.
The fear is understandable: cryptocurrencies like Bitcoin are peer-to-peer, borderless, and permissionless. Could Russia not use them to conduct international trade, despite being cut off from SWIFT?
In a theoretical vacuum, perhaps. Yet so far, there’s little evidence of Russia using crypto for this purpose besides one curious wallet identified by blockchain forensics firm Elliptic.
However, the very identification of this wallet proves crypto’s ineffectiveness for this purpose.
While Bitcoin may be immutable, it most certainly isn’t private. Every transaction that’s ever taken place is tracked on the blockchain’s public ledger. Therefore, if any person’s blockchain address has ever been linked to their identity – as they so often are through KYC compliant exchanges – then all funds sourced from that wallet may hence be followed.
Elliptic’s co-founder Tom Robinson reiterates this:
“It’s not proving out realistic that oligarchs can completely bypass sanctions by moving all their wealth into crypto,” he told Bloomberg on Monday. “Crypto is highly traceable. Crypto can and will be used for sanctions evasion, but it’s not the silver bullet.”
While it is true that more private Bitcoin trading methods exist (peer-to-peer exchanges, cash trading, Bitcoin ATMs), they don’t nearly provide the liquidity required for the Russian government to use them in a meaningful way.
Therefore, targeting crypto exchanges should be more than enough to stop Russia from evading sanctions with digital assets.
In fact, the most important Federal bodies already recognize this fact. FBI Director Christopher Wray said last week that Russia’s ability to use crypto in this fashion is “highly overestimated.” Even the White House and Treasury Department have stated that evading sanctions on Russia’s sovereign scale using cryptocurrencies would be neither private nor possible.
It would seem that the only one who thinks a knee-jerk, hostile crackdown on crypto is called for right now is Elizabeth Warren.
Conclusion: Pursue Facts, Not Ideology
I noted earlier how Warren has positioned herself so that she can’t exit her anti-crypto stance, even in the face of logic. I have some evidence for my claim.
During a Senate Banking Committee hearing on crypto and illicit finance this Thursday, Warren got to speak to Chainalysis co-founder Jony Levin. She asked a fair set of questions about whether a hypothetical Russian oligarch could hide $1 billion in pre-purchased crypto by moving it across chains, moving it to different wallets, or by mixing the coins.
Unfortunately, she wasn’t interested in hearing a fair answer. As Levin repeatedly explained why none of these methods would prove effective at hiding such a large amount, Warren continued to interrupt him, only to draw her pre-established conclusion on the matter.
“I’m actually surprised by your answers since you charge a lot of money to untangle and track assets through the system and the system keeps developing more ways to obscure that money,” she said afterward.
— Neeraj K. Agrawal (@NeerajKA) March 17, 2022
This disregard of facts about how crypto actually works is what leads to such unmeasured and unhelpful policy responses as Warren’s recent bill. I’d argue that she chose to pursue an anti-crypto ideology well before drafting it – one which continues to grip members of her own party.
Though criminal transaction share drops and Bitcoin’s clean energy production rises, even the most crypto-savvy Democrats are turning against Bitcoin’s most basic functions and denying the market of a product that’s successfully launched across the rest of the world.
Governments must have an open mind when regulating this space and be open to adapting their policy as they learn more about it. Crypto is still evolving, after all; even community veterans are still debating what Bitcoin actually is.
As we continue figuring that out, perhaps the U.S. should keep its finger away from the sanctions button.