Congress Passes Laws Against Threats Including 'Decentralized Cryptocurrencies'
By Jason Brett
The COUNTER Act of 2019 (H.R. 2514), which stands for the “Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform Act of 2019,” passed the House of Representatives last week and is now under consideration by the U.S. Senate. The bill will modernize the laws for the Bank Secrecy Act, including new “Innovation Labs” at each of the U.S. federal regulators to advance the way BSA is applied by financial institutions.
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A House Report published by the Financial Services Committee provided to accompany the Bill to the floor noted the BSA laws have not been updated in 18 years. In describing the risks that now exist in the world we live in today, the Report states, “The BSA defines the roles and responsibilities for agencies and industry to enable defense of the United States’ financial system…The last major reforms to the BSA were in 2001 before the rise of lone-actor terrorists, decentralized cryptocurrencies, sophisticated transnational trafficking schemes, and cybercrime.”
While many hope Congress may consider the fact that the SEC and CFTC statutes are also outdated – making a 2001 BSA law seem like a baby – the disconcerting combination of including decentralized cryptocurrency with lone-actor terrorists, trafficking schemes and cybercrime – provides a good pulse as to how cryptocurrencies are still viewed by many in Congress.
At least it is #2, behind lone-actor terrorists, so this cannot be all bad for crypto. However, to think this is somehow a mischaracterization of the existential threat of cryptocurrencies, it would seem to be more of a mischaracterization of the concept of decentralization. The announcement of Libra and testimony by David Marcus in Congress, combined with comments by the President and Treasury Secretary – made clear how policymakers on both sides of the aisle had a strong dislike for cryptocurrency, whether it was Bitcoin or Libra.
Since the Treasury department and its Office of Terrorism and Financial Intelligence has had under its purview cryptocurrencies with the Financial Crimes and Enforcement Network (FinCEN), it makes sense why the immediate concern of the Secretary of the Treasury relate to viewing decentralized cryptocurrency as a national security threat. Cryptocurrency is a new form of “currency” after all, SEC and CFTC regulations aside, so, there is always the risk of a new type of currency being used in ways to thwart Anti-Money Laundering (AML) protections that are established in the traditional banking system.
The problem that exists for the cryptocurrency and blockchain industry – one that will not go away anytime soon – is less the cryptocurrency part and more the decentralized part. The idea of miners all over the world validating transactions versus a centralized bank is the part that seems to throw any type of common BSA examination into disarray.
Later on in the report, it is noted “The industry is also adopting or adapting to new products and services in the marketplace, such as cryptocurrencies, payments platforms, and blockchain technologies. Bad actors actively seek opportunities to leverage, abuse, or trick these tools.” The report goes on to note that, “…regulators need to understand this changing environment to regulate in a manner that encourages innovation while limiting negative impacts to our financial system and national security.”
While the industry is adopting to new products and services, the fact that bad actors seek opportunities to “trick these tools” does not fully tell the story as sometimes bad actors are “tricked” by the tools of blockchain. To simply label cryptocurrencies as a means of terrorist financing misses the other side of the digital coin to cryptocurrencies – the “decentralized” aspect of a blockchain, a distributed ledger of all transactions that cannot be altered. Indeed, just recently, the “largest dark web child sex abuse marketplace run by bitcoin” was uncovered – in a sting operation that was able to use the blockchain properties of the cryptocurrency to find the wrongdoers. Could it be that in the final prognosis by BSA examiners in the field that “tricking” the tools of a decentralized cryptocurrency are actually much harder than cash transactions or even typical financial transactions.
Still not convinced and think the decentralized cryptocurrency is akin to lone wolf terrorists and transnational crime? That the spawn of Bitcoin on the world will be our doom, the end of civilization as we know it? Not so fast, as this new technology has recently helped crack the case in South Korea related to child sex abuse. And, if we remember the Silk Road escapade, it is not just the person who ran Silk Road who sits behind bars, but also two former FBI agents who attempted to abscond with $25 million in Bitcoin after they completed the bust. Only this led to their arrest – in spite of their successful efforts to walk into U.S. banks and suppress the existence of transactions because of their authority as F.B.I. agents, blockchain technology is neutral when it comes to revealing the truth and was similarly used to bust the agents looking to take some of the Silk Road bitcoin for themselves.
At the end of the day, there is certainly a view of “national security” and how that is threatened by a “decentralized cryptocurrency”. However, unlike a lone wolf terrorist or cybercrime, the concept of a terrorist or a cybercriminal implies a person who chooses to do bad things. By lumping in the concept of cryptocurrency implies that it also was wrought by evildoers. Hopefully, as the new BSA bill works its way through the Senate and as new Labs start to spring up around D.C., the regulators will note that perhaps, there is some virtue to a decentralized cryptocurrency after all.
For further details on the House Report and the bill that is now in the Senate, see below:
COUNTER ACT OF 2019
House Report 116-245 to Accompany the COUNTER ACT of 2019