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USA's Money Laundering Act, FTX's "late Fix"?

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A glimpse of the American virtual assets supervision direction of the road, and learn useful experience and lessons.

原文标题：《 USA《反洗钱法案》，FTX 后的「亡羊补牢」？》

Original article author: Xiao Sa's legal team

At the end of 2022, FTX event sounded the alarm for virtual asset regulators around the world. In the face of the booming new fintech, what regulatory measures should we take to ensure that it can play the role of HP Finance and protect the security of users' funds? As a leading country in the forefront of virtual asset regulation, the United States released a draft legislation on strengthening virtual asset regulation at the end of 2022: The Digital Asset Anti-Money Laundering Act, the first draft legislation on virtual asset regulation in the United States after the FTX incident.

Whether or not this bill is ultimately passed, we can get a glimpse of the direction of virtual asset regulation in the United States and learn useful experience and lessons from it.

I. Overview of the US Digital Assets Anti-Money Laundering Act in 2022

In December 2022, U.S. Senators Elizabeth Warren and Roger Marshall, both Democrats from Massachusetts, introduced new legislation: Under the Digital Assets Anti-Money Laundering Act, FTX, one of the largest centralized virtual currency trading platforms in the United States, suffered a serious explosion due to the absence of financial supervision. In fact, the person in charge was even accused of fraud and other charges. They argue that a range of existing anti-money laundering laws and rules in the traditional financial sector need to be extended to the regulation of virtual assets. Although in the name of anti-money laundering, it is actually through the mandatory reporting system and other systems, to achieve the purpose of strong supervision of all virtual asset platforms.

The bill caused a lot of controversy when it was published. On the one hand, the virtual asset industry in the US hopes that the US government will introduce a unified regulatory framework at the federal level. This is mainly due to the lack of uniformity among the administrative licensing laws of virtual assets in the US states (typical regional administrative licensing laws such as Bite licence in New York State), as well as the complicated remittance licensing systems in each state. Creating barriers to financial innovation and creating a compliant, global platform for trading virtual assets is extremely expensive. Therefore, for the federal level of virtual assets legislative regulation, the industry generally expects attitude. But on the other hand, from the legislative experience of states in the United States and the world, the regulation of virtual assets is still immature. Except for countries that adopt a "one size fits all" policy, no country can really set out a road for reference in this field of legislation (otherwise FTX and Mentougou incidents would not happen frequently this year). Overall, therefore, the Digital Assets Anti-Money Laundering Act is a promising and controversial piece of legislation.

In short, the seven-page bill does not seem to be enough so far to support the U.S. virtual asset industry's hopes for a balanced and workable set of regulations.

First, let's look at the definition of DIGITAL ASSETS in the Act: Digital assets are assets issued or transferred using distributed ledgers, blockchain technology or similar means, including, but not limited to, virtual currencies, coins and tokens. Compared with FATF and the EU's definition of virtual assets, this Act follows the consistent simplicity in the US legislation on virtual assets. In order to improve operability, it directly provides more specific forms and types of virtual assets.

Second, at the level of specific regulations, the highlight of the bill is the introduction of traditional financial regulations: Anyone helping to maintain the public blockchain infrastructure through software development (including technology developers such as unmanaged wallet providers) or by verifying transactions on the network (that is, participants in blockchain nodes such as miners) must register as a Financial Institution. As a regulated financial institution, it must fulfill the following obligations:

1. Strict KYC system. Identify and record the personal information of each person who sends a transaction using its software or through its Internet-connected computer;

2. Establish and implement an effective and credible anti-money laundering system. If the financial institution has reason to suspect that a person (an account) is transferring funds in connection with a crime, the financial institution is obliged to prevent that person from using the software or to impose such restrictions as are reasonably necessary;

3. Strict and low quota trigger mandatory trading reporting system. File reports about its users without a warrant, government requirement, or probable cause as a trigger (the trigger report is limited to $10,000). The clause is similar to FATF travel rules.

In addition, every financial institution, including banks, custodian crypto financial institutions, and existing virtual asset financial service providers that are not strictly classified and defined, Would prohibit the use of private trading tools (such as Blender and Tornado Cash, which are on the OFAC sanctions list of the Treasury Department's Office of Foreign Assets Control) that effectively hide the source and direction of virtual assets, Can be used for money laundering) or privacy-currency (typical privacy-currency such as Zcash, Monero, etc.) transactions, whether they are suspected of violating any laws or simply protecting the privacy of the user or financial institution's transactions.

Second, legislative analysis

Objectively speaking, Sa's team does not believe that the Digital Assets Anti-Money Laundering Law is a good law that can promote the development of Web3 network, blockchain underlying technology and virtual assets industry. If the legislation is really implemented, it is likely to have great restrictions on the technological innovation of virtual assets.

First of all, the legislative technique is crude and the scope of supervision is too large. Instead of strictly classifying and defining virtual asset service providers, the Digital Assets Anti-Money Laundering Act broadly lumps wallet service providers, miners, and various crypto asset service providers together with the real centralization involved in providing virtual asset financial services. Unmanaged infrastructure providers and Web3 application developers with low financial risk are crudely included in financial regulation. In this way, the regulatory obligations of law enforcement agencies are directly placed on the public chain network validators (miners) and software technology development teams, who are not sure whether they have the regulatory capacity. In fact, this move does not reflect on the FTX explosion at all. Simply imposing supervision obligations on participants in the virtual asset industry does not solve any existing problems of centralized trading platforms, but directly increases the compliance costs of these entities.

Second, some provisions of the bill may be suspected of being unconstitutional. If passed, it is unclear whether the bill will work in practice, and it is likely to face a constitutional review by the U.S. courts. This is because the Digital Assets Anti-Money Laundering Act requires virtual asset software developers to register before releasing their code, which is suspected of violating the freedom of speech protected by the First Amendment of the U.S. Constitution.

The First Amendment to the U.S. Constitution says: "Congress shall make no law establishing an religion, or prohibiting the free exercise of religion, or abridging the freedom of speech, or the press, or the right of the people peaceably to assemble, and to petition the Government for redress." Generally speaking, the expression of the First Amendment establishes three freedoms: freedom of religion, freedom of expression (freedom of the press), and freedom of assembly. Since the 20th century, the United States has, through a series of precedents represented by (1) New York Times Co. v. United States and (2) Bernstein v. United States, Established a rule: code is speech, code freedom is freedom of speech protected by law.

Therefore, we have to wonder if the prior review registration system for virtual asset technology developers' code, which requires programmers or technology developers to publish only content that complies with the Bank Secrecy Act, may violate the free speech rights protected by the First Amendment.

Write at the end

Sister team has always been happy to see the worldwide legislation and supervision of virtual assets, which is worth some reference experience for our country. After the release of the draft Digital Assets Anti-Money Laundering Act in the US, Sa's team boldly predicted that if more detailed legislative measures could not be adopted to classify and regulate participants of different racetracks on the basis of delineating financial risks and balancing the interests of all parties, the bill would have almost no chance to be passed.

The year 2023 will be full of opportunities for virtual assets and Web3. Thanks to the development of AIGC technology, the virtual asset industry will become more scalable and creative, and the crypto world may be born with more interesting and beneficial applications.