Sen. Warren calls for increased safeguards in stablecoin legislation

Andrew Harrer/Bloomberg

Sen. Elizabeth Warren, D-Mass., is calling for Treasury Secretary Janet Yellen and other members of Congress to incorporate anti-money-laundering and combating the financing of terrorism provisions into all future stablecoin legislation to assist the fight against illicit actors.

The provisions, which draw from proposed rules first introduced last November in a letter sent by the Treasury to Congress following Hamas' attack on Israel, would support the creation of new sanctions similar to the agency's Correspondent Account or Payable-Through Account authorities in the traditional financial system to additionally target cryptocurrency exchanges and fintechs that transact with terrorist groups.

Other modifications seek to clearly define the authority of the Bank Secrecy Act and the International Emergency Economic Powers Act over international entities with touchpoints in the U.S., while outlining a cryptocurrency category of financial institution under the BSA that would include crypto exchanges and virtual asset service providers.

"At some point, cryptocurrency proponents are going to have to make a hard choice about what is more important: expanding and democratizing the market by many, many scales by making it more secure and reliable, or keeping crypto as a murky underworld suitable only for tech nerds and extreme libertarians," said Evan Kohlmann, founder of New York-based crypto fraud intelligence firm Cloudburst Technologies and American terrorism consultant.

Warren highlighted figures showing that Iran generated more than $186 million in fee revenue between 2015 and 2021 from validating cryptocurrency transactions, which involves reviewing the movement of assets across blockchain networks to confirm their legitimacy before the shifts are then recorded on chain. Validators can earn fees for this work.

This, as well as Hamas' growing dependence on digital assets to fund its activities, were Warren's prime examples for why increased safeguards surrounding digital assets are essential for national security.

"Stablecoin legislation, which will grow the crypto market and opportunities for terrorist fundraising, must include the full suite of AML tools that Treasury requested in its November 2023 letter to Congress as necessary to effectively combat that threat," Warren said in her letter.

Regulation and compliance

FDIC's Hill calls for more nuance in regulatory approach to digital assets

March 11, 2024 2:35 PM

Digital assets and the supporting distributed ledger technology have been a constant focus among legislators over the last few years as both regulators and financial institutions go back and forth on how much engagement in the crypto market is permissible and safe. 

In February, members of the House Financial Services Committee advanced a resolution opposing the Securities and Exchange Commission's accounting bulletin that would require SEC registrants custodying crypto assets for clients to record the risk as a liability on their balance sheets. 

More localized efforts include New York Attorney General Letitia James' draft legislation last May. The bill, named the Crypto Regulation, Protection, Transparency, and Oversight or CRPTO Act, would require crypto platforms to reimburse victims of fraud, require independent public audits of exchanges and provide the New York State Department of Financial Services with stronger governance over digital assets within the region.

While there are "firms in the digital asset ecosystem that are making good faith efforts to establish concrete guardrails," safeguards remain largely in the hands of individual organizations, said Isaac Boltansky, managing director and director of policy research at BTIG.

"There is a chasm between good faith efforts and an enforceable regulatory standard," Boltansky said. "It is incredibly difficult to imagine any digital asset legislation moving without additional clarity on the AML and [know-your-customer] front." 

Bipartisan cohorts of lawmakers have made concerted efforts to address AML shortcomings in crypto legislation before, but made little headway.

Introduced by Senator Jack Reed, D-R.I., in July, the Crypto-Asset National Security Enhancement and Enforcement Act sought to hold decentralized finance investors — those with controlling interests in providers of defi protocols — accountable for compliance violations under BSA guidelines. The bill was last discussed in October and failed to gain any further progress.

Warren, along with Sens. Kristen Gillibrand, D-N.Y., Cynthia Lummis, R-Wyo., and Roger Marshall, R-Kan., managed to include a crypto AML provision in an early version of the National Defense Authorization Act that was signed into law last December. The amendment was ultimately removed from the final iteration of the bill.

Jamal El-Hindi, counsel for Clifford Chance and former deputy director for the U.S. Treasury Financial Crimes Enforcement Network, or Fincen, said that creating new classifications of entities only to "saddle them with ill-fitting legacy requirements" is not enough, requiring further clarity of authority and regulatory requirements.

"When the [U.S. government] asks for new authorities, or asks, as Treasury has done, to be able to define and regulate a new category of entities such as a 'cryptocurrency-related category of financial institution,' we need appropriately tailored rules for these entities," El-Hindi said. 

As is often the case with legislation surrounding emerging technologies, international governments are leading the charge. 

In September 2020, the European Union introduced its Regulation on Markets in Crypto Assets or MiCA proposal. The framework imposes requirements for both issuers of crypto assets and service providers like capital requirements, custody of assets, a mandatory complaint holder procedure available to investors and rights of the investor against the issuer, according to the EU's summary. The MiCA regime went into effect on June 29, 2023.

Leaders of banks, credit unions and crypto-oriented fintechs wary of any potential regulations that might result from these discussions should look first to peers and other experienced industry experts to gauge how — if at all — they will be impacted.

"It sounds obvious, but the first and most important thing for financial institutions and fintechs to consider is whether and how proposed legislation affects them," said Daniel R. Kahan, partner at King & Spalding.