Bitcoin Editor at Large
The first thing I want to make clear is I do not support criminals, criminal activity or terrorism of any sort. I am all for laws that make it harder for these types of organizations to exist and operate. The bummer is all laws have consequences to regular law-abiding citizens like you and me. No matter your philosophical ideologies on the matter, it is best to know and understand the facts. The legal system is unforgiving to ignorance. Bitcoin and CryptoCurrency regulations and laws are the hottest topics in the world right now. Governments are quickly trying to understand and deal with the reality that Bitcoin is here to stay.
Last week a friend forwarded me a link in the back alleys of a slack group. He said I needed to check something out that has legal implications to Bitcoin. The link was to The US Committee On The Judiciary hearing held on 11/28/17 headed up by Chairman Senator Chuck Grassley entitled, “S.1241: Modernizing AML Laws to Combat Money Laundering and Terrorist Financing.” In short, the hearing was over two hours long and a bunch of bureaucrats and a few “witnesses,” one from Coinbase notably, and others from various public and private organizations presenting testimony. The hearing was filled with compelling facts and statistics on how criminal organizations are getting away with laundering trillions of dollars.
With all the speculation, assumptions and rumors being put out about how this might affect Crypto, I wanted to get to the bottom of this. I am not a legal eagle, but owning a company for years I do understand the importance of knowing the rules of engagement. I also get that in those rules there are 50 shades of grey that attorneys bill hundreds of hours preparing for and arguing in a court of law. This is why you need to do your research. My goal in this article is to do my best to break down S.1241 and present the facts on what this law might mean to Bitcoiners and Crypto holders.
In addition, I wanted to add another layer of insight and queried several voices in the Bitcoin and Crypto community for their opinion. Hopefully this information will help educate people as to what’s at stake.
S.1241: Combatting Money Laundering Terrorist Financing, and Counterfeiting act of 2017 is exactly what is says it is; a bill designed to update antiquated Anti Money Laundering laws (AML).
The AML laws were originally written to target the “Cocaine Cowboys” and prevent the rampant money laundering that was going on back then. As time has passed we are in a new era, and the current laws need to be modernized to handle drug cartels, trans global criminal enterprises and terrorist organizations.
S.1241 is designed to help modernize the AML laws which will give law enforcement more tools to prosecute and close legal loopholes. It will also clarify rules on evidence for prosecutors and judges, which in turn will help increase convictions. To put it bluntly, it will make it easier to go after drug kingpins, drug cartels and terrorist organizations by using the age old saying, “Follow the Money!” However, now they will be able to seize that money more easily.
S.1241 also updates the AML laws to cover, “new types of money.” This is where the caveat is for Bitcoin and Crypto holders in Section 13. Prepaid Access Devices, Digital Currencies, Or Other Similar Instruments.
The Senators and individuals testifying at this hearing presented very compelling statistics on the ineffectiveness of our current AML laws in the United States and Globally. 99.99% of criminal money laundering goes unprosecuted. They hammered on the point that passing S.1241 is important to our national security. I pulled these quotes directly from some of the witness’s testimony and linked to it if you want to dig deeper.
“International Monetary Fund (IMF) has estimated that money laundering comprises approximately 2 to 5 percent of the world’s gross domestic product (GDP) each year, or approximately $1.5 trillion to $3.7 trillion in 2015 — nearly the size of the U.S. federal budget. Similarly, the United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds. According to the UNODC, criminal proceeds in 2009 amounted to 3.6 percent of global GDP, roughly $2.7 trillion.” –John Cassara, Center On Sanctions And Illicit Finance
“The World Bank and IMF estimate that every year between $2.17 and $3.61 trillion U.S. dollars are laundered. Criminals are willing to test out new methods of laundering and are early adopters of new technologies. Because of this our AML laws must also evolve, especially given the increased use of the global financial system by money launderers, terrorist financers, drug traffickers, transnational organized criminals, and cybercriminals to place their financial transactions out of reach.” — Kathryn Haun Rodriguez, Coinbase Board of Directors
· Addresses gaps in the current AML laws.
· Stronger prosecutor powers
· Criminalizes if you lie to a bank
· Civil penalties to banks who do not respond to records requests from law enforcement
· Measures to improve communication between banks and to help make reporting suspicious activity easier.
· Increases the sentence from 5 years to 10 years for individuals smuggling more than 10k in and out of the United States.
· Clarifies rules on moving money in and out of the United States to evade taxes.
· Clarifies rules on shell corporations and people trying to hide money anonymously using complex business structures.
· Adds rules to go after trade based money laundering, real estate money laundering and other modern money laundering schemes
· Changes the status of “digital currencies” and defines it as a “monetary instrument.” (Section 13)
Section 13 lays down the framework for Bitcoin and Altcoin regulation when it comes to moving money in and out of the US. To put it in layman’s terms, S.1241 adds digital currency in the definition of financial institutions and includes it along with digital exchanges or tumbler as monetary instruments. This definition opens the debate on what is defined as a “digital currency,” Logic would say that the US government would consider Bitcoin and CryptoCurrency a form of “digital currency.” If so, this could potentially require Bitcoin and Crypto holders, businesses and exchanges to comply with the BSA reporting rules. This means any time you move more than 10k in or out of the US, you might have to report it. Lying about it would be a crime. They did not come out and specifically mention Bitcoin or Altcoins, but I foresee the shades of grey of defining themselves as we move forward.
I pulled this from the Blockchain Blog of Steptoe & Johnson, LLP. It does a great job breaking down three significant proposed changes in S.1241 and the “Implications on “blockchain and digital currencies.” If you have time, read the entire article.
1. “Inclusion of digital currency in the definition of financial institution and monetary instrument under 31 U.S.C. § 5312(a): This provision of the Bank Secrecy Act (“BSA”) would be amended to state that “(2) “financial institution” means — […] (K) an issuer, redeemer, or cashier of travelers’ checks, checks, money orders, prepaid access devices, digital currency, or similar instruments, or any digital exchanger or tumbler of digital currency” [changes in bold];
2. GAO Report: The bill calls for the Comptroller General to submit a report to Congress on: (1) the impact the amendments would have on law enforcement, the prepaid access industry, and consumers; and (2) the implementation and enforcement of the Treasury Department’s Bank Secrecy Act (“BSA”) regulations (76 Fed. Reg. 45403); and
3. Homeland Security and Customs and Border Protection (“CBP”) Report: The bill calls for the Secretary of Homeland Security and the CBP Commissioner to submit a report to Congress on: (1) a strategy to interdict and detect prepaid access devices, digital currencies, and similar instruments at border crossings; and (2) an assessment of the infrastructure needed for this strategy.”
Here is a basic definition of BSA pulled from google. The Bank Secrecy Act (BSA), also known as the Currency and Foreign Transactions Reporting Act, is legislation passed by the United States Congress in 1970 that requires U.S. financial institutions to collaborate with the U.S. government in cases of suspected money laundering and fraud.
By including “digital currencies” as monetary instrument, it means Crypto transactions could be considered as “digital currencies.” Complying with BSA reporting of any “digital currency” movement over 10K might then be required. This potentially opens a can of worms if any and all Bitcoin or Altcoin movement over 10k has to be reported.
I will defer to Steptoe & Johnson, LLP,’s blockchain blog again to concisely explain BSA.
“Under the BSA, a person or an agent or a bailee of the person who is transporting, will transport, or has transported “monetary instruments” of more than $10,000 at one time to, from, or through the US must file a Report of International Transportation of Currency or Monetary Instruments . Including digital currency in the definition of “monetary instrument” would subject those devices to these anti-money laundering reporting requirements under the BSA, as stated in the bill summary.”
There was little said about “digital currency” in this hearing. I had hoped to hear more clarifications on the implications this legislation has on Bitcoin and Crypto holders. Everyone should take a moment and listen to Senator Grassley’s question and Ms. Haun’s response at 1:54:57 in the hearing. Ms. Haun discusses the evolution of the guidelines that define “currency vs virtual currency” put forth in 2013 by the Department of the Treasury Financial Crimes Network (FinCEN). These guidelines put the framework in place to regulate persons administering, exchanging or using virtual currencies. The guidelines require exchanges dealing with virtual currencies to comply to BSA rules and regulations and report suspicious transactions. The legit exchanges doing business in the US at the moment are supposed to be following BSA.
At the end of her statement, you will notice Ms. Haun’s former prosecutor side starts to come out when she talks about the problems with unregulated and unregistered exchanges. She stops herself abruptly from elaborating on the need to go after unregulated exchanges. One can only assume that it would not be a good look for a member of the Coinbase’s board of directors to be advocating criminal prosecution of other exchanges. This could be construed as a conflict of interest to some and would not be the first-time big business helped write and advocate laws that help regulate out their competition.
I do believe Ms. Haun’s motives are pure here, and she meant no malice. I think everyone can agree, going after shady exchanges and bad actors is a good thing. The problem is what and who defines a shady exchange and bad actors?
Here is a cheat sheet for those of you who want to listen to what was said at the hearing.
“Ms Haun because you touched upon prosecution problems with currency. What should be done to ensure law enforcement can identify, prevent and prosecute criminals who use digital currencies to profit and fund their operations.”
“Is this transition we’re seeing from cash to digital going to make it easier or harder for law enforcement to track these money laundering cases, and do you think these drug cartels are going to start going cash free, and what do you do about it?”
Kathryn is a bit of a legend in Bitcoin lore. You may not know her name, but you most certainly have heard of her work. She helped successfully prosecute the corrupt federal agents who stole 21,000 Bitcoins from the Silk Road Investigation. It is no wonder why Coinbase asked her to join their Board where she is chair of its Audit and Risk Committee. She also advises technology companies and investment funds. I certainly hope Coinbase is compensating her well as she is clearly a ninja attorney who knows how to navigate the murky waters of AML and digital currencies. This is not to mention her DOJ contacts.
For the record, this is not Ms. Haun’s first testimony on behalf of Coinbase. The testimony she gave at the November 28, 2017 hearing is boring compared to what she gave on Jun 8, 2017 before the US House of Representatives Committee on Financial Services and Subcommittee on Terrorism and Illicit Finance. Haun was only two weeks into her job at Coinbase and goes into depth on Bitcoin and Cryptocurrencies and her involvement prosecuting cybercrimes.
Let’s review her resume.
· Former Assistant US Attorney in San Francisco
· Served in senior posts at the US Department of Justice National Security Division
· First Digital Currency Coordinator at the US Department of Justice.
· Visiting Lecturer Cyber Crime, Financial Technologies and Cryptocurrency at Stanford University
· Former clerk for Supreme Court Justice, Anthony Kennedy
· Prosecuted the corrupt DEA and Secret Service agents on the Silk Road Task Force who stole 21,000 Bitcoin during the Investigation.
· Recently joined the Board of Directors of Coinbase Global, Inc
Enforcement is currently and will be the biggest challenge. Law Enforcement, banks and exchanges are already having trouble keeping up with the current demand of enforcing and complying to laws and regulations. S.1241 will make it easier to prosecute criminal activity, but it will also clog up the system with more cases. There was mention in the hearing about banks being defensively over reporting suspicious activity to avoid penalties for not complying. The other challenge I see are the shades of grey in the language used in S.1241. Attorneys will have a field day arguing every letter of the law.
Steptoe & Johnson, LLP,’s blockchain blog does a great job breaking down a few other challenges.
“The challenge, of course, is that many of today’s financial instruments work this way. If you have online banking access on your phone, or the ability to draw cash off of your credit cards, and this exceeds $10,000, then you are similarly carrying digitally-accessible currency across the border. Moreover, these digital capabilities enable a person to access the overwhelming currency of choice for criminals: Cash.
This challenge is less about virtual currency and more about how to adapt regulatory structures designed for an earlier era to today’s digitally-enabled economy. Singling out virtual currencies at the border doesn’t materially impact the risk of money laundering or terrorism financing. While criminals are using digital currencies, like Bitcoin, the majority of digital currency activity does not involve illicit activity (See Jonathan Levin of Chainalysis’s Written Testimony). In fact, according to a recent report from the Center for a New American Security (CNAS), “There is no more than anecdotal evidence that terrorist groups have used virtual currencies to support themselves.” The technology does have features that may be attractive to criminals, including enabling low cost, efficient, peer-to-peer transactions, but those features are exactly why the technology may bring huge benefits to myriad industries (e.g., Digital Identity, Smart Contracts, Pharmaceuticals).”
The Bitcoin and Crypto world is extremely diverse. It is safe to say that not everyone agrees or gets along. I wanted to add another layer of perspective and asked several thought leaders in the Crypto world the same question. The responses are all over the board. Some people kept it short and sweet, some opted out while others went full court press. The opinions you are about to read are unedited and unfiltered.
What do you think of the US Senate Move to Criminalize Non-Disclosure of Cryptocurrency Ownership?
Ari Paul, CIO Block Tower Capital, @aridavidpaul, USA
“The bill in front of the Senate judiciary committee is mostly an extension of existing rules to cryptocurrency — no surprise. This year’s parabolic surge in cryptocurrency has drawn the attention of regulators globally however, and I expect far more draconian regulations in the future. At the start of the year, cryptocurrency was $18 billion, too small to be viewed as a threat to governments; at $330 billion, they now view it as an important phenomenon to control.”
Vortex, World Crypto Network, The Bitcoin News Show, @theonevortex, USA
“There are many people that saw this coming. We all knew that creating a money outside of the nation state would bring up these kinds of fears. However, I am very much hoping for a continued soft touch regulation approach. It may not seem like it but there are many in the US government who see the need and importance for something like bitcoin. In my opinion the US government will try their best to regulate, and we’ll have places to use and spend our bitcoin. There will also be an entire space that no government can regulate. This to me is the most exciting part as this is where money can truly be set free.”
The Wolf, Infamous Crypto Trader @WolfOfPoloniex, USA
Dr. Julian Hosp, Co-founder TenX @julianhosp, Singapore
“Doing so would be the question, why they don’t criminalize every fiat cash holding. It would have a very adverse effect on the US economy and I don’t think the US will go through with it.”
Ryan Dippmann, Co-founder of Azteco, @ryandippmann, USA
“Bitcoin is Software as a Service (SaaS), or secure data exchanged between users; that connects the 4B+ unbanked and the 4B+ without Internet access to the new global e-commerce. The US Senate Bill S.1241 mischaracterizes Bitcoin as a “crypto currency” that only restricts entrepreneurs and software developers in the US from taking part in the massive global opportunity. I think they (Diane Feinstein and co) should be told that trying to stop Bitcoin is like trying to stop the invention of the internal combustion engine, the model-t or radio. All of those things made America a better place and so will Bitcoin.”
Bitfinex’ed, Crypto Trader, Whistle Blower, @Bitfinexed
“I don’t think that will pass, and even if it does it will get thrown out.”
Leonardo De Barros, Founder PymiAlimentos, BitcoinZuela @bitconzuela, Venzuela
“Cryptocurrencies are money, and governments always want to know where the money is, who has it and what you are doing with it. So, imho this measure was to be expected. The good thing is bitcoin is censorship resistant!”
Akin Fernandez, Co-founder Azteco @beautyon, UK
“It is profoundly un American and unconstitutional, and will be shot down. The 5th Amendment protects all Americans from self-incrimination, so this is a nonstarter. No one “owns cryptocurrency”; you have knowledge of a piece of text only, text that is protected speech. The hapless overworked men in the Senate have got this entirely wrong, because some bad actors (CoinCenter) have lied to them.
This explains it all.”
Gabriel D Vine, Musician, Futurist, Future Rant, World Crypto Network @gabrieldvine, USA
“Cypherpunks have been expecting this move for twenty years. The constant propaganda to encourage “bans on cash” has been a signal that this process was already underway, and this latest move is merely a confirmation that the desire for authoritarian government surveillance extends to transactions down to the smallest unit. The blatancy of this legislation will be a good wakeup call to the Bitcoin ecosystem that, as longtime thinkers in the space have been declaring for years now, privacy (and by extension, fungibility) is the number one priority for development innovations at the moment, especially now that Segregated Witness (enabling second-tier scaling) is live and in use. Fortunately, the research of the past few years into keeping senders, recipients, and amounts of Bitcoin transactions totally encrypted and private has advanced greatly, and such legislation will only speed adoption of such technologies to evade detection by violent state actors.”
Jimmy Song, Bitcoin Developer and Entrepreneur, @jimmysong, USA
“It’s a good thing law tends to take a long time.”
Taking everything into consideration, I am not concerned about this. It is inevitable that we will see more regulation and new laws on the books regarding Bitcoin and Cryptocurrency as the years pass. Nothing has changed, and nothing will in the immediate future. If anything, these laws are already written in the grey areas of current laws. All this does is empower law enforcement and prosecutors even more.
The problem I see is the precedence it sets. We tend to rationalize laws targeting criminals as, “I am not doing anything wrong. This targets bad guys, so it’s all good.” Unfortunately, Americans have had their privacy and liberty chipped away under the guise of “National Security.” Every year we lose a little more of our civil liberties and privacy to laws targeting criminals or terrorists. I do not see this changing anytime soon.
The misconception that many people have is that S.1241 is going to change the game. It might help them convict some bigger fish, but the sad thing is nothing will ever change. No matter who you are or how sly you think might be, if the government or law enforcement wants to take you down, they will take you down. It doesn’t matter what laws are written on the books.
I am interested to see how all this plays out in the future. The one thing I know for sure, I will comply with whatever they ask. I encourage you to do the same. There is no reason to jeopardize losing everything or going to jail over Crypto. The best thing you can do is to do read up, research and stay informed. #knowledgeispower
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