'Pro Law Enforcement Bill' Clarity Passed Out of Committee
Feelings are mixed as U.S. Senate Banking Committee passes landmark cryptocurrency regulation while tension over core components remain.
The Senate Banking Committee passed its part of the Digital Asset Market Clarity Act 15-9 out of committee after more than two hours of deliberations on Thursday, positioning the bill for a full Senate vote after the text is merged with the Senate Agriculture Committee’s draft on the Commodity Futures Trading Commission’s authority.
Over the past months, the Banking Committee’s draft has been widely criticized for expanding surveillance powers over digital assets, while opponents have argued that the bill’s powers do not go far enough. During Thursday’s markup, Wyoming Senator Cynthia Lummis defended the bill’s law enforcement provisions, telling the committee: “This is a pro-law enforcement bill.”
L0la L33tz
How Much Surveillance is Enough Surveillance?
Even though the CLARITY Act was sold as ending regulation by prosecution, it’s now set to expand PATRIOT Act special measures to digital assets while arguably only narrowly improving on the prosecutorial trapdoor that convicted Tornado Cash and Samourai developers.
Lummis pointed to the bill’s extensive Bank Secrecy Act integration as evidence of its enforcement focus. “This bill, our bill, I think references the BSA 16 times,” she said. “So we’re really tying BSA into our bill.” The Bank Secrecy Act is the 1970 law that requires financial institutions to employ KYC measures and monitor and report customer transactions to FinCEN under criminal penalties.
During Thursday’s hearing, Lummis rattled off a list of surveillance provisions: Treasury’s expanded special measures authority, studies on mixers and tumblers, annual reports on foreign jurisdictions’ AML compliance, and temporary holds for suspicious activities.
Senator Elizabeth Warren disagreed that the bill went far enough, defending her failed amendment attempts to restore OFAC’s authority to sanction Tornado Cash. She called the platform a “notorious mixer that had been used to launder more than $7 billion for criminals and foreign entities, including more than $450 million for a North Korean hacking group.” Warren asked rhetorically, “What purpose does Tornado Cash serve except to hide where the money came from and where the money is going to? It’s the terrorists, money launderers, Iran.”
But Tornado Cash did not launder $7 billion. The figure represents the total amount transacted in the charged time period, of which around $1.5 billion is estimated to have been of illicit origin. Lummis countered Warren’s criticisms explaining that the bill was already designed to target illicit behavior.
Crypto industry experts were quick to call out the dissonance. As CoinCenter CEO Peter van Valkenburgh wrote on X in response to Senator Kim’s failed amendment to add a distinct BSA category for DeFi protocols, “there is so much new BSA authority in this bill. There will be so much more collection of intimate data about innocent Americans as a result. That this still is not acceptable to surveillance hawks is disappointing.”
Van Valkenburgh also rebutted Warren’s characterization of Tornado Cash as a “service,” noting that it was “immutable software that could never have been effectively sanctioned without full bans on publishing the blockchain,” he said. Warren’s amendment would have directed OFAC to do the impossible and try to punish an immutable smart contract, he argued.
“It won’t work and would only ban Americans from using good privacy tools.”
L0la L33tz
PATRIOT Act Provisions, BSA Risks
The bill references Section 5138A of the PATRIOT Act four times across titles II and III. Section 5318A, added to the Bank Secrecy Act in 2001, gives the US Treasury five escalating “special measures” it can impose when it finds a foreign jurisdiction, institution, class of transaction or type of account to be of “primary money laundering concern.”
Historically it has been used sparingly, mostly against foreign banks in countries like Myanmar, North Korea, and Iran. Now the provision finds itself inside crypto legislation, meaning Treasury authorities can treat entire protocols as “primary money laundering concerns,” potentially limiting the availability of privacy tools. The Tornado Cash sanctions already attempted this, but with Section 5318A, Treasury would have statutory authority to essentially achieve the same effect, this time avoiding the Fifth Circuit’s ability to review whether immutable code qualifies as sanctionable “property,” as no sanctions would be imposed.
Worse yet, Section 303 amends Section 5318A to add a sixth special measure category dubbed “certain transmittal of funds.” But the bill doesn’t define what that entails, leaving Treasury officials with broad discretion over which cryptocurrency transactions fall under the new category.
The expansion of the PATRIOT Act to digital assets is nothing new. Last year, the White House tasked the Treasury with finalizing a special measure rule for digital assets, which FinCEN Director Andrea Gacki had stated to have been in the works.
The bill’s bipartisan support also came at a cost. Last-minute negotiations between Republicans and Democrats resulted in a compromise that removed language from Section 301 referencing the Blockchain Regulatory Certainty Act, according to sources familiar with the discussions.
Section 301 calls on Treasury and the Securities and Exchange Commission (SEC) to address the regulatory obligations of individuals operating “non-decentralized finance trading protocols” that act as securities intermediaries and fall under the Bank Secrecy Act.
With the references to the BRCA intact, non-custodial developers would have stood protected from impeding BSA obligations by failing to qualify as a financial intermediary. The change now means that Section 301 could require DeFi protocols to comply with Bank Secrecy Act obligations even if their developers would otherwise be protected from being qualified as money transmitters under BRCA provisions.
But the section continues to contain protections for sufficiently decentralized projects, writes CoinCenter, which remains optimistic on the bill: “the section is premised on a meaningful distinction between decentralized protocols and ‘non-decentralized’ protocols in which a group of persons under common control have the ability to alter the protocol or restrict access.”
The exact measure for what “common control” is, however, remains unclear, and rather appears to be subject to interpretation. Over the past years, we have seen US courts take vastly different stances on technologies that virtually offer the same levels of decentralization – the most stark example being the same Judge qualifying Uniswap as decentralized, while allowing arguments to proceed that Tornado Cash isn’t. To the contrary, the European Central Bank has published a paper finding Uniswap not sufficiently decentralized – highlighting just how interpretative a definition of common control can be.
The White House tasked Congress to consider passing laws for the application of the Bank Secrecy Act (BSA) last year, despite growing criticism of the BSA’s effectiveness. As Cato Institute has found, with 28.7M reports filed and only 275 launched investigations, “the BSA doesn’t work,” while others question whether the law is in line with the US Constitution.
The banking sector yet continues to lobby for its application to cryptocurrencies, conceding that it “requires tens of thousands of employees and countless hours.” Reforms of the BSA will be discussed by the House Financial Services Committee next week.
Industry groups praised the bill but flagged the unresolved Section 301 issue. “We still have work to do on Section 301 to protect non-controlling developers and providers,” said the DeFi Education Fund.
L0la L33tz
Luke-Warm Developer Protections
Section 604 of the CLARITY Act incorporates the Blockchain Regulatory Certainty Act as the bills most anticipated section – a provision meant to protect developers who do not control user funds from being qualified as money transmitters under 18 U.S.C. § 1960.
But critics have questioned whether the provision really protects developers from prosecution at all, as it exempts Section 1960(b)(1)(C) from the protections — a statute stemming from the PATRIOT Act originally designed to target non-traditional financial networks such as Hawala, under which both the Tornado Cash and Samourai Wallet developers have been convicted.
Since its last draft in January, the bill has however been improved for developers, adding that prosecution requires “specific intent” to assist criminals in their actions. What constitutes such intent will be left up to law enforcement and the courts to decide, but it should protect developers from being held liable for merely having knowledge of illicit activity if such activity is not explicitly supported.
Now the bill stands ready to be merged with a final version of the Senate Agriculture Committee before heading to the Senate floor for a full vote.
Democrats insist on adding an ethics provision barring senior officials from owning cryptocurrency businesses — aimed primarily at President Trump’s World Liberty Financial project. But Senator Van Hollen’s amendment to prevent conflicts of interest failed 11 to 13, and until they are in, many Democrats have explicitly said they won’t support the bill.
Independent journalism does not finance itself. If you enjoyed this article, please consider making a donation. If you would like to note a correction to this article, please email corrections@therage.co
