Senate Bill Could Open Crypto to U.S. Sanctions, but Industry Trying to Head it Off

As an analyst with experience in the digital assets industry, I believe the recent provision in the Senate’s intelligence committee spending package targeting crypto ties to terrorism is problematic and may not survive the budget process. The sudden appearance of this section without significant debate or awareness from the industry raises concerns about its potential implications and unintended consequences.

A bill carrying significant ramifications for the digital assets field was approved in the Senate Select Committee on Intelligence’s budget proposal more recently, with many in the sector and even some in Congress seemingly unaware. However, experts within the industry believe that the bill’s prospects are uncertain.

A Senate proposal for financing American intelligence activities contained a clause derived from prior legislation intended to obstruct the financing of terrorism through cryptocurrencies. This clause, as drafted, might necessitate substantial changes within the crypto sector, compelling increased efforts to unmask users and potentially endangering digital asset businesses due to potential sanctions. If enacted, this would represent a landmark U.S. crypto policy – without extensive discussion regarding its implications.

In this part of the intelligence budget allocation, we aim to expedite and mechanize the approval procedure for “digital asset transaction intermediaries” or “crypto exchanges” with ties to individuals backing terrorist organizations.

Despite the Intelligence Authorization Act receiving a unanimous approval in the committee with a vote of 17-0, the cryptocurrency section remained absent from both public discussions and the listed key provisions when Sen. Mark Warner (D-Va), the committee chairman, announced its passage through a press release. However, sources familiar with the matter revealed that Warner’s office has been arranging meetings with crypto sector representatives to discuss this particular section. The Digital Chamber, a lobbying organization for the industry, also confirmed their involvement in these talks.

The conversation implies that the issue remains under discussion as the budget plan moves closer to a Senate vote, possibly as part of the mandatory National Defense Authorization Act (NDAA).

Cody Carbone, the Digital Chamber’s chief police officer, shared with CoinDesk via email that he has discussed this matter with Warner’s team, and they are receptive to increased involvement from the industry. In his opinion, it is probable that the proposed change will be removed from the NDAA (National Defense Authorization Act) process due to strong opposition from the industry.

The House of Representatives might be hesitant to adopt such restrictive measures for the crypto industry following their approval of the Financial Innovation and Technology for the 21st Century Act (FIT21) last month. This legislation aims to regulate the industry while avoiding excessive restrictions. With one-third of House Democrats supporting this bill, crypto regulation could enjoy broad bipartisan backing in Congress. Notably, a similar industry victory occurred in the Senate, where 11 Democrats collaborated with Republicans to override the SEC accounting policy, despite President Joe Biden’s promised veto.

Due to the large number of senators who are favorable towards the industry, it might be challenging for legislation aimed at combating illicit finance to secure approval, particularly if it hasn’t gone through a public debate and amendment procedure. The initial bill was supported by Senators Warner, Jack Reed (D-RI), Mike Rounds (R-SD), and Mitt Romney (R-UT).

Overly broad?

The spending bill’s language might inadvertently affect a wider range of crypto-related entities than intended, potentially encompassing central banks issuing digital currencies (CBDCs) as well as software developers. This is according to industry experts, who note that some lawmakers may not have been aware of the bill. There are also potential concerns for users of popular stablecoins like Tether (USDT), which has faced scrutiny in the US over allegations of misuse by malicious actors.

I analyzed the situation and reached out to both Warner’s and Rubio’s offices for comments regarding the crypto provision. Unfortunately, I didn’t receive any responses from them.

Washington-based lobbyists from the cryptocurrency sector have emphasized their readiness for dialogue with policymakers regarding proposed legislation aimed at preventing unlawful usage of cryptocurrencies. These bills are widely viewed as essential to secure Senate Democratic support for other crypto regulations, such as those addressing market structures and stablecoin issuance.

Carbone expressed agreement with the objective of the legislation to stop financing for terrorist organizations abroad. He commended the provision that only applies to groups that “intentionally” channel funds to terrorists. However, he pointed out that the bill has both positive and negative aspects. The challenges he identified include unclear guidelines for designating offenders and an all-encompassing sanctions regime given to the U.S. Treasury Secretary. A more nuanced approach with tiered penalties could be a potential solution.

The cryptocurrency sector is determined to prevent another unexpected legislative action similar to the 2021 infrastructure bill, which suddenly introduced provisions for crypto taxation at the last minute. This surprise legislation intensified the industry’s resolve to increase its lobbying efforts in Washington, resulting in a more significant influence on current bills like this intelligence bill.