The Minority Staff of the Senate Banking, Housing, and Urban Affairs Committee released an analysis that contends that the Digital Asset Market Clarity Act would weaken law enforcement tools for decentralized cryptocurrency mixers.
The analysis notes that the U.S. Secret Service warned last year that criminals are increasingly using cryptocurrency mixers, also known as tumblers, to commingle illicit funds with monies from other sources. This makes any investigation and potential seizure more difficult for law enforcement, according to the Secret Service. It added that decentralized mixing services have features that benefit “criminals who want to further distance themselves from potential law enforcement detection.”
The minority staff report added that mixers have helped terror groups, state-affiliated hackers, and other illicit actors launder billions.
The analysis cited a recent report from the Trump Administration and G7+ partners that found that North Korea used “mixers, decentralized cryptocurrency exchanges, cross-chain bridges, and swap services” to fund its weapons of mass destruction and missile programs. One infamous mixer known as Tornado Cash laundered more than $7 billion for North Korea and criminal organizations from 2019 to 2022 alone.
Given these concerns, the minority staff of the Senate Banking Committee analyzed the recent text of the Clarity Act and found several ways that it would weaken law enforcement tools related to decentralized mixers.
- Section 10301 changes U.S. law to exempt the businesses behind decentralized platforms, like decentralized mixers, from having basic responsibilities to counter money laundering and terrorist financing. Even when businesses are making millions in fees from the operation of a decentralized platform, they would be carved out. The bill states that future anti-money laundering and countering the financing of terrorism (AML/CFT) rulemaking can apply only to a person that “controls the operation of” a “non-decentralized finance trading protocol” identified in rulemaking. Many DeFi actors would not be covered under these standards, and others would be incentivized to decentralize further to escape any AML/CFT requirements, the staff report says.
- Section 10303 fails to restore U.S. sanctions authority to effectively isolate decentralized mixers that are known to be laundering hundreds of millions for criminals or U.S. adversaries. All Democrats on the Banking Committee voted to close a statutory gap preventing Treasury from applying sanctions to specific decentralized mixers. But the Clarity Act leaves Treasury without sanctions authority that had cut down transactions involving Tornado Cash. The bill instead includes a “special measure” that would leave anyone in the United States free to transact with targeted platforms using their own wallets. Also, it would present no sanctions risk for non-U.S. persons that use an identified platform.
- Section 10604 removes the requirement to register with Treasury for businesses behind decentralized mixers. It also takes away tools used to prosecute actors behind the worst decentralized mixers like Tornado Cash. Unregistered digital asset services are known to present high illicit finance risk. Congress strengthened the U.S. registration requirement after 9/11 to cover those who set up informal money transfer systems or networks of people who facilitate transfer of money outside of the conventional financial system. But the bill broadly exempts businesses engaged in software development (DeFi businesses) from that registration requirement. Further,, a failure to register under is one way that prosecutors can initiate investigations and bring charges.
The staff report draws on various open-source reports, law enforcement warnings, industry analyses, and government findings. These findings, according to the minority committee staff, “paint a stark picture of how digital assets and decentralized finance (DeFi) services are already being exploited — and how the current text of this bill would make the problem worse.”