Bipartisan Senators Warn Crypto Bill Could Weaken Money Laundering Enforcement

What Happened

“Blockchain developers who have simply written code and maintain open-source infrastructure have lived under threat of being classified as money transmitters for far too long,” Lummis said when introducing the standalone BRCA.

Market Context

According to Politico, Grassley and Durbin wrote in a private letter to Scott and ranking member Elizabeth Warren that Section 604 of the crypto market structure legislation “falls squarely within the Judiciary Committee’s jurisdiction,” adding that their panel “was not consulted” about the language ahead of a since-postponed markup.

The debate centers on decentralized finance platforms that use software to facilitate trading and lending without centralized intermediaries.

Why It Matters

Senate Judiciary leaders Chuck Grassley and senators have warned that a provision in Senate Banking Chair Tim Scott’s crypto bill could curtail law enforcement’s ability to prosecute money laundering and other illicit financial crimes.

They warned it would have “likely precluded the government from bringing charges against” the founder of Tornado Cash, a crypto mixer platform prosecutors said was used to launder money.

“Such a gap risks attracting illicit actors—like cartels and other sophisticated criminal organizations—to decentralized platforms,” the letter stated.

Details

The provision would exempt certain blockchain software developers from financial licensing requirements.

The section mirrors the Blockchain Regulatory Certainty Act, bipartisan legislation led by Senator Cynthia Lummis and Senator Ron Wyden.

Law Enforcement Warns of Prosecution Gaps

The disputed provision exempts “a dangerously broad category of actors” from criminal law treatment, according to the Grassley-Durbin letter.

A co-founder of the platform was found guilty of operating an unlicensed money transmitting business last year, though crypto proponents and congressional Republicans have decried the conviction.

The National Association of Assistant United States Attorneys also echoed concerns, writing that the bill would “materially limit prosecutors’ ability to pursue financial crime cases involving the movement of funds outside established regulatory frameworks.“

A committee spokesperson for Scott defended the provision, stating the South Carolina Republican “remains committed to protecting software developers while ensuring that law enforcement has the necessary tools to prosecute actual illegal money transmission operations.“

The parliamentarian has ruled that the Blockchain Regulatory Certainty Act falls squarely within the Banking Committee’s jurisdiction, according to spokesperson Jeff Naft.

Developer Protections Collide With Financial Crime Concerns

Democratic senators negotiating with Republicans have raised concerns about DeFi being used for illicit finance and pushed for changes to the developer exemption language.

They were preparing to try to amend it during a markup before the session was postponed.

GOP crypto allies maintain new exemptions are essential for innovation.

“This designation makes no sense when they never touch, control, or have access to user funds, and unnecessarily limits innovation.“

The Solana Policy Institute also recently asked the SEC to grant explicit exemptions for developers of open-source, non-custodial software, arguing that existing frameworks built around centralized intermediaries do not fit smart-contract-based systems in which users retain custody of their assets.

In DeFi systems, users retain custody of their assets, approve their own transactions, and interact directly with public blockchains without the software holding funds or exercising discretion.

SEC Chairman Paul Atkins has criticized the agency’s past reliance on regulation by enforcement, arguing that “engineers should not be subject to securities laws” simply for publishing code.

Commissioner Hester Peirce has similarly stated that regulators should not impose obligations on developers who do not custody assets or override user decisions.

Thousands of Developers Face Regulatory Uncertainty