Legislators have a strange relationship with magic. To achieve that which physically cannot be done, they like to wave magic wands and pretend that it can. Reality puts a limit on political power, a realization that always sits poorly with those in charge of our trillion-dollar bureaucratic machinery.
Senator Elizabeth Warren is a stunning case in point, and she’s had her aim at the magic-seeming world of digital assets like bitcoin for a while. Last month she cosponsored The Digital Asset Anti-Money Laundering Act of 2022 with Roger Marshall which attempts to put those assets under rules that echo the regulatory system that cryptocurrencies were created to escape.
The bill’s purpose is “closing loopholes and bringing the digital asset ecosystem into greater compliance with the anti–money laundering and countering the financing of terrorism (AML/CFT) frameworks governing the greater financial system.”
This turns tens of thousands of node runners, wallet users, or bitcoin holders into licensed money service businesses for running software on their computers. The bill’s text especially rallies against “unhosted” wallets, which are just assets that are not under the custody of a regulated exchange or bank-like entity—that are owned outright instead of being counterparty to a censorable banking contract. There can be no financial privacy in the senator’s world.
Money transmitter entities would be required to perform the sort of identification and counterparty checks that banks submit to, but the bill takes things one step further:
Prohibit financial institutions from using or transacting with digital asset mixers and other anonymity-enhancing technologies and from handling, using, or transacting with digital assets that have been anonymized using these technologies.
An old-world analogy of the absurdity of this is physical cash, where using an ATM and then making a bank deposit is the most rudimentary form of “anonymity enhancing technologies.” If the senators get their way, the kind of privacy that cash permits would be ruled out in the new world of bitcoin: we must see what you’re up to and make sure you’re not spending any funds we disapprove of.
Reality Reasserts Itself
Never before was a piece of proposed legislation so resolutely defeated by reality. Reality doesn’t go away simply because you label it “money laundering” or tangentially connect it to criminal behavior by the rogue states that ostensibly motived the bill.
Warren cannot do this for three reasons: Bitcoin doesn’t work the way she thinks. Congress is constitutionally barred from doing it. And because the bitcoin protocol doesn’t care about her magic-wand waving.
While bitcoin attempts to be money, it doesn’t conform to the physical properties of pieces of paper (or regulated banking institutions) that Warren pretends to understand. Paper dollars are handed over in trade, and bank transfers clear between banks or on the Federal Reserve’s balance sheet; something that has monetary value moves, and we therefore get money transmitter laws to keep tabs on who is moving funds to whom.
On the surface it seems that bitcoin operates in the same way:…