Cops v Crypto

A rift between cryptocurrency and law enforcement groups is threatening a landmark digital asset bill championed by Senate Banking Chair Tim Scott.

Groups representing police and prosecutors have been quietly raising concerns in recent months about a small but pivotal section of the crypto bill, which Republicans are hoping to advance soon after Congress returns to Washington next week from its recess. But crypto supporters, who pushed for the language, aren’t budging on the need for its inclusion.

The provision in question would protect certain crypto software developers or firms from being prosecuted for illicit activity committed by others on platforms they create. In a series of previously unreported letters to lawmakers, groups including the National Sheriffs’ Association and the National District Attorneys Association said that the language would impede law enforcement’s ability to crack down on financial crime.

The law enforcement concerns, which have been echoed by Senate Judiciary Chair Chuck Grassley (R-Iowa), are a major potential problem for the underlying crypto bill. Lawmakers are eyeing a resolution to a high-profile clash between crypto firms and banks that has bogged the legislation down for months. But Scott now needs to solve a series of other issues — including the crypto software developer spat — in order to win bipartisan support at a potential Banking Committee markup.

The fight illustrates that concerns raised by critics about digital assets being used as a vehicle for fraud and financial crime remain persistent hurdles to legislative efforts that would help legitimize the industry.

Democrats including Sen. Catherine Cortez Masto, a former federal prosecutor and Nevada attorney general, are pushing for changes to address law enforcement concerns. A spokesperson for the Nevada Democrat, Lauren Wodarski, said she is “working with a wide variety of Senators, including Chairman Grassley, to ensure law enforcement and prosecutors have the enforcement tools they need.”

But the provision remains a top priority for the crypto industry and some Republicans, who say that existing law has been used to unfairly target crypto developers.

“It’s the most important part of the market structure bill, and I actually think it’s the thing that the industry has been the most united on,” said Amanda Tuminelli, the executive director of an industry-backed nonprofit called the DeFi Education Fund.

She said her group, which has been meeting with lawmakers about the issue, is open to adding a so-called rule of construction to the existing language telling courts and agencies how to interpret the provision. But “we’re not open to changing the actual text of it,” she added.

A spokesperson for Scott (R-S.C.) said the senator “has been clear” that the language “is essential to delivering real rules of the road for digital assets.”

The provision “corrects the misuse of” existing law by “ensuring non-custodial software developers who never control customer funds are not treated as money transmitters, while preserving law enforcement authorities,” said the spokesperson, Jeff Naft.

The provision — which mirrors standalone legislation dubbed the Blockchain Regulatory Certainty Act — deals with a part of the crypto universe known as decentralized finance, or DeFi, that uses software to facilitate trading and lending and cut out centralized intermediaries like exchanges. It would exempt DeFi developers who do not control the funds that move on the platforms they create from having to register as money transmitters and comply with anti-money laundering requirements.

In a letter to lawmakers last month, the Sheriffs’ Association wrote that the “provision risks creating gaps in oversight and reducing access to critical information that federal, state, and local law enforcement rely on in financial crime investigations.” The NDAA — which represents state and local prosecutors — wrote in a separate February letter that the proposal “would further exacerbate the growing fraudulent and illicit activity that occurs on” crypto platforms. And the National Association of Assistant United States Attorneys warned in January that the language would “materially limit prosecutors’ ability to pursue financial crime cases involving the movement of funds outside established regulatory frameworks.”

All three law enforcement groups signaled in their letters that they are not necessarily opposed to the broader crypto effort.

It’s unclear if lawmakers will be able to settle on a landing place that satisfies both the crypto industry and Democrats like Cortez Masto and Sen. Mark Warner (D-Va.) who are concerned about the issue.

If senators don’t strike a deal to resolve the matter, it could risk the bill advancing through the Banking Committee without Democratic support — an outcome that wouldn’t bode well for the fate of the legislation, which needs bipartisan backing to clear the Senate. The law enforcement concerns could also catch on with more Republicans who are less sympathetic to the crypto sector.

Sen. Cynthia Lummis (R-Wyo.), a leading crypto ally who is helping lead talks over the bill, said in a statement she is “continuing to work on a bipartisan basis with Sen. Cortez Masto on the Blockchain Regulatory Certainty Act.”

“Publishing code is protected First Amendment speech, and software developers should not be required to cede their constitutional right to due process and fair notice just because they publish software,” she said.

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