Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
The monkey's paw is unfurling. For years, the refrain among the crypto crowd has been the need for regulatory clarity. Now, the industry may be getting what it's been asking for—in nightmare form.
This week, Sen. Elizabeth Warren (D-Mass.) announced five new cosponsors for her landmark crypto legislation, dubbed the Digital Asset Anti-Money Laundering Act. After she introduced it in 2022, detractors warned that the draft's attempt to categorize crypto services such as wallet providers, miners, and blockchain validators as "money service businesses," and therefore subject to know-your-customer requirements just like traditional financial institutions, could cripple the industry.
Since reintroducing the measure in July, Warren's bill seemed to face steep odds, especially without the explicit endorsement of Senate Banking Chair Sherrod Brown (D-Ohio). And even though she had the nominal bipartisan support of Roger Marshall (R-Kans.) and Lindsey Graham (R-S.D.), a more centrist legislative effort emerged by senators including Mark Warner (D-Va.) and Mitt Romney (R-Utah).
October's attack by Hamas, and the ensuing debate around the use of crypto in illicit financing, reignited political interest in terrorism-focused legislation, which only intensified after the Treasury Department released a proposal two weeks ago to expand its supervisory powers. Warren's bill, which once seemed too radioactive to face serious consideration, suddenly gained new legs and sponsors—much to the chagrin of the crypto industry.
A twin effort in the House of Representatives has not been so lucky. Rep. Sean Casten (D-Ill.) has emerged as one of the fiercest critics of the crypto industry on the Hill, and not the type to denounce digital assets as "creepy dough" without engaging on their substance. He even appeared at the Blockchain Association's Policy Summit in late November, gamely participating on a panel with a Treasury official-turned-crypto lawyer.
In October, Casten sent a letter to the Treasury Department and White House alongside a bipartisan group of lawmakers expressing concern over Hamas' apparent reliance on crypto for payments, and he announced at a House Financial Services Committee hearing that he planned to introduce a version of Warren's bill in the House.
Since the announcement, Casten has sought a Republican co-lead for the bill. I viewed an email that his legislative staff sent out to House Republican staffers in November, inquiring whether their bosses would be interested in co-leading or being an "original cosponsor" on the legislation. The email highlights now-disputed figures for the amount of crypto payments received by Hamas, as well as the national security risks posed by crypto. It also cites the groups that have endorsed the Warren bill, including the Bank Policy Institute, the AARP, and the Massachusetts Bankers Association.
A follow-up email from December reads that "the crypto industry opposes being subject to Bank Secrecy Act obligations...and would instead prefer to implement their own AML controls," adding that Casten's call for new controls is echoed by senior Treasury officials.
According to a source familiar with the discussions who spoke on the condition of anonymity, Casten has struggled to find a Republican House member willing to introduce the bill alongside him. The difference from the Senate? Rep. Patrick McHenry (R-N.C.), the bowtied chair of the House Financial Services committee, who recently announced that next year will be his last.
According to the source, while House Republicans have been interested, they have been instructed by McHenry that their focus should be on his own legislative efforts—market structure and stablecoin regulation. Even when Casten looks beyond financial services, including foreign affairs, the select committee on China, and the select committee on intelligence, McHenry has been an impediment. "He holds a lot of sway within the House Republican Conference," they said. A spokesperson for McHenry did not respond to a request for comment.
The House version is unlikely to move forward without a Republican co-lead, and McHenry will remain a gatekeeper as long as he's in Congress. Still, there are signs he may be willing to horse trade for his beloved market structure and stablecoin legislation. Earlier this week, McHenry told Punchbowl News that he wants "workable policies" for anti-money laundering as it relates to crypto. Just don't imagine that any concessions will come for free.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
