The reports mandated by President Biden’s March executive order are here and seek to offer a comprehensive framework for the responsible development of digital assets (commonly known as cryptocurrencies). As noted early after the release, however, many of the items were left to be determined. But that doesn’t mean that the reports should be ignored. This series of blog posts will tease out some of the subtler points from each of the reports released on Friday.

Recommendations from the U.S. Department of the Treasury

The first report, “Action Plan to Address Illicit Financing Risks of Digital Assets,” came from the U.S. Department of the Treasury. And as the name suggests, the Treasury was tasked with identifying how the United States can develop a coordinated plan for mitigating illicit activity facilitated by cryptocurrencies (Section 7(c) of Executive Order 14067). To that end, the report offered the following seven recommendations:

  1. Monitor emerging risks.
  2. Improve global efforts to combat money laundering and terrorist financing.
  3. Expand the Bank Secrecy Act.
  4. Strengthen the U.S. effort to combat money laundering and terrorist financing.
  5. Hold criminals accountable.
  6. Engage with the private sector.
  7. Maintain the United States as a leader in finance and payments technology.

Let’s consider some of these recommendations in more detail.

To monitor risks, the Treasury called for the expansion of Bank Secrecy Act (BSA) in addition to what is already in the third recommendation. Considering that the BSA has been expanded legislatively through several acts over the years and has been expanded practically through inflation since 1972, further expansions are not warranted until the government can prove how effective the BSA has been. And if what evidence that is already available is any indication, the BSA should be limited or repealed, not expanded.

To improve efforts to combat money laundering and terrorist financing globally, the Treasury recommended exporting the U.S. regulatory code to other countries through the Financial Action Task Force (FATF) and “bilateral engagement.” And to improve such efforts within the United States, the Treasury called for the Financial Crimes Enforcement Network’s (FinCEN’s) supervisory enforcement functions to be strengthened. Much like with the BSA in general, FinCEN needs to be properly evaluated under its existing framework first. Before exporting and expanding regulations (or funding), the Treasury should be pinpointing exactly where there are problems and exactly how they intend to fix them.

To hold criminals accountable, the Treasury said that law enforcement will continue “investigating, detecting, disrupting, and prosecuting” financial crimes. Although this recommendation should be relatively innocuous, it was only a few weeks ago that the Treasury oversaw a controversial application of the law when the Office of Foreign Assets Control (OFAC) sanctioned a decentralized software protocol known as Tornado Cash. Yet despite the outcry of criticisms since then (including court challenges from the public), the Treasury recommended pursuing further sanctions as needed. Treasury may not have caused such a controversy had it used more precisely targeted tools, but it seems that the Treasury has been unphased by the collateral damage that comes with such sweeping sanctions.

Engaging with the private sector also sounds relatively reasonable, but a deeper look reveals that the Treasury’s suggestion is for the private sector to be even further deputized as law enforcement investigators than they already are. In short, the private sector is encouraged to voluntarily share more information to help the collection and reporting of “potentially suspicious” activity. It’s time to end this practice, not expand it. Financial institutions should not be required or pressured into accusing private citizens of criminal behavior.

So in short, the seven recommendations could have been condensed into just three: (1) Expand the Bank Secrecy Act to require more financial reporting, (2) Engage with the private sector to encourage more financial reporting, and (3) Enforce the law when financial reporting goes awry.

A Few Other Notes on the Report

While it likely was not the intent, the report did acknowledge the proper context for viewing the relationship between illicit finance and cryptocurrency. The following two quotes, however, were refreshing to see in this context (emphasis added):

While the use of virtual assets for money laundering remains far below the scale of fiat currency and more traditional assets by volume and value of transactions, virtual assets have been used to launder illicit proceeds as described…

…U.S. authorities have identified several instances where terrorist groups and their financial supporters solicited funds in virtual assets… Such cases are still less prevalent than those involving traditional financial assets.

With that said, there is a question that was missing from the report: How much financial crime is too much? As noted earlier in response to the White House’s statement, eliminating all crime may be ideal, but it is not practical. For instance, Harvard University professor Harvey Silverglate has famously estimated that the average American professional commits three felonies per day. It doesn’t take long to recognize that locking up the entire adult population is not a realistic response. Likewise, it shouldn’t take long to recognize the approach to tackling financial crime must also keep the broader American public in mind.

The report ended with a list of 23 questions that the Treasury wishes to engage with the public on. While it may have been helpful to ask such questions during the Treasury’s recent request for comment on the Federal Register, it is good to see that the report was offered as more of a starting point rather than a definitive source. Hopefully the administration will recognize these questions need to be answered before the Treasury’s recommendations can be taken at face value.

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