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Node Operators, Software Developers Sanctionable Under New Bill, Says Crypto Think Tank

Elizabeth Warren – Democratic Senator from Massachusetts – has introduced a new bill titled the ‘‘Digital Asset Sanctions Compliance Enhancement Act of 2022’’ to congress. Co-authored and signed by over 10 other Democrats, the bill proposes far-reaching measures to ensure sanctioned Russian entities don’t use cryptocurrency to bypass trade restrictions.

However, a new non-profit crypto policy think tank – Coin Centre – has sounded the alarm on some “unconstitutional” measures within the bill.

Targeting “Transaction Facilitators”

The bill has been in preparation since at least last week, as a follow-up to sweeping Western sanctions against Russia. A long-time crypto skeptic, Warren suggested that virtual assets could be used as a tool for sanctions evasion by bypassing the traditional financial system.

The suspicion is understandable: Blockchains such as Bitcoin are permissionless, pseudonymous, peer to peer, and borderless. That means authorities cannot easily use their standard regulatory tools to combat illegal trade, such as targeting financial intermediaries.

Warren’s bill was reportedly designed to sanction foreign crypto exchanges that interacted with targeted Russian parties, which provide a fiat ramp to and from crypto.

However, section 3 of the draft revealed today goes further than that. It calls for sanctioning and freezing assets of any foreign person that has provided “material or technological support” for sanctioned persons relating to the Russian Federation.

It also calls for sanctioning “digital asset transaction facilitators,” that support those persons. This includes individuals that assist in the “validation” of digital assets and those that create Defi technology, smart contracts, and open-source code.

Warren claims her bill will “strengthen” the US sanctions program, and “close off any avenues for Russian evasion”.

Senator Elizabeth Warren Has Covid-19 - Bloomberg
Elizabeth Warren. Source: Bloomberg

Unconstitutional Overreach?

Coin Centre responded critically to the senators’ new bill, labeling it “unnecessary,” “overbroad,” and “unconstitutional”. It believes the language present in the bill encompasses an “uncountable number of persons” that otherwise had “no knowledge or intent” to help sanctioned individuals bypass sanctions.

For example, anyone who has written open-source code used by sanctioned people to transact could be captured in the bill’s language. Other groups include miners on proof of work chains, validators on proof of stake chains, and persons who run nodes on any blockchain network.

For context, Bitcoin alone is estimated to have tens of thousands of people running network nodes worldwide. Ethereum will presumably have over 300,000 nodes once it upgrades to proof of stake in November, of which each validator runs a full node.

Such actors technically “facilitate” every transfer that happens over Bitcoin and Ethereum, upon which transactions are overwhelmingly and increasingly legal.

“It is unreasonable for Congress to call on the President to sanction every person who performs these activities irrespective of their knowledge or intent to facilitate some stranger’s illicit activity,” states Coin Centre.

Concerns with this bill are remarkably similar to those of the Infrastructure bill passed last year. That bill included strict reporting requirements for crypto “brokers” which many thought could include stakers, software devs, and node operators.

Will the Bill Really Help?

It’s important to note that there is yet little evidence that Russians can or are using cryptocurrencies for sanctions evasion. So far, only blockchain analysis firm Elliptic has identified just one wallet that could possibly be holding millions of dollars in crypto for Russian oligarchs.

However, it is exactly these tools that severely weaken crypto’s prospects for sanctions evasion. Virtual assets are lacking in privacy and are highly traceable on the blockchain. As Elliptic co-founder Tom Robinson states: Crypto can and will be used for sanctions evasion, but it’s not the silver bullet.”

Various Federal bodies such as the FBI, White House, and the Treasury Department have recognized this fact in recent weeks. “The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others,” said FBI director Christopher last Thursday at a Senate Intelligence Committee hearing.

Furthermore, the President already has the authority to place secondary sanctions on non-compliant foreign crypto exchanges. Therefore, the portion of the bill pertaining to this arguably more measured response is arguably redundant anyways.

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Coinbase has already blocked over 25,000 Russian wallets in compliance with existing sanctions.

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