Sen. Warren’s Anti-Money Laundering Legislation is Bad Medicine

We talk a lot about the various crypto-related legislative measures floating around out there, especially the problematic ones coming in the wake of FTX, and the one US Sen. Elizabeth Warren, D-MA, dropped this week in the Senate may be the most troubling. The Digital Asset Anti-Money Laundering Act Of 2022 is a problem not just because of the threat it represents to privacy for the vast majority of crypto users and a stifling of business innovation, but because of how it directly violates the First Amendment.

The industry has to oppose these kinds of onerous regulations not just because of their impact on the business side of the industry, but because of their impact on individual rights and freedom.

The Digital Asset Anti-Money Laundering Act Of 2022, proposed by Senator Elizabeth Warren, proposes the following regulations, among others:

Section three, part a: The classification of custodial wallets and “unhosted wallet providers,” likely meaning developers of non-custodial wallets, as well as cryptocurrency miners, validators or other nodes that may act to validate or secure third-party transactions, independent network participants and other validators with control over network protocols as money service businesses.

Section three, part d: Promulgation of a rule that prohibits financial institutions from handling, using or transacting with digital asset mixers, privacy coins and other anonymity-enhancing technologies, as specified by the secretary of the U.S. Treasury; and handling, using or transacting business with digital assets that have been anonymized.

Section three, part a of the Digital Asset Anti-Money Laundering Act Of 2022 would deem anyone developing non-custodial wallets as money transmitters, requiring them to obtain a license. The problem: “unhosted wallet providers” do not exist. “Unhosted wallets,” or non-custodial wallets, are simply software.

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The enactment of section three, part a would hence require anyone writing software which enabled the sending, receiving and signing of bitcoin transactions to obtain a money transmitter license. This attempt at restricting the writing of code is nothing new and a directly unconstitutional approach, as the U.S. constitution clearly states that “Congress shall make no law . . . abridging the freedom of speech.”

Under these circumstances, attempts at regulating the writing of software have been struck down by U.S. courts numerous times.

In Universal City Studios vs. Corley, 2001, for instance, the second circuit addressed the attempted restriction on computer code with the following arguments:

Communication does not lose constitutional protection as “speech” simply because it is expressed in the language of computer code. If someone chose to write a novel entirely in computer object code by using strings of ones and zeroes for each letter of each word, the resulting work would be no different for constitutional purposes than if it had been written in English.

Computer programs are not exempted from the category of First Amendment speech simply because their instructions require use of a computer. A recipe is no less “speech” because it calls for the use of an oven, and a musical score is no less “speech” because it specifies performance on an electric guitar. The fact that a program has the capacity to direct the functioning of a computer does not mean that it lacks the additional capacity to convey information, and it is the conveying of information that renders instructions as “speech” for purposes of the First Amendment.

Limiting the First Amendment protections of programmers to descriptions of computer code (but not the code itself) would impede discourse among computer scholars, just as limiting protection for musicians to descriptions of musical scores (but not sequences of notes) would impede their exchange of ideas and expression. Instructions that communicate information comprehensible to a human qualify as speech whether the instructions are designed for execution by a computer or a human (or both).

The court further cited that the limiting of free speech under the U.S. constitution is permitted if, and only if, it serves a substantial governmental interest, the interest is unrelated to the suppression of free expression and the regulation is narrowly tailored, which, in this context, requires that the means chosen do not burden substantially more speech than is necessary to further the government’s legitimate interests.