Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems (ENFORCE) Act

Introduction

On April 8, Senators Thom Tillis (R-NC) and Bill Hagerty (R-TN) released the ENFORCE Act, a draft proposal aimed at addressing the U.S. Treasury’s request for more robust legislative framework to address digital asset anti-money laundering concerns and improve the current Bank Secrecy Act (BSA) treatment of digital assets. The proposal was intentionally released the night before a Senate Banking Committee hearing on the digital asset illicit finance featuring U.S. Deputy Treasury Secretary Wally Adeyemo as a witness.

Additionally, the draft aims to serve as a workable counterproposal to the significant momentum that Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) have promulgated with S.2669, the Digital Asset Anti-Money Laundering (DAAML) Act.

Below, please find a full summary and analysis of the legislation. If you have any questions, please email The Digital Chamber’s National Security team: Kristopher Klaich, Policy Director and Jack Goewey, Senior Policy Associate.

Summary

Section 1: Title

Section 2: Creates the New Category of Digital Asset Financial Institution

  • Dispels any notion that digital asset firms are not required to comply with the BSA under current standards by creating an additional definition for Digital Asset Financial Institutions, focused on centralized, customer facing entities which includes digital asset exchanges, custodians, issuers, or intermediaries that convert monetary instruments into digital assets or vice versa.

Section 3: Applies Applicable AML Requirements to Digital Asset Financial Institutions

  • Prescribes the same AML and KYC requirements applied to money service businesses (MSBs) to the new definition of digital asset financial institutions.

Section 4: Applies Applicable Suspicious Activities Reports (SARs) Requirements to Digital Asset Financial Institutions

  • Prescribes the same reporting requirements currently applied to money service businesses (MSBs) to the new definition of digital asset financial institution.
  • Adds optionality to allow the digital asset financial institution to utilize a third-party to assist with the filing, record-keeping, and management of SARs reporting.
  • Requires the Department of the Treasury to conduct a review after five years and to publish a set of ‘best practices’ for SARs reporting by digital asset financial institutions.

Section 5: New Special Measures Authority

  • Adds a new provision to existing Section 311 authority that gives Treasury the ability to impose one or more of the ‘special measures’ in instances where digital assets are utilized to facilitate a primary money laundering concern providing legal certainty that Treasury can bring the same tools to bear in instances of digital asset illicit finance as in other assets.
  • Maintains existing Section 311 requirements for Treasury to undergo notice-and-comment rulemaking when implementing new authority.

Section 6: Ensures Anti-Tip Off Compliance for Digital Asset Financial Institutions

  • Prescribes edits to Section 1510(b)(3) of title 18, United States Code to ensure that digital asset financial institutions and other entities in the digital asset ecosystem operate under the same anti-tip off laws and standards that cover traditional financial institutions to ensure that law enforcement can properly investigate, and the justice system can properly adjudicate those involved in illicit financial activity.

Section 7: Information Sharing Pilot Program to Combat Illicit use of Digital Assets

  • Requires the Attorney General (AG) to establish a pilot program under which relevant law enforcement agencies and voluntarily participating private sector entities may share information about potential illicit finance violations and bad actors to coordinate and deploy resources most effectively and establish related best practices.

Section 8: Crypto Asset Anti-Money Laundering Examination Standards

  • Requires Treasury, CFTC, SEC and state authorities to work together to adopt financial institution examination standards related to the prevention of money laundering and sanctions evasion aiming to establish standards comparable to those mandatory for traditional financial institutions, to fill a gap in the regulatory landscape.

Section 9: Rule of Construction

  • Delineates that this clarity on requirements for digital asset participants around the BSA, AML, KYC and SARs does not affect any existing FIs’ requirements under the BSA.

How we see it

The Draft takes a reasonable approach in codifying the Financial Crimes Enforcement Network (FinCEN) standards for the newly defined ‘digital asset financial institution’.  The bulk of the bill appears duplicative, essentially restating the same BSA standards for digital asset financial institutions and FinCEN has previously asserted its authority in this area. However, this approach prevents FinCEN from creating specific future rulemaking for the industry. It also ensures the digital asset sector is not treated more harshly than other sectors or industries.

The bill purposefully does not touch miners/validators, P2P transactions, smart contracts, and decentralized finance (DeFi), though it may need more clarification to ensure DeFi founders’ activities do not subject them to this regime. This is a direct win for those miners and validators that were subject to register as financial institutions under Senator Warren’s proposed DAAML Act.

Expanding the Treasury’s Section 311 authority over digital assets financial institutions and transactions codifies what FinCEN has already claimed it has and is not any broader than its authority over other financial institutions.

Furthermore, any changes under this authority require a notice and comment period for industry to respond to rulemaking. Another line of effort to expand the Treasury’s authority to cover digital assets financial institutions has been to modify the 9714 authorities to remove the word “Russia” and make it applicable to any geography. However, implementing this change would NOT require a notice and comment period for future rulemaking so we view the 311 modifications as a beneficial landing point.

Prospects: The Senate has prioritized illicit finance digital assets legislation and a vehicle like this one remains the most likely bill in this space to move forward and receive consideration. However, there remains limited time on the legislative calendar in an election year and digital assets is not a priority for the broader Senate. We do anticipate that this proposal will receive considerable attention and serves as a strong bill to address illicit finance while balancing the goal for U.S. digital asset and blockchain innovation to remain in the U.S., but likely will act as a messaging bill to influence future legislative action.