How Bad is Crypto's Money Laundering Problem and What Do We Do About It?

The point of Bitcoin and other legitimate cryptos was to create an economy outside the traditional finance system. Transactions could be made without oversight or permission. While this is coming to fruition, although maybe not in the same way originally envisioned, we need to deal with the fact that crypto has become the payment method of choice for criminals. According to Chainalysis, nearly $24 billion in illicit funds was moved through crypto in 2022. This is largely done through privacy coins, crypto mixers like TornadoCash, transferring small amounts across a complex web of wallets, and off-ramping via less-than-reputable exchanges.

A possible solution to crypto's money laundering problem is to bring it under the purview of laws like the US's Bank Secrecy Act. This requires banks and financial institutions to record transactions over $10k, report anything that might be suspicious, etc. In fact, this puts the burden on banks to find suspicious activity, as they could be penalized for not finding it or even for not trying to find it. Policymakers like Elizabeth Warren want to create broad legislation to bring the crypto-verse under the Bank Secrecy Act, though it would have to be adjusted to include crypto. The problem with this, though, is that it's not nuanced. It's like doing surgery with a baseball bat. For example, her "Digital Asset Anti-Money Laundering Act" would attempt to regulate nearly all entities in the crypto-verse, including self-custody wallets.

However, Tom Emmer's "Blockchain Regulatory Certainty Act" (https://www.congress.gov/bill/118th-congress/house-bill/1747) would prevent this overreach. It simply states that only exchanges and other services that actually take custody of customer funds would be subject to the Bank Secrecy Act. This would certainly make it harder for criminals to launder their cash via crypto while preventing unnecessary and potentially harmful regulation.

What else can be done? I'm not sure.