Lawless money, on the move
The revised rule around blockchain developers is an important part of today's Clarity conversation in Senate Banking
Three things that are very useful to criminals almost every day:
Telephones
Roads
Duct tape
Three groups that never get prosecuted when criminals use the products they developed:
Electrical engineers
Civil engineers
Johnson & Johnson, a division of which developed the product we know today as “duck tape”1 or “duct tape.”
But certain Democrats seem to believe that the people who develop certain technologies should be held criminally responsible for how other people use them.
Today, the Senate Banking Committee will hear what could be the final version of the Clarity Act, the big bill meant to finally provide statute under which to regulate the creation, buying and selling of digital assets.
The meeting is underway as I write this:
In the existing bill, there’s a long sought provision (section 604, in the legislation under consideration today) that would protect developers of software if their software ends up being used in criminal activity.
So if I build a popular decentralized exchange, publish it to a blockchain and throw away the keys to update it, I can’t be punished if someone steals $55 million worth of WOULDJA from some poorly designed Defi protocol and trades it for the vastly more liquid COULDJA.
Senator Catherine Cortez Masto (D—Nevada) offered amendments that strike the section that offers these protections and severely limits them. Her amendment (number 16 on today’s agenda), shrinks the extent of Sec. 604.
To be honest, I can’t tell what it would protect. It’s hard to follow.
As I write this, I’m told the amendment won’t move forward. Word is that some Democrats are coming around and plan to support the legislation. It’s not yet clear quite what is moving.
The language is prevented early this week, however, would provide that if a developer doesn’t have control over other people’s assets, they are protected from registration requirements as money transmitters.
This has been a core question in crypto for some time. People can create tools that other people can use to move millions or billions of dollars worth of assets, people have wanted to treat those applications as if they were the same as MoneyGram or the VISA network.
Blockchain advocates argue that it’s different, though, because, with blockchains, it’s possible to create applications that regulate the flow of funds without giving their creators any responsibility for them. Indeed, once these apps get released, often the developer couldn’t change the flows if they wanted to.
(And if they are running one of the blockchain apps where they could change the flows, then these protections wouldn’t apply to them).
The point here is to make a distinction between coming up with code, with products that people could use, and actually running companies that control customer funds — like Bank of America and Western Union do.
Tornado Cash has been the key case here. Tornado Cash is a privacy service on Ethereum. It’s still running. People still use it. It was never possible for its creators to modify it or take it down. Various governments have put its staff in prison, but Tornado Cash kept chugging. That’s decentralization.
Even the U.S. government couldn’t take it down, because there was no one to ask to do it. The only way to take Tornado Cash down would be to disable the whole Ethereum blockchain, and it doesn’t have an off switch.
Liberties
Coin Center is an organization formed around letting people be free to develop digital products in the blockchain space. Coin Center supports the language submitted for markup today.
Authorities have a way of getting weird about personal liberties with money in the mix.
Like: You have the right to privacy. Well, you have the right to privacy except any privacy at all about how you spend any of your money ever. If you buy a pack of Twizzlers in a gas station outside a Phoenix Costco, the authorities would argue that it’s better that they can know about that.
Just in case they might be terrorist Twizzlers.
Precisely because things get weird when money is involved, Coin Center exists to push back and say that rights are rights.
To some degree, winning a statutory protection saying people can write money code without fear of prosecution would be the organization’s pièce de résistance. The work would never really end, because people would inevitably need to be defended under the statute, if passed.
Still, protections for software developers on chain would be a big win.
And the organization is not eager to see it watered down.
The compromise
There is a compromise in the text under discussion today, versus what was sent over in Clarity from the House, though. New language that was added before this latest version came out.
As Jason Somensatto, Coin Center’s policy director pointed out to me, there’s a new section on “Clarification of treatment” that gives prosecutors some leeway. Basically, if they can show that some code was written with crime in mind, a developer could be prosecuted for it.
So if a criminal syndicate created some kind of cross-chain protocol, for example (so they could move stolen funds between chains without any risk that they would be frozen mid-route). A prosecutor could bring a case over developing that software if they had evidence that this had been the main intent.
This is much like how fraud cases work. It’s not enough to show that someone committed an act of fraud. Prosecutors have to show evidence that the accused knew it was wrong (a “guilty mind”). This was probably the main topic during the Sam Bankman-Fried case, over how he misused customer funds entrusted to FTX.
What to watch
A bunch of law enforcement agencies have put out letters saying that they don’t like the language protecting developers. Never too many reasons to throw people behind bars, I guess.
If you’ve never been through a markup, it’s going to be an unbelievably long and tedious process, where lots of senators will offer amendments in order to get a few minutes on the mic, in hopes of landing a zinger that they can post on social media. It will probably go till midnight or later. There will be lots of redundancy. Sen. Elizabeth Warren will talk about “cronies” a lot.
My guess is that the Cortez-Masto amendments get voted down. The act of amending legislation is all largely a game of show. The amendments that will be allowed to move and the ones that won’t tend to all be decided ahead of time by the party.2
If a legislator ever changes his or her mind in one of these conversations because someone actually made a really good point in one of these hearings, well, I’d love to see that caught on film.
The big question though is whether or not Cortez-Masto will support the legislation on the floor if her amendment doesn’t pass. (I have written to her press staff twice now, but I haven’t heard back)
Cortez-Masto was one of the Democrats who voted for GENIUS on final passage. In the Senate, Democrats are needed to beat the filibuster.
Sen. Ruben Gallego, of Arizona, says he will support a version of the bill expected to come out today, according to Crypto in America. He seems to have been leading the middle of the road Dems on this topic, so this could be a good sign for this legislation passing the Senate.
(If that happens, remember, the House will still have to concur with their changes — though I’m guessing Rep. French Hill (R—Ark.) will push his chamber to do that quickly)
But maybe it will turn out that the developer protections do get lost in the end. Or maybe there’s another attempt to kill them on the floor. Or even in the House! We just don’t quite know yet.
So.
Just to note.
As I write this, there’s likely several million dollars worth — maybe tens of millions! — of dangerous illegal drugs, like pot laced with fentanyl, driving over America’s highways. So I hope if law enforcement gets its way with blockchain development it doesn’t stop there.
The next target: All those lawless civil engineers designing roads we can drive on willy-nilly without even registering an itinerary with our local Department of Transportation.
Can you even imagine.
I had always heard that “duck tape” was a mishearing, but apparently this was how they originally referred to the product when it was developed — for military applications, not plumbing.
As I write this, folks are saying on X that all of Sen. Warren’s amendments have been voted down.