Anti-crypto sentiment rises as Warren accused of collaborating with short-seller.

Progressive Democrats, Republican national security hawks, and Wall Street traders are all joining United States Senator Elizabeth Warren’s “anti-crypto army.” This alliance includes Warren’s reported partnership with Marc Cohodes, a Wall Street short-seller who made a profit from the recent chaos at crypto banks.

Crypto enthusiasts may see this unusual pairing as further evidence that entrenched interests are working together to destroy Web3 in the United States. They are not entirely incorrect, but America’s polarized factions are uniting against crypto for a reason. The industry has consistently failed to address valid concerns about financial crime and national security. That needs to change, or Warren’s anti-crypto army will continue to attract supporters.

Publicly traded crime scene?

In late 2022, Cohodes circulated a memo on Capitol Hill flagging “existential” regulatory risks at Silvergate, a crypto-friendly bank. The short-seller dubbed the bank a “publicly traded crime scene” and claimed, among other things, that Silvergate had “huge” Know Your Customer (KYC) and Anti-Money Laundering (AML) liabilities. These rules require U.S. financial institutions to carefully due-diligence their customers, and they are rigorously enforced.

Related: Elizabeth Warren wants the police at your door in 2024

Cohodes had reason to be concerned. Problems with KYC/AML compliance are rampant in crypto, and Silvergate appears to have been a striking example. According to New York magazine, Silvergate was “the go-to bank for more than a dozen crypto companies that ended up under investigation, shut down, fined, or in bankruptcy,” including FTX, the defunct crypto exchange. Cohodes claimed the bank went so far as to help FTX siphon user deposits into its sister fund, Alameda.

Silvergate shut down after FTX’s flameout in March, but its collapse may be symptomatic of serious industry-wide problems. The crypto bank, Cahodes claimed, was “a worldwide money laundering story… with a crypto wrapper.”

Anti-crypto army

Warren reportedly found Cohodes’ Silvergate memo to be compelling, and she has become one of crypto’s most vocal opponents. Unlike her calls for a wealth tax of up to 6% or a “just and equitable cannabis industry,” Warren’s criticism of crypto is resonating far beyond progressive circles. Her message is straightforward: Crypto enables bad actors — from drug traffickers to rogue states — and is a threat to national security.

Related: Elizabeth Warren is pushing the Senate to ban your crypto wallet

Her anti-crypto campaign is gaining momentum. In January, three U.S. financial regulators published a joint statement on crypto banking. It mirrored Warren’s proposals, effectively laying the groundwork for a regulatory crackdown. The senator is collaborating with Republicans on a bill that would impose strict industry-wide KYC requirements. She is even receiving cautious support from banking lobbyists.

The issue is not with Warren’s overarching concerns. Web3 should be accountable for filtering out bad actors. The problem is that poorly executed policies could seriously damage the nascent industry. For instance, Warren’s proposed KYC/AML legislation appears to indiscriminately target almost every aspect of crypto, including validators. It could severely undermine network decentralization, which is arguably Web3’s most important feature.

Crypto should embrace KYC/AML to undermine Warren

Although Silvergate may have collapsed, KYC/AML liabilities still permeate Web3. This is not a coincidence. Anyone familiar with crypto’s cypherpunk origins knows that, for many users, anonymity is a feature, not a bug. Indeed, privacy and self-custody are what make Web3 unique.

It is wrong to dismiss crypto as a tool for money laundering. Blockchain’s unique attributes have transformative applications in industries ranging from asset management to media. Unfortunately, they are also setting up the industry for a head-on collision with U.S. regulators.

Web3 still has options. Emerging technologies are creating new ways to address policy concerns without compromising crypto’s core values. For example, zero-knowledge identity proofs promise seamless on-chain KYC/AML checks that respect users’ privacy. Meanwhile, blockchain intelligence platforms, such as Chainalys, have been a boon for financial crime enforcement agencies.

The industry should stop burning political capital on resisting KYC/AML requirements altogether. Instead, we need to start attacking these challenges ourselves — or Warren’s army will.

(There is no need for translation as the original text is already in English.)

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