A legal challenge over crypto reporting could strike down decades-old anti-money laundering laws

Since the Silk Road, the power of Bitcoin to fuel anonymous transactions (and, more specifically, money laundering) has been a major concern for lawmakers and law enforcement agencies. A new provision passed as part of the infrastructure package has tried to address that problem, but is facing stiff opposition from cryptocurrency groups and a legal challenge that could have huge implications for financial transparency across the country.

In November 2021, when President Biden’s $ 1 trillion Infrastructure Employment and Investment Act was enacted, a controversial cryptocurrency provision was passed along with key legislation on roads, bridges and other infrastructure.

The bipartisan infrastructure bill included a tax code amendment that required any business or individual to receive a cryptocurrency transaction in excess of $ 10,000 to report to the IRS using a specific form that includes the sender’s name, date of birth and the taxpayer identification number. . This is in line with Title 26, Section 6050I’s cash declaration requirements, and failure to comply can result in a fine of up to $ 250,000 for an individual and up to five years in prison.

Although changes to the tax code have already been approved, the reporting requirement will not begin until the start of fiscal year 2024, unless a challenge to the law prevents it from coming into force.

Last week, Coin Center filed a lawsuit in the U.S. District Court for the Eastern District of Kentucky, appointing Janet Yellen as a Treasury Department representative, IRS Commissioner Charles Rettig, and the Attorney General’s Office. United States, Merrick Garland, on behalf of the government as a whole.

A defense blog post says the lawsuit seeks to overturn “unconstitutional financial oversight.” The authors, Coin Center Executive Director Jerry Brito and Research Director Peter Van Valkenburgh, write:

Our demand leads to two main statements: (1) forcing ordinary people to collect very intrusive information about other ordinary people and reporting it to the government without order is unconstitutional under the Fourth Amendment; and (2) require politically active organizations to create and report lists of the names of their donors, and government identification information is unconstitutional under the First Amendment.

The legal complaint shows that the technical details of the cryptocurrency are noteworthy for the case. It is easy to link transactions from the same cryptocurrency wallet address, the complaint argues, which means that a transaction related to a donor’s name and address could give a much more detailed and long-term view of your financial history. (“From a 6050I report in 2024,” reads the text, “the government was able to find out that a person donated to a local mosque in 2016, paid for a child’s sobriety treatment in 2018, contributed to an unpopular political cause in 2020, and hired a marriage counselor in 2022. “)

However, some privacy and surveillance technology scholars, such as law professor Orin Kerr, tagged arguments as “not particularly serious”: in his view, the information in question was unlikely to be covered by the Fourth Amendment, Kerr tweeted, citing previous case law.

With regard to the First Amendment, the complaint argues that forcing a defense group to provide the government with details about donors giving more than $ 10,000 would create a “chilling effect” on the right to political expression. It is an interpretation of the Constitution that has been maintained in some high-profile cases before, especially the historical one United Citizens ruling that removed election spending restrictions on corporations, unions, and nonprofits. (That judgment remains highly controversial, and many transparency groups argue that it allowed dark money to play a disproportionate role in the influence of contemporary elections).

Some very crypto-skeptical privacy advocates have spoken out in favor of Coin Center. Evan Greer, director of the digital rights group Fight for the Future, tweeted in favor of the legal challenge, writing that supporters of basic rights “must oppose unconstitutional expansions of surveillance that will disproportionately harm marginalized and overly marginalized communities.” police “.

At the other end of the spectrum, there are some proponents of cryptocurrencies who see the inclusion of cryptocurrency in section 6050I as totally rational and have advocated a more nuanced set of reporting mandates rather than a total overturn.

If the Coin Center challenge succeeds, it could have far-reaching implications for cryptocurrency due to how the reporting law was passed in the first place.

When the new requirement became law through the infrastructure bill, it was not written as a new statute: rather, it was an amendment to an existing part of the U.S. tax code, Section 6050I, which was in the books for almost 40 years. years.

Rule 6050I states that anyone who receives more than $ 10,000 in cash as part of a business transaction must provide the sender’s data to the IRS through a particular form. This requirement to declare cash, which became law in 1984, came after the Bank Secrecy Act of 1970: one of the first major laws to address money laundering in the United States. Taken together, the new reporting laws passed in the 1970s and 1980s helped law enforcement agencies detect and deter money laundering by creating documentation requirements that made it easier to track cash transfers and impose sanctions if such documents were not filed.

The law has been in place ever since, with no significant changes so far. In the infrastructure bill, a critical eight-word change was made to 6050I, expanding the definition of cash to include “any digital asset” and thus extending tax code reporting requirements to cryptocurrency. And because of this construction, a successful challenge on behalf of cryptocurrency users could mean nullifying the status quo completely.

Coin Center Director Jerry Brito confirmed The Virgin that this is a possibility:

“Given our focus on cryptocurrency, our goal is [removing] the change that adds crypto to the 6050I cash reporting requirement, “Brito said.” But that being said, if the whole 6050I has to go, that’s fine with us. “

Brito says Coin Center does not take a stand on the concept of financial reporting in general, noting the organization’s support for guidance issued by the Financial Crimes Enforcement Network (FinCEN) on how cryptocurrencies should be regulated under the Bank Secrecy Act, but other groups who supported Coin Center’s complaint have a more ideological opposition to financial monitoring.

One such group is the libertarian think tank Cato Institute: a blog post published by the DC-based research institute makes it clear that the fate of the legal challenge to section 6050I could serve as an indicator to overturn other types of financial reporting.

“If it comes to enforcing a provision of the tax code or the requirements of the Bank Secrecy Act (BSA), the fact remains the same that the government should have to“ prove to a judge that it has reasonable suspicions that justify a record of our private roles “, ‘writes Cato Institute policy analyst Nicholas Anthony.’ the reason why the Constitution exists “.

Daniel Jellins, a staff lawyer at Georgetown Law’s Communications and Technology Law Clinic investigating technology, finance, and the First Amendment, also agreed that a challenge to digital asset reporting could be just the tip of the iceberg. all cash reporting requirements. round.

“The broader context is that the Supreme Court has, from now on, been much more willing to repeal such disclosure rules than in the past,” Jellins says. “So if the ultimate goal was to eliminate this reporting requirement for all money, then using cryptocurrency as a tool … could be a great way to get there.”

It is difficult to quantify the exact effect that a total repeal of Section 6050I would have or the likelihood that the side effects would leave the Bank Secrecy Act open to challenge; the Treasury Department declined to comment on the implications of the case when contacted by The Virgin. The fight against money laundering is a huge task that is under the jurisdiction of several federal agencies and is carried out through a number of legal means that far exceed the cash declaration requirements of the tax code.

As for cryptography, although the industry minimizes the use of digital currency in money laundering, the analysis suggests that billions of dollars are laundered by these means each year, bringing the total amount up by 30 percent in 2021 in compared to 2020. It is clear that more reporting and transparency could prevent it, but a court may decide that the loss of tax revenue is only the cost of the constitutional right to privacy.

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