Senator Elizabeth Warren is leading an effort to crack down on bitcoin and crypto markets. In an open letter to national security officials, Warren and other lawmakers claimed terrorists raised $130 million in crypto currencies in order to help finance the recent attacks in Israel.

The letter cited a Wall Street Journal article for the $130 million figure. Preston Pysh, a retired Army Officer and bitcoin advocate published an article recently disputing those figures. Though Hamas does raise funds via crypto markets, Chainalysis data cited in Pysh’s article found only $450,000 of Hamas’ $300 million annual budget was raised through crypto channels.

In fact, Hamas announced last spring that they had halted their bitcoin fund raising efforts due to the traceability and transparency which created safety issues for donors. According to a Forbes article published last year, illicit transactions are still much more common in the traditional banking system, with illicit activity in the cryptocurrency space making up only 1.1% of transactions.

Policy Implications

The congressional letter presses for increased regulatory scrutiny in the bitcoin and crypto space from the Treasury Department’s Financial Crimes Enforcement Network. In response, the U.S. Financial Crimes Enforcement Network published a sweeping proposal, effectively criminalizing financial privacy under data collection powers provided by the Patriot Act.

Historically, FinCEN has targeted individual institutions, like banks facilitating money laundering. “An entire class of transactions being labeled a primary money laundering concern is unprecedented from a legal standpoint,” Jonathan Bobb, a compliance professional in the bitcoin industry told me in an interview about the matter.

Advocates are concerned that the knee jerk reaction from lawmakers and regulators could inadvertently crush the nascent bitcoin and crypto market in the United States without actually solving any problems.

“It will mean that small companies like the ones you see innovating in the space will be priced out of doing business,” Michelle Weekly, Director of Product Development at Byte Federal, told me in an interview. This would inevitably mean business shutting down or offshoring to more friendly jurisdictions.

Brady Swenson, Co-Founder and Head of Marketing at Swan referred to the FinCEN measures as dangerously overbroad. “They would infringe on the rights of individuals and damage our nation’s ability to compete on the rapidly evolving global monetary stage,” he added.

Swenson focused on the right to free speech as a key factor that would be degraded by FinCEN’s proposed rules. He thinks that the rules would unnecessarily restrict privacy and freedom at the individual level in a futile attempt to stop a small portion of transactions.

Politicians Express Their Concerns

Senator Cynthia Lummis of Wyoming sent a letter to the DOJ this week pressing them to complete their investigation and consider criminal charges against Binance and Tether. In a social media post, Lummis alleges their involvement with illicit activities, but also clarifies that bad actors are the enemy, not the underlying technology. Lummis has been unavailable for comment, but her post alludes to a potential disagreement with the FinCEN rule proposal.

Senator Ted Cruz’s office has yet to respond to requests for comment as well. In a recent post however, Cruz pointed to the billions of dollars' worth of lifted Iranian sanction as a key contributor to Hamas’ ability to conduct attacks. With a several hundred-million-dollar annual budget, a few hundred thousand dollars in crypto may have been immaterial in Hamas’ ability to fund operations.

All in all, experts conclude that the FinCEN rules may only punish the industry domestically. Because of the Bitcoin Network’s distributed and open-source nature, peer to peer transactions are nearly impossible to stop. The FinCEN rules may prove to be largely unenforceable at the individual level.

If companies must shut down following these new rules, the United States will effectively opt of the burgeoning digital economy. There are also concerns that it could cause a concentration of the industry into an already concentrated financial sector. Concentration and opacity are key factors that led to the spectacular failure of FTX. It is only because of bitcoin’s transparency that the Hamas transactions were identifiable to begin with.

The full text of the FinCEN proposal is live on the federal registrar website and is available for official comment for the next three months. Advocates urge concerned citizens to submit their formal comments for review before the period expires.