Prepare For SB1241's Pit Bull Assault on Bitcoin Freedom
Senate Bill 1241 defines digital currencies as “monetary instruments” and digital exchanges/tumblers as “financial institutions” for purposes of enforcing anti-money laundering laws. If successful, the “Combating Money Laundering, Terrorist Financing and Counterfeiting Act” would inflict unhappy consequences on bitcoin freedom. [Note: for a section-by-section analysis of the bill, please click here. Section 13 deals directly with cryptocurrencies. The other sections become relevant only because 13 makes bitcoin fall under their purview.]
Also read: European Commission Launches Digital Currency and Dark Web Consortium
SB1241 would have another impact that is less obvious but 
equally sweeping. Federal law is centralized law; that is, the same regulation is imposed equally on all states. Of course, the ideal is no regulation at all except for the community standards of businesses and users. But if bitcoin is to be regulated, then a patchwork of incompatible or differing laws is far more favorable to freedom than homogeneity. A network of decentralized authorities (states) may not constitute liberty but it does offer alternatives and escapes for those who seek greater freedom.
The Obvious Unhappy Consequences
Section 13 of SB1241 is entitled “Prepaid Access Devices, Stored Value Cards, Digital Currencies, and Other Similar Instruments.” This would amend Section 5316 of Title 31 in two significant ways.
First, 5316 currently states: “(2) ‘financial institution’ means—…(B) a commercial bank or trust company.” This would be amended to insert “or any digital exchange or tumbler of digital currency.” The news site Coindesk observes, “the bill clarifies that any ‘issuer, redeemer or cashier’ of a ‘digital currency’ is also covered.”
Second, a summary of the bill provided by co-sponsor Senator Chuck Grassley (R-IA) states,
Funds stored in a digital format” would be included “within the definition of monetary instruments” making them subject to “anti-money laundering reporting requirements…where the value stored is above $10,000.
In other words, digital exchanges would become the equivalent of banks.
Parallel Institutions, The Less Obvious Unhappy Consequence
Here, “institution” refers to a society or an organization. A “parallel institution” refers to a society or organization that acts as a counterbalance or competing authority to another organization, such as the federal government.
Parallel institutions have always benefited freedom-seekers, especially religious and political refugees. In the Middle Ages, Protestant dissenters fled Anglican England to find refuge in the Netherlands. Puritans colonized the New World and served as a beacon to others who sought religious liberty. The power of parallel institutions is captured by the principle of “sanctuary” by which a Church exercises a higher authority than the State and can refuse to surrender ‘criminals’ who seek refuge within its walls.
The political version of sanctuary plays out every day. People cross the border of one nation and escape into another. The second nation is not necessarily freer than the first but some aspect of it is freer to the refugee. Russia may not be freer than America, for example, but to Edward Snowden it is. The Ecuadorian embassy in London may be obscenely confining but it is more expansive than a prison cell to Julian Assange.
Parallel institutions also play an important 
practical role in the bitcoin community which is highly fluid and transplantable. In June 2015, a harsh licensing requirement for crypto businesses became law In New York with enforcement to begin in August. Many businesses chose to leave rather than abide by a license that required, among other things, the divulgence and sharing of customer data. Fortune magazine noted, “Last weekend the deadline to apply for a BitLicense came and went, and a slew of bitcoin startups went too—right out of New York State… This is not a comprehensive list, but here are some of the companies that packed up and left New York: Bitfinex, Bitquick, BTCGuild, Eobot, Genesis Mining, Gocoin, Kraken, Localbitcoins, Paxful, and Poloniex.” Those who physically left did so by relocating to parallel institutions – that is, to other states with more palatable environments.
The power of parallel institutions is also seen through what happens when the two merge their interests and become, in effect, one institution. Instead of offsetting each other’s power, they buttress and increase it at the expense of individual freedom.
When church and state speak with one voice, both become more oppressive; it was precisely because the Anglican Church was the state church of England that religious dissenters felt impelled to flee. In extreme cases, the melding of church and government can lead to an Inquisition. When capitalism and government blend their interests, the results are no less devastating. Crony capitalism is established; government and favored businesses grant each other privileges by which both grow rich by picking the pockets of average people. This bastardization of the free market is an efficient engine of oppression.
S1241 is the federal government’s attempt to merge its power with that of the states and to homogenize that power under laws it enforces. There would be “one law to rule them all, one law to find them, one law to bring them all and in the darkness bind them.”
Moving from state to state to escape a specific regulation is a relatively trivial task. Under SB1241 and the follow-on legislation it would inspire, physical bitcoin businesses would need to move internationally or shut down.
Conclusion
SB1241 was referred to the Senate Judiciary Committee on May 25. This is the preliminary step before a bill can be introduced into the House or Senate for debate and, perhaps, a vote. In short, S1241 is in the earliest stage of legislation, and many bills never make it out of committee. If it does move forward, then the bill’s sweeping scope may be a barrier to passage in either the House or the Senate. On the other hand, the draft bill may deliberately express overreach in order to provide room for negotiation and compromise. And another terrorist attack on U.S. soil could create a political hysteria that the bill could ride into becoming law.
One thing is clear: S1241 is what some—and 
probably many—politicians want to impose on monetary instruments, including bitcoin, and financial institutions, including digital currency exchanges.
A last point: S1241 mandates a report from Department of Homeland Security which is due 18 months after the bill’s passage. DHS is asked to detail “a strategy to detect prepaid access devices and digital currency at border crossings and ports of entry”. Travelling in and out of the U.S. with bitcoin could become a real problem. Currency control at the border is an indication of a government that is becoming or has become a totalitarian state.
S1241 is a dot on the legal horizon. Whether or not it passes, this is the direction the state is pushing and will continue to push cyptocurrencies. Prepare now.
What do you think bitcoin and other digital currencies will harmed SB1241? Do you believe there are ways to mitigate the damage? Let us know in the comments below.
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