ChainArgos submitted a comment to Treasury’s RFC on “Innovative Methods to Detect Illicit Activity Involving Digital Assets.” Unsurprisingly our comment differs dramatically from most of the industry.
Our focus is on leveraging transparency to deter illicit use. Consequently we do not want to talk about methodologies or safe harbours. Instead we propose expanding the scope of False Claims Act actions and whistleblower programs to allow private parties to pursue enforcement in cases where governmental powers are not necessary to prove wrongdoing. If the data is transparent we do not need government involved in the way traditional finance might require. If you do need need access to privledged internal documents to prove an OFAC violation then why involve government at all?
As regards specific methodologies or tools: government should not be picking winners. Blockchain analysis is a flavour of forensic science. There is an existing framework for evaluating forensics within the legal system. We do not believe any changes are required there to accommodate “technology.” Nothing fundamental changed when DNA matching appeared. Nothing fundamental changed when fingerprint matcing was introduced. Or blood spatter analysis. Yes there are details to work out. There is a framework and it should be left to run. What it needs is cases to process.
Federal law, and many states, have provisions that allow private parties to pursue fraud against the government in the name of the government to recover fraudulently obtained funds. Famously this is the construction used to pursue Lance Armstrong via USPS sponsorship payments (the claim was that Armstrong defrauded USPS, a government agency, by cheating at cycling through doping). The federal False Claims Act has strong bipartisan support. Sen Grassley, one of the authors of the currently-active bill back in the 1980s, is perhaps the most prominent and longstanding supporter. There is little to no resistance to this framework in DC.
If private parties can recover for fraudulent disbursements in the healthcare and military procurement sectors based entirely on privately-available information there is no private parties cannot do the same for, say, OFAC violations when all the transactions are on a transparent public ledger.
There are already robust procedures for managing what are known as qui tam lawsuits where government can intervene and appropriate judicial oversight is provided. This is not a license for private parties to run amok and, again, the currently-active framework dates back to the Reagan administration.
Surely web3 must support this position. Our proposal leverages transparency to create a wide range of benefits:
- Government no longer needs to expend resources, or as many resources, policing these areas. Less intrusive government is surely a common web3 position.
- Private parties are incentivized to develop reliable tools to identify problems and withstand judicial scrutiny. If you believe software-intermediated finance is the future this is perfect for you!
- Private parties need to pay to defend the reliability of their own tools. Clear incentive alignment and “eat your own dog food” rather than externalizing costs. If you believe in self-custody you surely believe in bearing your own costs.
- The entire process will be quicker and less prone to corruption. We are proposing removing gatekeepers from compliance enforcement. Removing gatekeepers is kind of the point of web3.
To anyone that thinks this will open up the floodgates of frivolous lawsuits: go learn how False Claims Acts work. This stuff is not new and that is not generally a problem. We are not teaching a law school seminar here and encourage you to DYOR. This framework recovers billions of dollars every year and has for decades and has consistent, widespread support throughout DC.
If innovation is truly the solution to financial crime then government should get out of the way. With transparent public records and good technology private parties can take over much of the burden. False Claim Acts fund this work by allocating a fraction whatever is collected to the private party initiating the action. Decades of research shows that this approach dramatically increases government revenues. This would seem an ideal use case for improving the financial system through transparency.
We are not aware of anyone that is publicly opposed on policy grounds to the federal False Claims Act or the many state variants*. Nor are we aware of anyone in web3 that is opposed to more efficient sanctions enforcement or to getting government out of the regulation business. This seems like a win for everyone. And we are curious to see how people respond.
*Yes there are legal questions around the edges as you would expect. The Federal law is from 1986 and jurisprudence continues to evolve. We do not mean that nobody opposes any aspect of these programs at all. We simply mean there is little public support for graft and overwhelming support for the general idea of this kind of enforcement.
Treasury Digital Assets Illicit Activity RFC Part 1: Our Comment was originally published in ChainArgos on Medium, where people are continuing the conversation by highlighting and responding to this story.
