Digital asset investment firm Galaxy Digital issued a stark warning regarding proposed US Senate legislation aimed at regulating the cryptocurrency sector, asserting that certain provisions could usher in the largest expansion of financial surveillance authority since the passage of the Patriot Act in 2001.
In a detailed analysis published by the firm’s research department, Galaxy identified proposed language focusing on anti-money laundering (AML) and counter-terrorist financing (CTF) measures as the primary threat. While ostensibly designed to close loopholes exploited by bad actors, the firm argues the sweeping definition of entities required to comply would extend surveillance obligations far beyond traditional financial intermediaries.
The core controversy revolves around provisions that may mandate compliance for non-custodial service providers, software developers, validators, and decentralized autonomous organizations (DAOs). Traditionally, surveillance requirements have applied exclusively to institutions that hold customer funds, such as banks or centralized exchanges. Extending these mandates to individuals or groups who merely write code or secure a decentralized network structure, Galaxy claims, fundamentally alters the relationship between the government and private finance.
“The scope of mandated reporting and identification requirements contemplated in these drafts risks turning essential infrastructure providers—who do not hold customer assets and operate outside of traditional custodial relationships—into unwilling agents of the state,” the report stated. “This level of intrusion, forcing identification requirements on peer-to-peer transactions and foundational software layers, has echoes of the broad data collection powers granted post-9/11.”
Opponents of the proposed legislation fear that mandatory reporting for decentralized protocols would force developers to collect highly sensitive user data, potentially undermining core privacy principles inherent in blockchain technology. Furthermore, enforcing compliance against pseudonymous or truly decentralized entities poses significant technical and legal challenges, potentially leading to mass non-compliance or outright suppression of US-based innovation.
Galaxy’s critique adds significant weight to the growing pushback from the cryptocurrency industry, which is lobbying intensely on Capitol Hill to ensure that regulatory efforts focused on consumer protection and illicit finance do not inadvertently stifle technological advancement or erode fundamental user privacy rights.
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