The current technological revolution parallels the advent of the internet, and decisions made by policymakers in Washington today will have long-lasting implications for accountability in the event of technological misuse. While Congress seeks to establish a clearer regulatory structure for the cryptocurrency sector through the proposed CLARITY Act, the approach taken appears to harbor significant flaws.
The CLARITY Act, championed by legislators who argue it is essential for defining the federal regulatory jurisdiction over the cryptocurrency market, aims to create a distinct regulatory environment for digital assets. Though intended to enhance oversight, the bill possesses critical loopholes that could be exploited by nefarious entities. For instance, even with this legislation, individuals such as Iran’s Revolutionary Guard may continue to utilize decentralized finance platforms for money laundering activities that finance proxy operations. In a similar vein, drug cartels could exploit these platforms to obscure revenue generated from narcotics trafficking.
Is it acceptable to intentionally construct a system without accountability?
When challenges arise within complex automated systems, a fundamental question emerges: Should there be accountability, or can systems be designed to circumvent responsibility? The provisions of the CLARITY Act suggest that wider distribution of control among algorithms, token stakeholders, and automated contracts diminishes accountability. Essentially, if a blockchain or artificial intelligence system is constructed in such a way that no single entity can be deemed “in control,” the proposed law becomes a means of legally evading responsibility for any resultant fraud, sanctions violations, or market manipulations.
This legislation complicates accountability by potentially exempting software developers and other stakeholders in cryptocurrency systems—not based on their actions but rather on the structural organization of their systems. If culpability hinges on the absence of a clearly defined controlling party, then malfeasance can be obscured under this ambiguity. This is reminiscent of tactics employed by North Korean state-sponsored hackers, who exploit these decentralized structures to transfer billions derived from cyber theft without oversight.
The bill might inadvertently release malevolent actors from liability, claiming their systems merely process instructions from others. Notably, traditional financial institutions such as Visa and Mastercard do not hold customers’ funds; rather, they facilitate transactions while performing necessary checks for fraud and compliance with sanctions. Similarly, financial systems like Hawala operate through ledger entries without a central vault yet remain accountable for their functions.
While the CLARITY Act primarily seeks to regulate the cryptocurrency industry, it also potentially sets a precedent for how courts and regulators might oversee artificial intelligence systems, which are increasingly functioning autonomously. Recent developments indicate that AI agents can negotiate payment terms and finalize commercial transactions independently, often using systems similar to those that would be exempt from regulatory scrutiny under the proposed law. It is crucial for lawmakers to define accountability mechanisms that address instances of fraud, sanctions avoidance, or market manipulation.
Historically, the legal framework in the United States has maintained a key principle: accountability is linked to power. For example, airlines bear liability for aviation accidents, banks are held accountable for facilitating fraudulent activities, and telecommunication companies are compelled to assist in lawful investigations. In these instances, legislators focused on the capacity to prevent harm and the financial gains made, rather than the labels ascribed to industries. Unfortunately, this principle seems overlooked in the current attempt to regulate cryptocurrencies.
The experience with Section 230 illustrates how laws based on entity type rather than function can become obsolete, and Congress must adjust the CLARITY Act to avoid similar pitfalls.
It is essential to recall the implications of Section 230 of the Communications Decency Act. Enacted in 1996, this provision exempted online platforms from liability for user-generated content based on the nature of the entity—be it an early message board or a major social media platform. While this served a purpose in its time, as technology evolved, platforms began leveraging algorithmic systems to manipulate user experiences, ultimately falling under the same liability protections established decades earlier. It took Congress over twenty years to craft a narrow exception to address significant abuses, including those related to human trafficking.
