Galaxy Research Warning: U.S. Crypto Legislation Could Trigger the Largest Financial Surveillance Expansion Since the Patriot Act

January 14 News, the draft of the Cryptocurrency Market Structure Act currently under review by the U.S. Senate Banking Committee could significantly expand the United States’ regulatory authority over digital assets. Galaxy Research pointed out in its latest report that the bill grants the Treasury Department new powers to freeze decentralized finance (DeFi) front-ends and transactions, potentially representing the largest expansion of financial surveillance since the USA PATRIOT Act of 2001.

Overall, the draft establishes a “temporary freeze” mechanism that allows law enforcement agencies to suspend digital asset transactions without a court order and provides legal safe harbors for good-faith stablecoin issuers and service providers. This measure aims to streamline regulatory requests while enhancing compliance auditability, but also raises concerns about privacy protection and operational flexibility for businesses.

Galaxy Digital Research Director Alex Thorn noted that the bill’s authority for financial surveillance is stronger than the CLARITY Act previously proposed by the House, which aims to combat illegal financial activities. The memo also explicitly introduces the concept of a “distributed ledger application layer,” requiring the Treasury Department to clarify sanctions and anti-money laundering responsibilities for front-ends operating in the U.S., which will directly impact the compliance obligations of DeFi developers and on-chain service providers.

Industry observers pointed out that the bill exposes the trade-off between regulatory transparency and privacy protection. Rob Viglione, CEO of zero-knowledge company Horizen Labs, stated that as activity in the Ethereum ecosystem increases, regulators must find a balance between auditability and expanded surveillance, or else it could pose practical risks to businesses. Megan Knab, CEO of Franklin, added that although stablecoins are considered legal tender at the federal level, significant differences remain in state laws and banking policies, meaning on-chain wages and commercial payments still face major legal and operational challenges.

In summary, if the bill is ultimately passed, it will not only redefine the U.S. cryptocurrency regulatory landscape but also have far-reaching impacts on global DeFi projects, stablecoin compliance operations, and digital asset investor behavior.