The Senate Committee on Banking, Housing, and Urban Affairs considered the implications of digital assets for illicit finance, terrorism, and other forms of criminal activity.
Senator Sherrod Brown, Chair of the Senate Banking Committee, emphasized crypto’s role as a tool used by criminals to facilitate ransomware attacks and finance terrorism. Senator Brown contrasted crypto with the dollar, stating that the latter “has safeguards to protect against crime and illicit activity” because companies that use real money are required to “know their customers, and report suspicious transactions.” Senator Brown argued that (i) “[c]rypto allows money launderers and terrorists to do things they never could have done with dollars,” and (ii) in the absence of the safeguards around dollars, “lax rules and little oversight” are giving criminals more opportunities to “hide and move money in the dark.”
Senator Brown also said that President Biden’s recent executive order on digital assets will “jumpstart a coordinated strategy from law enforcement and regulators to fight bad actors who want to use crypto.” He added that without such regulatory and law enforcement action “cybercriminals, rogue regimes [and] terrorists . . . [would] create a shadow financial system that works for them.”
Ranking Member Patrick J. Toomey’s emphasized the need for “regulatory clarity” with respect to digital assets. Senator Toomey argued that criminals have always “tried to utilize new technologies for nefarious gain . . . [b]ut that is not a reason to stifle new technological developments.” He went on to say that cryptocurrencies were being used both by Russia to evade sanctions and by Ukraine which raised over $100 million in donations.
Jonathan Levin, Co-Founder and Chief Strategy Officer of Chainalysis, Inc. emphasized that (i) “the transparency of blockchains enhances the ability of policymakers and law enforcement to detect, disrupt, and ultimately, deter illicit activity” and (ii) a financial system founded on the use of blockchain technology “can enhance the effectiveness of financial regulation more broadly.” He provided several short-term recommendations aimed at reducing the risk of sanctions evasion through digital assets, as well as long-term recommendations aimed at improving detection, disruption and deterrence of broader illicit uses of digital assets.
Mr. Levin’s short-term recommendations include:
- authorities using digital asset wallet addresses as identifiers;
- OFAC potentially sanctioning those digital asset exchanges and crypto entities that facilitate sanctions evasion; and
- expanding information sharing.
His long-term recommendations include, among other things:
- financial regulators and other law enforcement investing in “blockchain intelligence and analytics capabilities . . . that will enhance their ability to detect, disrupt, and deter illicit uses of digital assets”;
- improving and promoting interagency coordination through the creation of a Virtual Asset Coordination Center; and
- greater legal clarity over financial digital assets (e.g., commodities and securities).
Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer at FinCEN, stated that policymakers should focus not only on “chas[ing] bad actors,” but also on preventing exploitation of the vulnerable “from the start.” His recommendations include: (i) expanding the AML and Kleptocracy whistleblower programs to explicitly include “sanctions evasion and any violation of money laundering laws not just BSA violations”; (ii) providing the Kleptocracy Whistleblower Program with “dedicated funds and much higher caps” for those whistleblowers under autocratic regimes; and (iii) reducing global regulatory arbitrage, in part through Congress pressing U.S. FATF representatives to “focus on standardizing licensing across jurisdictions.”
Shane Stansbury, Senior Lecturing Fellow in Law and Robinson Everett Distinguished Fellow in the Center on Law, Ethics, and National Security at Duke University School of Law, detailed the challenges that cryptocurrency presents for law enforcement, including (i) deciphering who is responsible for the criminal activity, (ii) lack of regulation, and (iii) tracing digital assets. He stated that even with the latest blockchain analytics, “investigations can take years to complete.”
While President Biden’s Executive Order on digital assets has been interpreted by some to reflect an open-mindedness on digital assets, recent statements by federal regulators and legislative representatives appears to be moving in a contrary direction – with Senator Brown’s statement being the most aggressively example. (See also Statement of SEC Commissioner Lee; DOL Warns Plan Fiduciaries of the Substantial Risks of Cryptocurrency Investments; SEC Warns Investors of Risks Associated with Interest-Bearing Crypto Accounts.) Senator Brown echoed a phrase used to describe the Executive Order, saying that the “whole of government” must be put to the service of fighting the the problem of crypto. As to the Senate Banking Committee hearing, the “whole of government” is about amping up regulation.
One potentially interesting exception to the negative take on digital assets is the suggestion in the Executive Order that the Administration is open to considering the introduction of a USD-Central Bank Digital Currency. Perhaps the Administration considers private alternatives to a governmental CBDC as being undesirable and unwelcome competitors. A governmental CBDC, in which all transactions are ultimately routed through the banking system, could afford significant government transparency into spending.
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- Senate Banking Committee Hearing: Understanding the Role of Digital Assets in Illicit Finance