SBC Hearing on Understanding the Role of Digital Assets in Illicit Finance

Senate Banking Committee

Understanding the Role of Digital Assets in Illicit Finance

Thursday, March 17, 2022

Topline

There was a significant focus on how Russia could use digital assets to evade sanctions and how Ukraine is using crypto currency to support their war efforts

Witnesses

Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis, Inc.

Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network (FinCEN)

Michael Chobanian, Founder of KUNA Exchange, President of Blockchain Association of Ukraine

Shane Stansbury, Robinson Everett Distinguished Fellow in The Center for Law, Ethics, And National Security Senior Lecturing Fellow, Duke University School of Law

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown said often crypto companies who are not covered by the law do not play by the same rules, specifically offshore crypto companies that are not subject to U.S. law. He discussed Russian actors being able to use crypto to get around sanctions and added that crypto allows money launders and terrorist to do many things that they could not do with dollars, for example, chain hopping and rug pulls. He added that the Financial Crimes Enforcement Network (FinCEN) warned last week that Russian actors could even use crypto to get around sanctions. Brown said lax rules and little oversight have given criminals the opportunity to commit digital illicit crimes at a greater rate and have caused many problems with law enforcement being able to trace who owns it. He concluded that we need to take a whole-of-government approach to the problem if we’re going to keep up with crypto in illicit finance and touted President Biden’s executive order on crypto assets last week.

Ranking Member Patrick J. Toomey (R-Pa.)

In his opening statement, Toomey said regulators must not do anything to harm technological innovation and that there is no evidence that crypto currency is being used by Russia to evade sanctions, adding that Ukraine has been using crypto to help provide various protective equipment for Ukrainian soldiers. He concluded that crypto can be used to empower individuals and promote personal autonomy, but it can also prevent illicit crimes. He asked the Committee to acknowledge both the risks and potential of crypto.

Testimony
Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis, Inc.

In his testimony, Levin stated that transparency of blockchains enhances the ability of policymakers and law enforcement to detect, disrupt and, ultimately, deter illicit activity. He said detecting and disrupting illicit activity, by mapping a single illicit actor to a wallet address, (e.g., a ransomware attacker or sanctions evader), allows law enforcement to unlock immediate insight into the network of wallet addresses and services (e.g., exchanges, mixers, etc.) that facilitate the illicit actor. He also said Congress should improve financial systems oversight to reduce systemic risk and to protect consumers. He stated advanced risk analytics could provide regulators the ability to easily independently stress test the entire portfolio of a financial institution. For short-term fixes, Levin stated that Congress could include digital asset wallets in designations when available, consider designating specific services that facilitate sanctions evasion, and expand information sharing. Levin also provided some long-term recommendations to Congress which included Congressional appropriations to fund blockchain intelligence capabilities, adequately funding government agencies charged with investigating the illicit use of digital assets, improve interagency coordination through the creation of a Virtual Asset Coordination Center, and providing market regulators with clear oversight authority over financial digital assets.

Mr. Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network (FinCEN)

In his testimony, Mosier recommended finding a balance that doesn’t merely chase bad actors but also prevents exploitation of the vulnerable. Mosier recommended that Congress appropriate funds for the landmark AML modernization legislation expansively clarify the AML and Kleptocracy whistleblower programs, and reduce global regulatory arbitrage.

Mr. Michael Chobanian, Founder of KUNA Exchange, President of Blockchain Association of Ukraine

In his testimony, Chobanian addressed the sanctions many crypto platforms are currently imposing on

Russia-based crypto accounts. He added that many crypto platforms have blocked the accounts of sanctioned Russian officials and businessmen who support Putin’s regime. He said crypto still remains a viable option for Russians who oppose the war and wish to stand up against Putin’s regime. Chobanian stated that purchasing digital assets is an effective means by which ordinary Russian citizens can demonstrate their opposition to Putin’s regime by moving their savings out of the financial system of the Russian ruble.

Mr. Shane Stansbury, Robinson Everett Distinguished Fellow in The Center for Law, Ethics, And National Security Senior Lecturing Fellow, Duke University School of Law

In his testimony, Stansbury stated that criminals can exploit cryptocurrency in several different ways, including (1) using cryptocurrency to facilitate the commission of crimes, or to support terrorist activity; (2) using cryptocurrency to illegally hide financial activity, such as through money laundering or sanctions evasion; and (3) committing crimes within the cryptocurrency market itself. He said cryptocurrency’s role in criminal activity is the most predominate in ransomware attacks and that the cryptocurrency market offers multiple opportunities for obfuscation along the path from payor to payee. He said the same factors that make cryptocurrency attractive to criminals can present challenges for prosecutors and law enforcement agents seeking to stop illicit activity, adding that criminal investigations are only as successful as the information available. He also suggested we should recognize the serious role that cryptocurrency is playing in criminal activity, and only then can we take the steps necessary to protect our health, safety, and national security.

Question & Answer

Digital Assets

Sens. Mark Warner (D-Va.), Chris Van Hollen (D-Md.), and Brown asked what emerging ways illicit actors use to obscure their identity and how digital assets are being used to invent new crimes. Levin stated the largest activity is happening offshore regarding cash-outs adding that criminals are looking for methods to maximize profitability not necessarily anonymity. Stansbury added that crypto has changed the way extortion looks, ransomware is an example, crypto is the exclusive medium for ransomware attacks. He said anytime there is a new financial ecosystem, new crime opportunities can be established. Sen. Catherine Cortez Masto (D-Nev.) asked what risks illicit financial assets bring and what law enforcement needs to track illicit activity. Levin stated that law enforcement needs more resources and new techniques in order to be able to effectively adapt to this new form of currency and the potential risks it brings. Mosier agreed and added that law enforcement should be able to go after illicit activity in real time. Sens. Bill Hagerty (R-Tenn.) and Cynthia Lummis (R-Wyo.) asked if an investigator is forced to choose between investigating a crime that involves digital assets or cash, which one would they choose. Mosier stated they would choose crypt because the existence of a public ledger makes the process much faster. Levin agreed. Sens. Jon Tester (D-Mont.) and Van Hollen asked if there is a way to recover crypto assets if they are stolen. Levin stated it is not always possible to recovery 100% of the funds, adding that regulating crypto exchanges would be helpful. Hagerty asked what capabilities currently exist in identifying illicit actors in crypto currency such as bitcoin. Levin stated that it is important to track all transactions to the entity conducting the said transaction, and it is equally important that the government track those transaction as well. Sens. Steve Daines (R-Mont.) and Hagerty asked if someone trying to avoid sanctions would be able to convert digital assets into fiat currency. Levin stated in order to convert crypto into fiat currency requires a financial institution, adding that one cannot move from crypto to traditional currency without having to go through the banking system. Sen. Kyrsten Sinema (D-Ariz.) asked how a company can manage to catch illicit activity without attempting to break the block chain or undermine the integrity of the public ledger. Levin said it depends on ability to see the transaction, and the public ledger plays a major role in that, adding that it takes a team of specialists to see how crypto currency exchanges can be abused and provide that information to the public sector.

Regulation

Sens. Tina Smith (D-Minn.). Tester, Hagerty, and Toomy asked what Congress can do to stop bad actors from making illegal crypto transactions. Mosier stated that the public ledger keeps track of crypto transactions, however, law enforcement needs the tools and resources to sort through the data and track bad actors in real time. He added that the best thing Congress can do is provide clear compliance standards. Stansbury said enforcing the Bank Secrecy Act more aggressively and having tighter rules on money transmitters is also important. Tester asked how individuals can be held accountable for illegal activity if they cannot be connected to illegal payments. Stansbury stated it is fact dependent, but looking at payment patterns and obtaining search warrants is helpful. Smith asked what the impact is of not having a clear regulator of crypto. Levin stated it is a possibility that we lose out on a very large economic industry as well as national security visibility.

Russia

Sens. Elizabeth Warren (D-Mass.), Jack Reed (D-R.I.), Robert Menendez (N.J.), Tester, and Brown asked if it is possible for Russian oligarchs to avoid sanctions by using crypto currency. Levin stated that it is possible, but there has been no evidence of such activity. Chobanian added that crypto can be used for good or bad, however, there is nothing Russian actors can do with their crypto currently. Stansbury said there are tools available that will allow regulators and financial institutions to prevent Russia from avoiding sanctions by way of using crypto, but it is largely upon law enforcement to do so. Menendez asked what the risks are to U.S. citizens or institutions trading with Russian exchanges and other jurisdictions with poor monitoring and Know-Your-Customer rules. Stansbury said scam, fraud, and theft are all risks, adding that there is a degree of risk to any consumer when they place their money in crypto.

Ukraine

Toomey asked why people are donating crypto to Ukraine as a way of supporting the country instead of donating dollars or other currency and if there has been an increase in Ukrainians using crypto currency to buy things. Chobanian stated the U.S. banking system is totally different than Ukraine, and it takes longer for U.S. dollars to be deposited in Ukraine bank accounts as opposed to crypto. He added that Ukraine is the number one country in regards to using crypto as a means to purchase goods. Lummis asked how long it took for Ukraine to set up the infrastructure to accept donations through crypto. Chobanian said the setup took about 10 minutes, and as soon as the currency is received, Ukrainians can use it. Sinema asked why the law President Zelensky signed, which legalized crypto currency, is so important. Chobanian gave an overview of the new law and added that crypto will be used to rebuild Ukraine. Daines asked how the donations Ukraine has received through crypto have been utilized. Chobanian stated the country has used the donations to purchase helmets, bullet proof vest, first-aid kits, scopes, and deliver money to Ukrainians to buy food.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here