House Financial Services panel explores combatting illicit finance in cryptocurrency

A congressional hearing on Thursday shed some light on how lawmakers may approach cryptocurrency and illicit finance as that becomes a focus in ongoing legislative efforts.

During a House Financial Services Committee hearing titled "Crypto Crime in Context Part ll: Examining Approaches to Combat Illicit Activity," a congressional panel examined how to prevent bad actors from using cryptocurrency for illicit finance. 

The hearing comes as both Democrats and Republicans are honing in on anti-money laundering (AML) provisions and bills. Republican leadership in the House Financial Services Committee have signaled a willingness to take a closer look at AML while Democratic leadership in the Senate have plans to move forward with legislation to combat money laundering. 

Rep. French Hill, R-Ark., started the hearing by alluding to, although not naming a bill introduced by Sen. Elizabeth Warren, D-Mass., that would require miners and validators take measures to help combat money laundering. 

Hill asked Michael Mosier, former official at U.S. Treasury, why it would "not make sense to subject miners and validators to BSA [Bank Secrecy Act] requirements?"

Miners and validators operate like an internet service provider, Mosier said. 

"So if we were to require them, a validator or a miner, to become a money services business, that wouldn't do anything per se to stop terror financing use of crypto?" Hill asked. 

Mosier agreed with the suggestion and added that there would be no customer. 

Rep. Warren Davidson, R-Ohio., later asked witnesses about what tools law enforcement have at their disposal when pursuing bad actors which utilize digital assets. "I've spoken with some of my county prosecutors, local law enforcement, and they really want to understand these tools better and I think that'll increase their confidence," he said. 

Gaps and understatements 

Rep. Stephen Lynch, D-Mass., criticized AML standards among organizations operating within the digital-assets industry during the hearing, citing a $50 million fine the cryptocurrency exchange Coinbase had to pay last month to a New York state regulator for failing to uphold proper compliance policies. The New York Department of Financial Services said those failures made Coinbase vulnerable to the potential of money laundering and narcotics trafficking, among other crimes.

"What worries me is if a good company is having that challenge, what about those that are offshore?" Lynch said. "With the global nature of this technology and of the crypto finance system, it makes me worry when there are gaps among our best run companies."

Rep. Sean Casten, D-Ill., warned that there could be a significant underestimation of the amount of illicit activity that occurs within the world of crypto. Casten is working on a House version of Sen. Warren's bill to strengthen bank secrecy act requirements for cryptocurrency. 

"If a police department said I've been monitoring the crime in front of the police station for the last year, and there's been no crime committed, and therefore there's no crime in my community, we'd have some questions," Casten said on Thursday. 

Blockchain analytics firms only see on-chain activity and so don't see what happens off chain, said Carole House, senior fellow at the Atlantic Council, who testified at the hearing. 

Casten also inquired what challenges blockchain analytics firms face when tracking illicit activity once it starts moving across blockchains.

Ari Redbord, global head of policy at blockchain intelligence company TRM Labs, told Casten that his firm tracks the flow of funds across 29 different blockchains. He later added that tracking funds makes it harder for bad actors to find off ramps. 

Data misrepresented

This was the second hearing this week focused on crypto and illicit finance. During a House Financial Services Committee hearing on Wednesday, Treasury's Under Secretary for Terrorism and Financial Intelligence Brian Nelson, who testified during that hearing, was asked about an October report from the Wall Street Journal that said Hamas, along with other militant groups used millions of dollars worth of crypto as a financing tool ahead of attacks in Israel.

Data in that article came from the blockchain forensics firm Elliptic, which has since said its calculations were misrepresented in the piece. Nelson said that the numbers in the article were overstated.