The House Financial Services Committee is holding a hearing today focused on illicit activity in digital assets. This hearing follows two others, conducted last month, in the aftermath of reporting around Hamas’s alleged use of cryptocurrency to fund terrorist activity.
Politicians have leveraged these claims to argue that terrorists benefit disproportionately from illicit use of crypto. These claims, however, have proven to be overblown, and reflect deeper misconceptions about crypto that need to be understood and corrected if the US is to get its policy right.
These misconceptions are driving proposed legislation—introduced in the Senate and expected soon to be introduced in the House—that purports to close alleged gaps in the financial system.
Hamas—designated a terrorist group by the US and EU—announced last April that it would stop accepting Bitcoin donations, because it understands what some lawmakers apparently don’t: that Bitcoin transacts on a public ledger that’s transparent for all to see.
And when Hamas tried to shift its illicit fundraising to other lower-profile cryptocurrencies, blockchain analytics tools quickly identified these new fundraising efforts—and supported Israeli authorities’ seizure, within 48 hours, of several Hamas-linked accounts that were created in the aftermath of the attacks.
One basic misconception is that terrorists and criminals are still largely sourcing contributions in crypto because this interface lacks the records and reporting requirements of the regulated banking system. Bad actors will exploit any resource they can in support of their objectives. Crypto is certainly no exception.
Yet the latest Department of the Treasury annual report on terrorism financing finds that instances of crypto-related terrorism funding are “less prevalent than those involving traditional financial assets.”
The Treasury points out that US banks “remain one of the primary avenues by which terrorist groups attempt to move funds in or through the United States” and lauds a recent trend: use of increasingly sophisticated automated transaction monitoring tools to help banks identify suspicious activity.
So, too, it should be with crypto. Effective compliance requires leveraging advances in technology to cut through the noise of trillions of transactions and pinpoint illegal activity—not simply creating even more paperwork.
Which brings us to a second misconception: that crypto transactions are secret and represent “dangerous gaps in our oversight of international money flows,” as Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kansas) said in a recent op-ed. Yet crypto transactions are decidedly not secret; they’re recorded on a public ledger for all to see.
The fast-growing, multibillion-dollar blockchain intelligence industry exists precisely to track activity on public blockchains and identify bad actors.
The industry’s customers include government agencies around the world—which explains in part how US law enforcement so quickly identified the Colonial Pipeline hackers, who foolishly demanded payment in Bitcoin.
Compliance-minded actors across the global crypto sector also proactively use analytics tools to identify illicit behavior and mitigate risk for us all. For example, such cooperation recently led to arrests of high-ranking members of an ISIS affiliate.
A third misconception is that US crypto companies aren’t currently subject to the kinds of transaction monitoring or suspicious activity reporting requirements as banks.
Crypto exchanges, brokers, and asset managers—basically all the industry participants you’ve ever heard of—are required to register with the Treasury’s Financial Crimes Enforcement Network as money services businesses, and to file suspicious activity reports in the same circumstances as traditional banks and broker-dealers.
There is a reason the US government is one of the largest holders of Bitcoin in the world: The public nature of blockchains makes it relatively straightforward, with the right technology tools and cooperation of the right players, to identify bad actors and seize assets before they’re used for nefarious purposes.
Likewise, US sanctions laws apply to US persons regardless where they’re located—or what type of business they’re in.
None of this is to say there aren’t corners of the crypto ecosystem that deserve serious policy attention. FinCEN has proposed designating crypto “mixers” as money-laundering hubs. The purpose of mixers is to conceal the identity of crypto users in ways that may subvert the inherent transparency of public blockchains.
Mixers can have legitimate financial privacy uses; illegal actors also often leverage them to launder money. These and similar efforts to evade transparency deserve a frank conversation and serious analysis.
The purpose of crypto isn’t to facilitate secret transactions, much less illicit transactions. The purposes of crypto are to create a user-controlled financial system and radically improve speed and cost of value transfer.
In a world where banks can be pressured to cancel people’s accounts based on political ideologies, and it costs as much as 10% for an immigrant worker to send money back home, these are considerable benefits.
Bad actors are quickly realizing that public blockchains are a terrible place to hide. And analytics tools to find and identify illicit activity continue improving at an extraordinary rate.
Crypto is no more an enabler of terrorism than the internet itself—which doesn’t mean it should escape regulation. But it also doesn’t mean the opposite.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Brian Brooks is partner at O’Melveny & Myers and a former acting US Comptroller of the Currency.
Sujit Raman is chief legal officer at TRM Labs and a former US Associate Deputy Attorney General responsible for crypto enforcement policy.
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