[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                 TERRORISM AND CRYPTOCURRENCY: INDUSTRY 
                                PERSPECTIVES

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                            INTELLIGENCE AND
                            COUNTERTERRORISM

                                 OF THE

                     COMMITTEE ON HOMELAND SECURITY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 9, 2022

                               __________

                           Serial No. 117-59

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 
                                     

        Available via the World Wide Web: http://www.govinfo.gov

                               __________
                               
                   U.S. GOVERNMENT PUBLISHING OFFICE                    
48-616 PDF                 WASHINGTON : 2022                     
          
-----------------------------------------------------------------------------------                                

                     COMMITTEE ON HOMELAND SECURITY

               Bennie G. Thompson, Mississippi, Chairman
Sheila Jackson Lee, Texas            John Katko, New York
James R. Langevin, Rhode Island      Michael T. McCaul, Texas
Donald M. Payne, Jr., New Jersey     Clay Higgins, Louisiana
J. Luis Correa, California           Michael Guest, Mississippi
Elissa Slotkin, Michigan             Dan Bishop, North Carolina
Emanuel Cleaver, Missouri            Jefferson Van Drew, New Jersey
Al Green, Texas                      Mariannette Miller-Meeks, Iowa
Yvette D. Clarke, New York           Diana Harshbarger, Tennessee
Eric Swalwell, California            Andrew S. Clyde, Georgia
Dina Titus, Nevada                   Carlos A. Gimenez, Florida
Bonnie Watson Coleman, New Jersey    Jake LaTurner, Kansas
Kathleen M. Rice, New York           Peter Meijer, Michigan
Val Butler Demings, Florida          Kat Cammack, Florida
Nanette Diaz Barragan, California    August Pfluger, Texas
Josh Gottheimer, New Jersey          Andrew R. Garbarino, New York
Elaine G. Luria, Virginia            Vacancy
Tom Malinowski, New Jersey
Ritchie Torres, New York
                       Hope Goins, Staff Director
                 Daniel Kroese, Minority Staff Director
                     Natalie Nixon, Committee Clerk
                                 ------                                

           SUBCOMMITTEE ON INTELLIGENCE AND COUNTERTERRORISM

                  Elissa Slotkin, Michigan, Chairwoman
Sheila Jackson Lee, Texas            August Pfluger, Texas, Ranking 
James R. Langevin, Rhode Island          Member
Eric Swalwell, California            Michael Guest, Mississippi
Josh Gottheimer, New Jersey          Jefferson Van Drew, New Jersey
Tom Malinowski, New Jersey           Jake LaTurner, Kansas
Bennie G. Thompson, Mississippi (ex  Peter Meijer, Michigan
    officio)                         John Katko, New York (ex officio)
               Brittany Carr, Subcommittee Staff Director
          Adrienne Spero, Minority Subcommittee Staff Director
                      Joy Zieh, Subcommittee Clerk
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable Elissa Slotkin, a Representative in Congress From 
  the State of Michigan, and Chairwoman, Subcommittee on 
  Intelligence and Counterterrorism:
  Oral Statement.................................................     1
  Prepared Statement.............................................     3
The Honorable August Pfluger, a Representative in Congress From 
  the State of Texas, and Ranking Member, Subcommittee on 
  Intelligence and Counterterrorism:
  Oral Statement.................................................     4
  Prepared Statement.............................................     5
The Honorable Bennie G. Thompson, a Representative in Congress 
  From the State of Mississippi, and Chairman, Committee on 
  Homeland Security:
  Prepared Statement.............................................     6

                               Witnesses

Ms. Kristin Smith, Executive Director, The Blockchain 
  Association:
  Oral Statement.................................................     7
  Prepared Statement.............................................     9
Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, 
  Chainalysis, Inc.:
  Oral Statement.................................................    11
  Prepared Statement.............................................    13
Mr. John Kothanek, Vice President, Global Intelligence, Coinbase, 
  Inc.:
  Oral Statement.................................................    21
  Prepared Statement.............................................    23

 
          TERRORISM AND CRYPTOCURRENCY: INDUSTRY PERSPECTIVES

                              ----------                              


                         Thursday, June 9, 2022

             U.S. House of Representatives,
                    Committee on Homeland Security,
                              Subcommittee on Intelligence 
                                      and Counterterrorism,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:01 a.m., in 
room 310 Cannon House Office Building, Hon. Elissa Slotkin 
[Chairwoman of the committee] presiding.
    Present: Representatives Slotkin, Langevin, Gottheimer, 
Pfluger, Van Drew, LaTurner, and Meijer.
    Chairwoman Slotkin. OK. Lovely to see you all. Good 
morning. The Subcommittee on Intelligence and Counterterrorism 
is meeting today on a hearing entitled, ``Terrorism and 
Cryptocurrency: Industry Perspectives''. Nearly a year ago this 
subcommittee received testimony from the Department of Homeland 
Security on how they are addressing this important issue. Today 
I am glad to welcome the Blockchain Association, Chainalysis, 
and Coinbase to share a couple of things with us.
    First, what trends the cryptocurrency and blockchain 
industry have observed regarding terrorist and illicit use, how 
the industry works to prevent such use, and how it partners 
with the Government in this endeavor.
    In full transparency, last week I introduced the 
Cryptocurrency Accountability Act. This was to ensure that as 
the investment in cryptocurrency grows Members of Congress are 
required to disclose all holdings and trades, similarly, to the 
way we are required to disclose normal stock trades. The goal 
is just to improve transparency and help stop corruption that 
erodes confidence in our Government.
    Now, while this is a separate issue from what we are 
discussing today, I think it speaks to the bigger sort-of 
context for our hearing today, which is the issue of 
cryptocurrency and blockchain technology is really a new space, 
certainly for Members of Congress. You know, I like to joke 
that sometimes our committee Chairs are from the flip phone 
generation. We are just kind-of catching up on the left and 
right limits that we should put down on social media is new, 
let alone things like cryptocurrencies and blockchain 
technology. Because it really is such a new field, there is a 
lack of frankly understanding of oversight of regulation. I 
think what we are all concerned about is what is the right 
space for the U.S. Congress to provide oversight, what is the 
right approach. I don't think there is any unanimity on the 
answer to that. As I have expressed to some of you, I think 
that on any given day up on Capitol Hill, you can hear how 
cryptocurrencies and blockchain analysis are going to change 
the world and they are going to be bigger than the internet and 
it is going to revolutionize everything we know. Then on the 
same day you can hear people truly dismissive cryptocurrencies 
and saying that it is, you know, a Ponzi scheme. So there is 
really not a consensus view and a baseline understanding to 
begin with.
    So because of that, this committee's purview is making sure 
bad actors don't have new avenues to exploit to carry out 
activities that affect the U.S. homeland, U.S. allies, and U.S. 
partners.
    I am a former CIA officer. My Ranking Member here is a 
former military officer. So we both have strong interest in 
making sure bad guys don't have new ways to threaten us and to 
fund their bad activity. So for the purposes of this hearing, 
that is really our focus. Trying to hear directly from the 
industry, in addition to others that we will and have heard 
from, what the space looks like in terms of terrorists and 
other bad actors, criminals, seeking to exploit this 
technology.
    The sort-of breadcrumbs of cryptocurrency are showing up 
everywhere in our districts. As I have expressed to some of 
you, you can drive through some of the smaller cities of 
Michigan where I am from and see bitcoin ATMs at all kinds of 
gas stations. I think a lot of people don't totally understand 
what those are. Even as recently as this week, the Michigan 
legislature had passed a bill requiring that Michigan students 
take a financial literacy course as part of their education 
because: (a) That is just a good thing to do, but (b) it has 
never been easier for a young person to trade stock and to 
invest in things like cryptocurrency. It was listed by name in 
that way. So it is very much kind-of seeping into the average 
person's life.
    According to the analysis of the U.S. Federal Trade 
Commission, consumers reported losing more than $1 billion to 
fraud involving cryptocurrencies from January 2021 through 
March 2022. As related to illicit or illegal use, Chainalysis, 
most recent crypto crime trends report found that illicit or 
illegal use of cryptocurrencies made up a mere .15 percent of 
all crypto activity in 2021, although I understand that others 
in the Federal Government may have slightly different number. 
Nevertheless, according to the report, even at that low 
percentage point, the raw value of the illicit transaction 
volume has reached its highest level ever at $14 billion, up 
from $7.8 billion just in 2020. So the trend is certainly going 
up.
    Regarding terrorism, specifically in 2020 U.S. authorities 
seized millions of dollars over 300 cryptocurrency accounts 
connected to groups like Hamas, al-Qaeda, and ISIS. So here you 
understand our concern. This is not small potatoes to us for 
providing oversight issues related to terrorism.
    At our hearing last year this subcommittee heard how DHS is 
in particular investigating terrorists and illicit use of 
cryptocurrency and provide State, local, Tribal, territorial, 
and private-sector partners with information necessary to try 
and combat the use, but nothing is more helpful to us and 
important to us than to hear directly from you all in the 
industry to tell us what you are seeing, to hopefully be 
transparent about what you are monitoring, what you are seeing 
are the trends in crypto and blockchain technology, and maybe 
the novel ways you are countering some of these potential 
exploitation routes.
    Our committee wants to be a partner. I think I told all of 
you before the hearing that I personally--and I don't--I think 
I can speak for my Ranking Member, we don't have an agenda, we 
are not for, we are not against, we are--this is new territory 
and part of this hearing is to publicly have the conversation 
about this. Since it is so new, I think it is partly just to 
educate and hear from voices.
    So we are ready to partner with you to help educate us up 
here, but also educate the public on how we can crack down on 
any and all illicit use of cryptocurrencies.
    [The statement of Chairwoman Slotkin follows:]
                 Statement of Chairwoman Elissa Slotkin
                              June 9, 2022
    The Subcommittee on Intelligence and Counterterrorism will be in 
order. The subcommittee is meeting today on ``Terrorism and 
Cryptocurrency: Industry Perspectives.''
    Without objection, the Chair is authorized to declare the 
subcommittee in recess at any point.
    Good morning.
    Nearly a year ago, the subcommittee received testimony from 
Department of Homeland Security officials on how they are addressing 
this important issue.
    Today, I am glad to welcome The Blockchain Association, 
Chainalysis, and Coinbase, to share with us:
   what trends the cryptocurrency and blockchain industry has 
        observed regarding terrorist and illicit use;
   how the industry works to prevent such use; and
   how it partners with Government in this endeavor.
    Last week, I introduced the ``Cryptocurrency Accountability Act'' 
to ensure that as the use of cryptocurrency grows, Members of Congress 
are required to disclose all holdings and trades. The goal is to 
improve transparency and help stop corruption that erodes confidence in 
our Government.
    Now, while this is a related but separate issue from what we are 
discussing today, it speaks to the fact that the laws and regulations 
that govern traditional financial institutions do not always apply to 
cryptocurrency exchanges and the crypto industry.
    Because of the lack of regulation and the idea that cryptocurrency 
and blockchain technology provide a level of anonymity, bad actors, 
terrorists, criminals seek to exploit the technology.
    In my home State of Michigan, there are Bitcoin ATMs, which as I 
understand it, are simply kiosks through which you can make Bitcoin 
purchases and sales. Unlike bank ATMs, Bitcoin ATMs do not require 
users to have an account to use them.
    I am curious to know if these ATMs are really offering legitimate 
alternatives to financially manage day-to-day life or if they are just 
another way for illicit financial actors to take advantage of people.
    According to analysis by the U.S. Federal Trade Commission, 
consumers reported losing more than $1 billion to fraud involving 
cryptocurrencies from January 2021 through March 2022.
    As related to illicit or illegal use, Chainalysis' most recent 
Crypto Crime Trends report found that illicit or illegal use of 
cryptocurrency made up a mere 0.15 percent of all cryptocurrency 
activity in 2021. Although, I understand that some in the Federal 
Government believe the percentage could be a bit higher.
    Nevertheless, according to the Chainalysis report, even at that low 
percentage point, the raw value of illicit transaction volume has 
reached its highest level ever at $14 billion--up from $7.8 billion in 
2020.
    Regarding terrorism specifically, in 2020 U.S. authorities seized 
millions of dollars, over 300 cryptocurrency accounts, connected to 
Hamas's military wing, al-Qaeda, and ISIS.
    That's not small potatoes.
    At the subcommittee's hearing last year, my colleagues and I heard 
how DHS, in particular, investigates terrorist and illicit use of 
cryptocurrency and provides State, local, Tribal, territorial, and 
private-sector partners with information necessary to combat such use.
    Today, I look forward to hearing from our witnesses about how you 
are monitoring and investigating exploitation of crypto and blockchain 
and the novel ways in which you are countering misuse.
    Our subcommittee stands ready to partner with you to take on this 
challenge.
    The Chair now recognizes the Ranking Member of the subcommittee, 
the gentleman from Texas, Mr. Pfluger, for an opening statement.

    Chairwoman Slotkin. With that, I now recognize the Ranking 
Member, Mr. Pfluger, from Texas, for his opening remarks.
    Mr. Pfluger. Thank you, Madam Chair. I appreciate you 
holding this hearing today. I would also like to thank our 
witnesses from Chainalysis, the Blockchain Association, and 
Coinbase. Thank you for your time.
    Totally support the comments made by the Chair on making 
sure that we understand, fully have a good transparent 
conversation, and don't rush into policy without knowing the 
facts first. I think that today should be a productive 
conversation on innovative solutions and that we can use the 
ideas heard today to provide safeguards against terrorists and 
other adversaries' use of crypto as a tool to evade the current 
law.
    The battle against terror financing and illicit activity is 
not a new one. We all know that. But the creation of 
cryptocurrency has introduced additional complications to that 
fight and cryptocurrency can provide both security and 
anonymity in financial transactions, making it an alluring tool 
for the nefarious actors around the world.
    Chainalysis reported that in 2021 illicit addresses 
received $14 billion through cryptocurrency--an all-time high. 
Between ransomware payments, the dark net market, sanctions 
evasion, and terrorism financing, we are combatting bad actors 
from a variety of multiple angles. Congress is notorious for 
being one step behind when it comes to new technologies, but we 
cannot afford to play catch up when it comes to any of these 
issues, and especially the pace and the speed at which they are 
accelerating and changing. That is why we are meeting with 
industry leaders today, to fully understand the scope of the 
problem and the challenges and then also to find innovative 
solutions to close that gap in the illicit activities involving 
digital assets.
    At the end of this hearing, like the Chair mentioned, I 
hope to understand what we should expect going forward, what 
trends we are seeing in terms of terrorist use of digital 
assets and how the public and private sectors can better work 
together and collaborate on stopping those bad actors.
    Given the global threat picture, we also cannot overlook 
the foreign nation-states who are attempting to use crypto to 
line their own pockets, essentially evading sanctions as well.
    I would like to hear more from the panel about Iranian 
efforts to utilize crypto mining and understand what the 
outlook is for Russia's use of similar methods. What steps are 
being taken in the private sector already to ensure that crypto 
isn't a back door to America's use of soft power at a time when 
sanctions enforcement is an important tool in our foreign 
policy?
    With that said, it is imperative that we remember 
regulation should not be implemented hastily. I think that is 
the purpose of today's conversation. I applaud the efforts of 
colleagues like Senator Lummis, who has long worked on industry 
regulation. As legislators it is incumbent upon us to protect 
our constituents in the American way of life while supporting 
private-sector growth and the U.S. economy. We must pursue the 
least burdensome regulatory path while also ensuring safety and 
security.
    I look forward to our discussion today. I hope that the 
committee can support the private-public partnerships necessary 
to combat terrorists and other illicit financing via 
cryptocurrency. Our witnesses are not only leaders in the 
private sector, but many of you also have Government experience 
to draw upon, which will be helpful to craft common-sense 
reform if needed with our committee.
    This is a new frontier for the security of our homeland and 
it is vital that we are working hand-in-glove between the 
public and the private industries and the sectors.
    The last thing I will say before we get into the questions 
is, in your testimony, is the United States needs to lead here. 
If we don't and if there is a vacancy, China, Russia, Iran, and 
other actors around the world will lead and that really is the 
purpose of today's hearing.
    I would like to thank our witnesses for appearing before 
the subcommittee today. I look forward to a robust 
conversation.
    Madam Chair, I yield back.
    [The statement of Ranking Member Pfluger follows:]
               Statement of Ranking Member August Pfluger
    Thank you, Madam Chair. I appreciate you holding this hearing today 
and would like to thank our witnesses from Chainalysis, the Blockchain 
Association, and Coinbase. I look forward to a productive conversation 
on innovative solutions that we can use to safeguard against terrorists 
and other adversaries' use of crypto as a tool to evade the rule of 
law.
    The battle against terrorist financing and illicit activity is not 
a new one, but the creation of cryptocurrency has introduced additional 
complications to that fight. Cryptocurrency can provide security and 
anonymity in financial transactions, making it an alluring tool for 
nefarious actors. Chainalysis reported that in 2021, illicit addresses 
received $14 billion through cryptocurrency--an all-time high. Between 
ransomware payments, the darknet market, sanctions evasion, and 
terrorism financing, we are combatting bad actors from multiple angles.
    Congress is notorious for being one step behind when it comes to 
new technologies, but we cannot afford to play catch-up when it comes 
to any of these issues. That is why we are meeting with industry 
leaders today--to understand the full scope of the challenges and find 
innovative solutions that will close the small, but profitable gap in 
cryptocurrency that is being used for illicit activity. At the end of 
this hearing, I hope to understand what we should expect going 
forward--what trends are we seeing in terms of terrorist use of 
cryptocurrency and how can we crack down on the billion-dollar profits 
nefarious actors are making from illicit cyber activity.
    Given the global threat picture, we also cannot overlook the 
foreign nation-states who are attempting to use crypto as a way to line 
their own pockets--essentially evading sanctions. I'd like to hear more 
from the panel about Iranian efforts to utilize crypto mining and 
understand what the outlook is for Russian's use of similar methods. 
What steps are being taken in the private sector to ensure that crypto 
isn't a back door to America's use of soft power at a time when 
sanctions enforcement is an important tool to our foreign policy?
    With that said, it is imperative that we remember--regulation 
should not be implemented hastily. As legislators it's incumbent upon 
us to protect our constituents and the American way of life while 
supporting private-sector growth and the U.S. economy. We must pursue 
the least burdensome path while ensuring the Nation's safety and 
security.
    I look forward to our discussion today and hope that this committee 
can support the public-private partnerships necessary to combat 
terrorist and other illicit financing via cryptocurrency. Our witnesses 
are not only leaders in the private sector, but they also have 
Government backgrounds that will give them the experience to craft 
common-sense reforms with our committee. This is a new frontier for the 
security of our homeland, and it is vital that we are working hand-in-
glove to understand the threat and mitigate against it.
    I thank our witnesses for appearing before the subcommittee today, 
and I look forward to a robust conversation. Madame Chairwoman, I yield 
back the balance of my time.

    Chairwoman Slotkin. Great. I thank the Ranking Member for 
his comments. Other Members may submit statements for the 
record.
    [The statement of Chairman Thompson follows:]
                Statement of Chairman Bennie G. Thompson
                              June 9, 2022
    Good morning.
    Today, the subcommittee will hear from the cryptocurrency industry 
about how terrorists and other criminals may try to exploit 
cryptocurrency and the blockchain--and how the industry is responding.
    This committee was formed after 9/11, as part of the effort to 
better protect the homeland from terrorism and other threats.
    Over the past two decades, technology has changed drastically.
    Digital finance technologies built on the blockchain, including 
cryptocurrency, and the digital marketplaces that make use of them have 
revolutionized the American economy and global markets.
    Unfortunately, terrorists' tactics have followed suit.
    Terrorists today not only use the internet to connect and recruit 
supporters, but also to seek funding to further their extremist 
activities.
    Over recent years, ISIS supporters have launched campaigns to teach 
people how to use Bitcoin to obscure financial support to the terrorist 
group.
    And when they believed that Bitcoin no longer provided the level of 
anonymity they sought, ISIS supporters began asking people to send 
money via a different cryptocurrency, Monero, citing its features that 
conceal transactions.
    The issue is not exclusive to foreign terrorism.
    In 2020, at least a dozen far-right groups and their leaders, 
including an American far-right commentator, received approximately 
$522,000 worth of Bitcoin from a French supporter.
    One year ago, this subcommittee held a hearing with Department of 
Homeland Security (DHS) officials to examine terrorists' use of digital 
currency and how it is changing the threat landscape.
    The subcommittee has also had Classified briefings with the 
Treasury Department and others on this issue, and I thank Chairwoman 
Slotkin for her steadfast leadership and for convening this hearing.
    Today, we have leaders from the cryptocurrency industry here to 
share their perspectives.
    The private sector and cryptocurrency industry are the first line 
of defense for protecting homeland security from terrorists and 
criminals who may seek to use cryptocurrencies to finance their illicit 
acts.
    As a Nation, we must continue to create and innovate. We cannot be 
stagnant or fearful of new technology.
    But we also must ensure that those developing and leading on 
emerging technologies are at the forefront of building in safeguards to 
protect against terrorists' exploitation and the ensuing danger.
    I look forward to a productive conversation on this topic and to 
working with the cryptocurrency and blockchain industries to ensure 
they have the tools and resources they need.
    I thank the witnesses for joining us today and look forward to this 
important discussion.

    Chairwoman Slotkin. I now welcome our panel of witnesses. 
We have two in person and one coming virtually.
    Our first witness is Ms. Kristin Smith, executive director 
of the Blockchain Association. In that role Ms. Smith 
represents companies in the crypto industry leading the 
industry in strategy and public policy development. Before 
joining the Blockchain Association Ms. Smith served as a 
Congressional staffer in both House and Senate offices, as well 
as in the private sector where she advocated for companies in 
the telecommunications, internet, and other tech-focused 
industries. Welcome.
    Our second witness is Mr. Jonathan Levin, co-founder and 
chief strategy officer Chainalysis, a blockchain data platform 
that helps organizations with cryptocurrency investigations, 
compliance, and market intelligence. Mr. Levin advises 
stakeholders on blockchain analysis capabilities and is 
responsible for designing long-term strategic initiatives that 
help Government agencies, cryptocurrency businesses, and 
financial institutions around the world manage and assess 
cryptocurrency-related risk.
    Our final witness, who is joining us virtually from London, 
thank you very much, is Mr. John Kothanek, vice president of 
global intelligence at Coinbase, the largest U.S. 
cryptocurrency exchange. He is a former Marine who worked in 
intelligence operations and went on to start and run Paypal's 
criminal investigations team. As the vice president of global 
intelligence for Coinbase Mr. Kothanek is responsible for 
standing up, training, and managing teams around the world, and 
for providing the best-in-class service, training, and 
investigative support to law enforcement partners.
    Without objection, the witnesses' full statements will be 
inserted in the record.
    I now ask each witness to summarize his or her statements 
for 5 minutes, beginning with Ms. Smith.
    Please go ahead.

STATEMENT OF KRISTIN SMITH, EXECUTIVE DIRECTOR, THE BLOCKCHAIN 
                          ASSOCIATION

    Ms. Smith. Thank you, Chairwoman Slotkin, Ranking Member 
Pfluger, and Members of the subcommittee for inviting me to 
testify today.
    My name is Kristin Smith and I am the executive director of 
the Blockchain Association, a nonprofit trade association 
dedicated to advancing good policy so that crypt networks can 
flourish in the United States.
    The Blockchain Association includes more than 90 leading 
companies who are committed to responsible innovation and 
strengthening the United States' strategic position in finance 
and technology. Our diverse membership includes this dynamic 
industry--reflects this dynamic industry and includes 
exchanges, developers, investors, and other participants in the 
crypto ecosystem. I am honored to be testifying today with 
professionals from Chainalysis and Coinbase who partner with 
law enforcement every day to stop bad actors from using crypto 
networks.
    Today I will explain what crypto networks are, what 
problems they solve, and why they will be the source of the 
next wave of American innovation.
    Bitcoin was the world's first cryptocurrency and the 
Bitcoin network is the world's first crypto network. Invented 
in 2009, Bitcoin allows anyone anywhere in the world to send 
and receive value using nothing more than a computer with an 
internet connection. Before Bitcoin, if someone wanted to make 
a payment over the internet they had to rely on an 
intermediary, like a bank, to add an entry in its private 
ledger debiting them and crediting the person they want to pay. 
In other words, before Bitcoin all on-line payments depended on 
gatekeepers and middle men, who are slow and expensive under 
the best of circumstances. Under the worse of circumstances, 
they expose American's sensitive information to cyber attacks, 
discriminate against underserved communities, and exploit their 
own customers in pursuit of profit.
    Bitcoin solves these problems by replacing centralized 
intermediaries with a decentralized ledger or database that 
allows anyone anywhere to send payments across the world almost 
instantly at almost no cost. Unlike the legacy banking system, 
which is dominated by large private financial institutions, the 
Bitcoin network is public payment infrastructure, it is digital 
cash for the digital age.
    It is critical to note that crypto is more than currency. 
Digital cash was the first use for crypto networks, but far 
from the last. American innovators, entrepreneurs, and 
developers are now using that same technology crypto networks 
to build the next iteration of the internet, sometimes referred 
to as ``Web 3''. ``Web 1'' refers to the early internet of the 
1990's when users could only do basic tasks, like read websites 
and send emails. ``Web 2'' refers to the internet we largely 
have today, with all its interactive applications and services. 
But just like the banking system, Web 2 is dominated by a few 
large companies, the tech giants, who wield outsized power and 
influence for their own benefit at the expense of the American 
public. Web 3, born from and built on crypto networks, is the 
solution to this imbalanced power. Web 3 brings property rights 
to the web. It not only allows individuals to own their own 
data and content, it also allows them to possess digital goods 
and property. Just like when the mainframe computer was 
replaced with personal computers and proprietary operating 
systems were replaced with web-based software, the opening up 
internet platforms and the ability to have digital ownership 
that comes along with it will unleash immense innovation and 
change how we live, work, and play.
    For the United States to realize the full benefits of Web 3 
and ensure we remain the global leader in this space, we must 
give American entrepreneurs the freedom to innovate.
    Crypto networks present extraordinary opportunities, but 
also risks. The subject of today's hearing is an important one 
to address head on. Thankfully policy makers at the Treasury 
Department and across the Government have been doing just that 
for many years. FinCEN, under the Treasury Department, was the 
very first regulator to issue guidance related to crypto 
networks back in 2013. Since then the U.S. law enforcement and 
intelligence communities have proven highly effective in 
identifying and stopping bad actors from using crypto networks. 
The Blockchain Association and all of its member companies are 
strongly committed to protecting the integrity of the financial 
system, supporting U.S. National security, and advancing U.S. 
interest.
    I greatly appreciate the chance to testify today and I look 
forward to your questions.
    [The prepared statement of Ms. Smith follows:]
                       Statement of Kristin Smith
                              June 9, 2022
     i. crypto networks are essential to the internet of the future
    Thank you for inviting me to testify today. My name is Kristin 
Smith and I am the executive director of the Blockchain Association, a 
nonprofit trade association dedicated to advancing good policy so that 
crypto networks can flourish in the United States. The Blockchain 
Association includes more than 90 leading companies who are committed 
to responsible innovation and strengthening the United States' 
strategic position in global finance and technology. Our diverse 
membership reflects this dynamic industry, and includes exchanges, 
developers, investors, and other participants in the crypto ecosystem.
    I'm honored to be testifying today with professionals from 
Chainalysis and Coinbase who partner with law enforcement every day to 
stop bad actors from using crypto networks. Today, I will explain what 
crypto networks are, what problems they solve, and why they will be the 
source of the next wave of American innovation.
    Bitcoin is the world's first cryptocurrency--and the Bitcoin 
network is the world's first crypto network. Invented in 2009, Bitcoin 
allows anyone, anywhere in the world to send and receive value using 
nothing more than a computer with an internet connection. Before 
Bitcoin, if someone wanted to make a payment over the internet, they 
had to rely on an intermediary, like a bank, to add an entry to its 
private ledger debiting them and crediting the person they wanted to 
pay. In other words, before Bitcoin, all on-line payments depended on 
gatekeepers and middlemen, who are slow and expensive under the best of 
circumstances. Under the worst of circumstances, they expose Americans' 
sensitive information to cyber attacks, discriminate against 
underserved communities, and exploit their own customers in the pursuit 
of profit.
    Bitcoin solves these problems by replacing centralized 
intermediaries with a decentralized ledger that allows anyone, 
anywhere, to send payments across the world, almost instantly at almost 
no cost. Unlike the legacy banking system, which is dominated by large, 
private financial institutions, the Bitcoin network is a public 
payments infrastructure: Digital cash for the digital era.
    It's critical to note that crypto is more than currency. Digital 
cash was the first use case for crypto networks, but far from the last. 
American innovators, entrepreneurs, and developers are now using that 
same technology--crypto networks--to build the next iteration of the 
internet: Sometimes called ``Web 3.'' Web 1 refers to the early 
internet of the 1990's, when users could only do basic tasks like read 
websites or send emails. Web 2 refers to the internet we have today, 
with all its interactive applications and services. But just like the 
banking system, Web 2 is dominated by a few large companies--the tech 
giants--who wield outsized power and influence for their own benefit at 
the expense of the American public.
    Web 3--born from and built on crypto networks--is the solution to 
this imbalance of power. Web 3 brings property rights to the web. It 
not only allows individuals to own their own data and content, but it 
also allows them to possess digital goods and property. Just like when 
the mainframe computer was replaced with personal computers, and 
proprietary operating systems were replaced with web-based software, 
the opening of internet platforms--and the ability to have digital 
ownership that comes along with it--will unleash immense innovation and 
change how we live, work, and play. For the United States to realize 
the full benefits of Web 3--and ensure we remain the global leader in 
this space--we must ensure American entrepreneurs have the freedom to 
innovate.
    Crypto networks present extraordinary opportunities, but also 
risks. The subject of today's hearing is an important one to address 
head-on, and thankfully, policy makers at the Treasury Department and 
across the Government have been doing just that for many years. FinCEN 
was the very first regulator to issue guidance related to crypto 
networks back in 2013. Since then, the U.S. law enforcement and 
intelligence communities have proven highly effective in identifying 
and stopping bad actors from using crypto networks. The Blockchain 
Association and all of its members are strongly committed to protecting 
the integrity of the financial system, supporting U.S. National 
security, and advancing U.S. interests.
      ii. crypto networks are not vulnerable to use by bad actors
    In the United States, custodial crypto companies like exchanges, 
payment processors, and other ``flat on-ramps and off-ramps'' are 
regulated as money services businesses (MSBs) and are responsible for 
compliance with the Bank Secrecy Act (BSA). These companies have 
established highly effective anti-money laundering (AML) compliance 
programs and regularly coordinate with U.S. law enforcement authorities 
to detect and prevent illicit activity. Peer-to-peer transactions, on 
the other hand, are not subject to the BSA pursuant to long-standing 
guidance from FinCEN. Yet, for several reasons, these transactions pose 
little risk of money laundering and terrorist financing.
    First, before cryptocurrencies are exchanged for goods or services, 
they typically have to be converted to a National currency, which 
requires that they be exchanged through a regulated financial 
institution where they will be subject to the same level of due 
diligence as transactions in the traditional financial system. In these 
cases, cryptocurrency transactions pose no greater risk of money 
laundering or terrorist financing than ACH payments or wire transfers.
    Second, the transparent and immutable nature of public blockchains 
allows law enforcement to ``follow the money'' and establish 
attribution in cases involving cryptocurrencies. According to the 
Department of Justice, ``armed only with the knowledge of a target's 
cryptocurrency address and this single--but highly valuable--data set, 
[the blockchain], law enforcement can learn a myriad of vital pieces of 
information about a target.'' Indeed, many of the individuals charged 
in recent high-profile ``busts'' involving cryptocurrencies were 
identified after sending their assets to custodial accounts at 
regulated financial institutions that law enforcement was able to 
subpoena to establish attribution for the relevant criminal activity. 
It is largely due to law enforcement's ability to leverage blockchain 
technology and coordinate with industry participants that the amount of 
illicit activity on crypto networks is so low.
    Third, the reality is that nearly 14 years after the invention of 
Bitcoin, the vast majority of money laundering and terrorist financing 
continues to occur in the traditional financial system. According to 
the United Nations, ``The best estimate for the amount available for 
laundering through the financial system, emerging from a meta-analysis 
of existing estimates, would be equivalent to 2.7 percent of global GDP 
(2.5 percent-4 percent) or US$1.6 trillion in 2009.'' From this 
statistic, it becomes clear that the value of illicit funds laundered 
each year through the traditional financial system is nearly greater 
than the value of all cryptocurrencies combined. For context, the 
largest cryptocurrency by market capitalization is bitcoin, which has a 
capitalization of about $568 billion, and the combined market 
capitalization of stablecoins that reference the U.S. dollar is about 
$144 billion. Additionally, the level of illicit activity in 
cryptocurrency markets, which according to blockchain analytics firm 
Chainalysis represented just 0.15 percent of cryptocurrency transaction 
volume in 2021, further proves that cryptocurrencies have not been 
widely adopted by illicit actors.
    Despite the minimal amount of illicit activity, some observers have 
suggested that the risk of illicit activity in peer-to-peer 
transactions is substantial enough to justify restricting the ability 
of crypto users to transact outside the confines of regulated financial 
institutions. It is not. Restricting the right of individuals to engage 
in peer-to-peer transactions on crypto networks would be akin to 
banning paper cash, a disproportionate response that would cause broad 
and long-lasting harm to the ideals of privacy and economic freedom at 
the core of our society.
                   iii. exhibits and further reading
    For more information on the level and typology of illicit activity 
as well as a deeper dive into the importance of self-hosted wallets, I 
recommend the subcommittee read the following exhibits:
    The Blockchain Association/Miller Whitehouse-Levine and Lindsey 
Kelleher/Self-Hosted Wallets and the Future of Free Societies/November 
2020.--This report is divided into two sections that seek to offer 
policy makers a broad introduction to self-hosted wallets. The first 
section describes what self-hosted wallets are, their role in the 
digital asset ecosystem, and the current regulatory framework for 
managing digital asset transactions involving self-hosted wallets. The 
second section argues that imposing restrictions on individuals' 
ability to use self-hosted wallets would be misguided.
    CoinCenter/Jerry Brito/The Case for Electronic Cash/February 
2019.--This paper shows that a cashless economy is a surveillance 
economy, arguing that removing the option to freely transact without 
intermediation greatly limits economic self-determination and places 
economic lives in the hands of financial institutions and governments. 
By presenting several case studies that demonstrate negative 
externalities associated with a completely intermediated payments 
system, the paper ultimately concludes that electronic cash, i.e. peer-
to-peer transactions using self-hosted wallets, should be fostered and 
celebrated.
    Consensys/James Beck/What is Web 3? Here Are Some Ways To Explain 
It To A Friend/January 12, 2022.--This article describes Web 3 and how 
it is different from the internet that we know and use today. 
Critically, this article describes the motivation behind the creation 
of Web 3 as ``a reaction to social networks not keeping our data 
secure, and selling it for their own profit.''
    Chainalysis/The 2022 Crypto Crime Report/February 2022.--This 
report gives an overview of illicit activity within the cryptocurrency 
ecosystem. The author of this report is Chainalysis, one of the world's 
preeminent blockchain analytics firms. According to the report, ``with 
the growth of legitimate cryptocurrency usage far outpacing the growth 
of criminal usage, illicit activity's share of cryptocurrency 
transaction volume has never been lower . . . Transactions involving 
illicit addresses represented just 0.15 percent of cryptocurrency 
transaction volume in 2021.''
    Unchained/Laura Shin, Zia Faruqui, and Jessi Brooks/How This DOJ 
Strike Force Hunts Down Cryptocurrency Criminals/October 20, 2020.--In 
this podcast, Laura Shin discusses how Zia Faruqui, Magistrate Judge, 
and Jessi Brooks, assistant U.S. attorney in the National Security 
Section at the United States Attorney's Office, prosecuted a number of 
Federal criminal and civil forfeiture cases involving cryptocurrency, 
including the Welcome to Video case, which led to the takedown of one 
of the web's largest child pornography sites, a case involving the 
North Korea affiliated Lazarus group, and another case involving Hamas 
and the Al Qassam Brigades. Interestingly, the success of each of these 
cases was contingent upon law enforcement's ability to leverage 
blockchain analytics to identify the perpetrators of these crimes.
    Reuters/Brett Wolf/Recovery of Colonial Pipeline Ransom Funds 
Highlights Traceability of Cryptocurrency, Experts Say/June 23, 2021.--
This article describes the Colonial Pipeline attack and the efforts of 
law enforcement to identify and return the stolen funds. According to 
one blockchain analytics expert who was quoted in the article, ``the 
seizure of approximately 85 percent of the ransom paid by Colonial 
Pipeline highlights how successful U.S. law enforcement has been in 
developing the capacity to execute this sort of complex operation using 
blockchain analysis in real time.''
    LawFare/Andrew Mines and Devorah Margolin/Cryptocurrency and the 
Dismantling of Terrorism Financing Campaigns/August 26, 2020.--This 
article describes how several U.S.-designated terrorist organizations 
attempted to receive funding using cryptocurrency. Ultimately, these 
terrorists were thwarted by law enforcement, who partnered with members 
of the cryptocurrency ecosystem to identify the terrorists and trace 
the flow of funds. Of particular note is the article's assertion that 
``despite common assumptions that Bitcoin transactions are fully 
anonymous, U.S. officials used third-party blockchain analysis and 
personally identifying information from virtual exchanges to track 150 
cryptocurrency accounts associated with al-Qassam, and to investigate 
U.S.-based individuals who donated to these campaigns.''
    Bloomberg/Matt Levine/Business Rapper Was Bad at Bitcoin 
Laundering/February 9, 2022.--This article describes the hack of the 
cryptocurrency exchange, Bitfinex, and law enformcent's efforts to 
identify and prosecute the culprits as well as recover about 80 percent 
of the 119,754 Bitcoin worth $3.6 billion that was stolen. One critical 
aspect of this article is Mr. Levine's comparison of money laundering 
with cash to money laundering with cryptocurrency: ``If you come to a 
bank with a sack of cash and say, `I, uh, inherited this from my 
grandmother, she kept cash in sacks,' that is somewhat hard for the 
authorities to check. If you come to a crypto exchange with a sack of 
Bitcoins and say `I got these cheap in 2014,' that is easier to check. 
Permanent immutable public ledger on the blockchain!''

    Chairwoman Slotkin. Thank you for your testimony.
    I now recognize Mr. Levin to summarize his statement for 5 
minutes.

  STATEMENT OF JONATHAN LEVIN, CO-FOUNDER AND CHIEF STRATEGY 
                   OFFICER, CHAINALYSIS, INC.

    Mr. Levin. Thank you, Chairwoman Slotkin, Ranking Member 
Pfluger, and distinguished Members of the committee. Thank you 
for inviting me here today to testify before you on this 
important topic.
    My name is Jonathan Levin and I co-founded Chainalysis with 
Michael Gronager, the CEO of Chainalysis. I currently serve as 
the chief strategy officer.
    I began studying cryptocurrencies 10 years ago through my 
research as an economist. I was interested in the way that the 
internet could create both new markets and impact developing 
economies. While the internet brought about citizens of the 
world closer together in terms of global connectivity, it did 
not give people the economic opportunities that were promised. 
The cryptocurrency industry provides a new way to conduct 
global commerce, providing economic opportunities for people 
across the world. Economic development has always been a key 
force against global terror, and as such preventing 
cryptocurrency from being abused for terrorist financing and 
other National security risks is intricately linked to our 
continued ability to encourage prosperity around the world and 
enhance our National security.
    Can the clerk cue visual one?
    If there is one point I want to make to the Members of this 
committee, it is that the transparency of cryptocurrency 
enhances the ability of policy makers, Government agencies to 
detect, attribute, and ultimately disrupt illicit activity. In 
many instances it is easier to investigate cases involving the 
illicit use of cryptocurrency than other forms of payment, as 
demonstrated by the visual that is shown on the screen. By 
studying an illicit actor's cryptocurrency wallet in the center 
of the diagram, law enforcement can identify the cash-out 
destination and the full network of accomplices and malicious 
tools underpinning their campaign. In contrast, many terrorist 
financing investigations are predicated on difficult to trace 
cash payment networks or prepaid cards.
    As previously mentioned, the overall percentage of illicit 
transactions in cryptocurrency is just 0.15 percent, indicating 
that the vast majority of cryptocurrency transactions are 
legitimate. While terrorist financing comprises an extremely 
small fraction of the total activity that we see in the 
ecosystem, it is nonetheless important that we address it.
    Can the clerk cue visual two?
    In my written testimony I provide background on Chainalysis 
outlining how blockchain analysis can be leveraged in 
investigations and explain how terrorists have used 
cryptocurrency in their fundraising efforts. I also provide 
several case studies like seen on this diagram demonstrating 
how Government agencies are rooting out terrorist financing 
using cryptocurrencies and actually seizing funds from their 
operations.
    I also provide recommendations for improving the 
Government's response to this threat.
    Can the clerk take down the visual?
    First, it is critical that we ensure that there is adequate 
funding resources and training for Government agencies with the 
task at hand. As terrorist organizations and other illicit 
actors are innovating with their techniques, governments must 
keep up with our adversaries. Governments have already embraced 
blockchain analysis, have seized millions of dollars, as 
previously mentioned, in cryptocurrency, and stopped several 
financiers that have tried to fund terrorist organizations. 
Further evidence that with the proper tools, investigators can 
cut off terrorist organizations from the funds they need to 
survive. This is increasingly important in the face of more and 
more communications going dark and the challenges that this 
creates for law enforcement.
    Second, the illicit use of cryptocurrency, including for 
terrorist financing, is a global issue and investigations often 
cross borders. We must improve the information sharing in 
coordination between U.S. Government agencies and their 
counterparts on these investigations. Again, the transparency 
of cryptocurrencies and their public nature create 
unprecedented opportunities for such collaboration.
    Finally, the United States should work with other countries 
around the world to assist them in the development and 
implementation of anti-money-laundering laws and regulations 
for cryptocurrency businesses to ensure that bad actors are cut 
off from cashing out their ill-gotten gains in unregulated 
jurisdictions.
    With that, I thank you and look forward to your questions.
    [The prepared statement of Mr. Levin follows:]
                  Prepared Statement of Jonathan Levin
                              June 9, 2022
    Chairwoman Slotkin, Ranking Member Pfluger, and distinguished 
Members of the committee. Thank you for inviting me to testify before 
you today on this important topic. I appreciate that this committee is 
looking into the nexus between cryptocurrency and terrorist financing. 
While terrorist financing comprises an extremely small fraction of the 
total activity we see in the cryptocurrency ecosystem, it is vital that 
it be addressed and that Government agencies have the training and 
tools they need to investigate these incidents.
    My name is Jonathan Levin and I co-founded Chainalysis Inc. with 
Michael Gronager, CEO of Chainalysis. I currently serve as chief 
strategy officer. I began studying cryptocurrencies 10 years ago 
through my research as an economist. I was interested in the way that 
the internet could create brand new markets and impact developing 
economies. While the internet brought citizens of the world closer 
together in terms of global connectivity, it did not give people the 
economic opportunities that were promised.
    The cryptocurrency industry provides a new way to conduct global 
commerce, providing economic opportunities for people across the world. 
As with any new technology, cryptocurrency can be used by both good and 
bad actors. As such, preventing cryptocurrency from being abused for 
terrorist financing and other National security risks is intricately 
linked in our continued ability to project prosperity around the world.
    Helping this industry stay on top of the emerging threats of 
terrorist financing while ensuring the vibrant economic output that 
will be built on these new rails is the task at hand.
    Cryptocurrency and blockchain technology are some of the best 
available tools in the toolkit that the United States has to compete 
with potential National security threats, like ransomware attacks and 
North Korean hackers. The entrepreneurial dynamism that 
cryptocurrencies present allows for innovators and builders to create 
universal access to financial products and re-engineer Web 2 business 
models to serve individuals and their data in a way that protects 
privacy and helps our communities. This technology is consistent with 
our American values and has the potential to be strategically more 
important in great power competition over the next few decades. Of 
course, we understand concerns about risk and abuse and that is why we 
are here today. At Chainalysis we share concerns about the illicit use 
of cryptocurrency, but we know that the inherent open nature of this 
technology can be leveraged to mitigate the risks associated with it 
and bring bad actors to justice.
    If there is one point I want to make to the Members of this 
committee, it is that the transparency of cryptocurrency blockchains 
enhances the ability of policy makers and Government agencies to 
detect, disrupt and, ultimately, deter illicit activity. By mapping a 
single illicit actor to a cryptocurrency wallet address, for example 
from a transaction made in a terrorist financing campaign, law 
enforcement unlocks immediate insight into the network of wallet 
addresses and services (e.g., exchanges, mixers, etc.) that facilitate 
the illicit actor. In contrast, in a traditional finance investigation, 
a similar tip, linking an illicit actor to a bank account, is just the 
beginning of a long, extensive process to request and subpoena records 
that are manually reviewed and reconciled to generate a comparable 
amount of insight.
    Even with this insight, it comes with a significant time delay that 
creates opportunities for illicit actors to evade justice vs. the real-
time monitoring capabilities of blockchain intelligence.
    In my testimony, I provide background on Chainalysis, outline how 
blockchain analysis can be leveraged in investigations, explain how 
terrorists have used cryptocurrency in their fundraising efforts, and 
provide several case studies demonstrating how Government agencies are 
rooting out terrorist financing using cryptocurrency. I also provide 
recommendations for improving the Government's response to this threat.
                       background on chainalysis
    Chainalysis is the blockchain data platform. We provide data, 
software, services, and research to government agencies, exchanges, 
financial institutions, and insurance and cybersecurity companies. 
Chainalysis currently has over 750 customers in 70 countries. Our data 
platform powers investigations, compliance, and risk-management tools 
that have been used to solve many of the world's most high-profile 
cyber-crime cases and grow consumer access to cryptocurrency safely. We 
have worked closely with law enforcement and regulators as they have 
worked to disrupt and deter illicit uses of cryptocurrency.
    Chainalysis's partnerships with law enforcement and regulators are 
consistent with our corporate mission: To build trust in blockchains. 
Fundamentally, we believe in the potential of open, decentralized 
blockchain networks to drive new efficiencies, reduce barriers for 
innovators to create new financial and commercial products, encourage 
innovation, enhance financial inclusion, and unlock competitive forces 
across financial services and other markets. Our goal is to contribute 
our data, tools, and expertise to drive illicit finance and other risks 
out of the cryptocurrency ecosystem, enabling the realization of the 
technology's potential.
    Chainalysis's data powers both investigative and compliance tools. 
Our investigative tool, Reactor, enables government agencies and 
investigative teams to trace the illicit uses of cryptocurrency, 
including money laundering, theft, scams, and other criminal 
activities. Our compliance tool, KYT (Know Your Transaction), provides 
cryptocurrency businesses and financial institutions the ability to 
screen their clients transactions and ensure that they are not 
attempting to interact with illicit entities. This transaction 
monitoring tool provides on-going insights for cryptocurrency 
businesses so that they can protect their businesses and clients and 
ensure regulatory compliance.
    Chainalysis also leverages our data to conduct research into the 
cryptocurrency ecosystem, including the illicit use of cryptocurrency. 
We publish a number of reports, including our annual Crypto Crime 
Report. Based on this research, we reported in our 2022 Crypto Crime 
Report that cryptocurrency-based crime hit a new all-time high in 2021, 
with illicit addresses receiving $14 billion over the course of the 
year, up from $7.8 billion in 2020. Top categories include scams, 
stolen funds, darknet markets, and--pertinent to this hearing--
ransomware.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Despite this large increase in illicit transaction volume, illicit 
activity as a percentage of total volume has actually fallen 
dramatically since 2019. In 2019, the illicit share was about 3 
percent, in 2020 it was just over 0.5 percent, and in 2021 it was 0.15 
percent. The reason for this is that cryptocurrency usage is growing 
faster than ever before, so while cryptocurrency-related crime is 
definitely increasing, the legitimate use of cryptocurrency is far 
outpacing its use by illicit actors. This is good news for the 
cryptocurrency ecosystem, but Government and industry must still put in 
place and implement the appropriate controls to mitigate risks in the 
system.
    Terrorist financing through cryptocurrency remains extremely low; 
however, we have identified terrorist organizations that have attempted 
to finance their operations with cryptocurrency. For example, in 2019 
and 2020, al-Qaeda raised cryptocurrency through Telegram channels and 
Facebook groups. Thanks to the Federal Bureau of Investigation, 
Homeland Security Investigations, and Internal Revenue Service-Criminal 
Investigation, more than $1 million was seized from a money service 
business (MSB) operator who facilitated some of these transactions. 
Additionally, in early spring of 2021, the `Izz al-Din al-Qassam 
Brigades, Hamas' military wing, collected more than $100,000 in 
donations in cryptocurrency. In July 2021, the Israeli government 
seized much of these funds from associated MSBs. According to our own 
analysis, Hamas raised at least $160,000 across three campaigns from 
2019-2021 and from October 2021 through March 2022, an ISIS-related 
campaign (the Forgotten Ones) raised $36,000, but terrorists appear to 
have pivoted away from public-facing cryptocurrency donation campaigns.
       how blockchain analysis can be leveraged in investigations
    It is a common misconception that cryptocurrency is completely 
anonymous and untraceable. In fact, the transparency provided by many 
cryptocurrencies' public ledgers is much greater than that of other 
traditional forms of value transfer. Cryptocurrencies like Bitcoin 
operate on public, immutable ledgers known as blockchains. Anyone with 
an internet connection can look up the entire history of transactions 
on these blockchains. The ledger shows a string of numbers and letters 
that transact with another string of numbers and letters. Chainalysis 
maps these numbers and letters--cryptocurrency addresses--to their 
real-world services. For example, in Chainalysis products, we are able 
to see that a given transaction was between a customer at a specific 
exchange, with a customer at another exchange, between a customer at an 
exchange and a sanctioned entity, or any other illicit or legitimate 
service using cryptocurrency. Our data set and investigative tools are 
invaluable in empowering Government and private-sector investigators to 
trace cryptocurrency transactions, identify patterns, and, crucially, 
see where cryptocurrency users are exchanging cryptocurrency for fiat 
currency.
    Using blockchain analysis tools, law enforcement can trace 
cryptocurrency addresses to identify the origination and/or cash-out 
points at cryptocurrency exchanges. Law enforcement can serve subpoenas 
to these cryptocurrency exchanges, which are required to register as 
MSBs here in the United States and collect Know Your Customer (KYC) 
information from their customers. In response to a subpoena, the 
exchange will provide law enforcement with any identifying information 
that it has related to the cryptocurrency transaction(s) in question, 
such as name, address, and Government identification documentation, 
allowing the authorities to further their investigation.
          background on terrorist financing and cryptocurrency
    As noted above, terrorist financing represents a small fraction of 
the 0.15 percent of the entire crypto market occupied by illicit 
activity. Terrorist organizations use an array of methods to raise, 
store, and transfer funds on the blockchain. Although terrorist 
organizations' use of encrypted communications and cyber platforms 
limits visibility into their financing activity, the transparent nature 
of cryptocurrency and blockchain analytics provides an invaluable 
forensic tool that empowers governments to identify, trace, and disrupt 
the fiow of funds. In addition, the blockchain's public, unclassified 
nature plays a critical role in fostering robust international 
collaboration among governments, given terrorist organizations' 
transnational networks and ability to inspire lone actors world-wide.
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    Terrorists have used cryptocurrency for a variety of purposes, such 
as to purchase military equipment and procure computer infrastructure. 
For example, in 2016, the pro-ISIS, Gaza-based Ibn Taymiyya Media 
Center (ITMC) hosted the Jahezona (``Equip Us'') cryptocurrency 
donation campaign--the first of its kind--and posted a graphic on 
Telegram depicting the type of weaponry different dollar-equivalent 
donation amounts could purchase. The Jahezona campaign, which the ITMC 
also advertised on YouTube and Twitter, ran from 2016 to 2018 and 
raised thousands of dollars worth of cryptocurrency. Although this may 
not seem like a large sum over a 2-year period, we must keep in mind 
that terrorist attacks are not expensive to carry out, especially when 
the attackers are acting alone.
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    In 2020, the Department of Justice (DOJ) seized bitcoin addresses 
of an al-Qaeda money-laundering network. In this campaign, 
organizations purporting to act as charities were actually soliciting 
donations that would equip Syria-based terrorists with weapons. 
Blockchain analytics revealed a likely administrator for the network 
who paid for encrypted cloud storage from a provider who accepts 
Bitcoin. This demonstrates that terrorist groups see utility in 
cryptocurrency to fund their procurement of secure technology 
platforms, well beyond the scope of funding attacks.
    In addition to Sunni terrorist networks in confiict zones, such as 
Gaza and Syria, Iran stands out for its embrace of cryptocurrency. Many 
key sectors of Iran's economy remain under U.S. and international 
sanctions, and a body of press reporting has pointed to Iran's creation 
of parallel trade and financial systems to help it evade these 
sanctions. Several generals in the Islamic Revolutionary Guard Corps 
(IRGC)--which plays an outsize role in Iran's politics and economy and 
is designated as a Foreign Terrorist Organization--have publicly 
endorsed the use of cryptocurrency, including the launch of a central 
bank digital currency, to circumvent sanctions. Iran has encouraged 
cryptocurrency mining projects to establish operations in the country, 
which subsidizes electricity and other power utilities. Iran has 
granted over 1,000 licenses to mining operations, and nearly 17 percent 
of funds moving to local Iranian cryptocurrency services come from 
mining entities, compared to 5 percent in the Middle East overall. 
While we haven't identified any of these links to date, we continue to 
monitor for any on-chain indicators that the IRGC's expeditionary 
force, the Qods Force, is using the blockchain to further destabilize 
international security by funding its regional proxies, such as the 
militias in Iraq, Hizballah in Lebanon, and the Huthis in Yemen.
    Press reporting has emphasized the potential for cryptocurrency 
adoption to continue rising in Afghanistan given the country's 
political isolation, economic volatility, instability at Afghanistan's 
central bank, and a run on banks following the Taliban takeover in 
August 2021. In 2021, Afghanistan ranked 20th in global crypto 
adoption, according to the Chainalysis Global Crypto Adoption Index. 
Afghanistan ranks this high because we weight the metrics that feed the 
index by countries' purchasing power and internet-using population, 
where Afghanistan ranks among the lowest. Some Afghans have turned to 
crypto as a safe place to store value amid economic uncertainty and the 
challenges of broad adoption in the country and the country has a 
nascent cryptocurrency economy driven by modest P2P exchange trading. 
It remains to be seen how their cryptocurrency economy will develop 
under the Taliban, but this is something we will continue to monitor. 
In addition to the Taliban takeover, the local affiliate of the Islamic 
State in Iraq and ash-Sham, ISIS-Khorasan, remains active in 
Afghanistan, raising the risk that it and affiliated networks could 
abuse cryptocurrency services in this strategically-situated, high-risk 
jurisdiction.
    As the nature of the terrorist threat itself continues to evolve, 
we are also monitoring the use of cryptocurrency by racially and 
ethnically motivated violent extremists (REMVE) in the United States 
and world-wide. According to the intelligence community's 2022 Annual 
Threat Assessment, ``individuals and small cells inspired by a variety 
of ideologies and personal motivations--including Sunni violent 
extremism, racially or ethnically motivated violent extremism, and 
violent militia extremism--probably present the greatest terrorist 
threat to the United States.'' Therefore, governments and industry 
alike should continue to rigorously and uniformly apply AML/CFT 
frameworks across all potential violent extremist funding mechanisms.
    al-qaeda, isis, and hamas among terrorist groups fundraising in 
         cryptocurrency--with government seizures close behind
    I will outline several case studies from 2021--one in June, one in 
July, and another in December. I would like to clarify that these case 
studies represent outlier examples--these are the largest terrorist 
financing cases involving cryptocurrency that we know of and are 
therefore likely not representative of the overall trends. However, 
what these cases do show are governments' recent successes in the fight 
against cryptocurrency-financed terrorism, underscoring the importance 
of properly training, tooling, and resourcing the government agencies 
charged with combatting this threat.
 case 1: israeli government seizes cryptocurrency addresses associated 
                     with hamas donation campaigns
    On June 30, 2021, Israel's National Bureau for Counter Terror 
Financing (NBCTF) announced the seizure of cryptocurrency held by 
several wallets associated with donation campaigns carried out by 
Hamas. The action came after a sizable growth in cryptocurrency 
donations to al-Qassam Brigades in May following increased fighting 
between the group and Israeli forces.
    Notably, this is the first terrorism financing-related 
cryptocurrency seizure to include such a wide variety of 
cryptocurrencies. Israeli authorities seized not only Bitcoin, but also 
Ether, Tether, Ripple, and more. The seizure was made possible through 
an investigation of open-source intelligence (OSINT) and blockchain 
data, as well as cooperation from the compliance team at a global 
cryptocurrency exchange.
    Below, we examine how the second of these--the analysis of 
blockchain data--contributed to the case.
How funds moved from donation addresses to exchanges
    The Chainalysis Reactor graph below shows the Bitcoin portion of 
the transactions carried out by many of the addresses listed in the 
NBCTF seizure announcement. Many of these addresses have been 
attributed to individuals connected to the donation campaigns.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The orange hexagons represent deposit addresses hosted at large, 
mainstream cryptocurrency exchanges that are controlled by individuals 
named in the NBCTF announcement. As we can see, the funds often passed 
through intermediary wallets, high-risk cryptocurrency exchanges, and 
MSBs before reaching the exchanges from which the named individuals 
likely hoped to cash out into fiat currency.
    Interestingly, we can see that two donation addresses named in the 
announcement received funds from addresses associated with the Idlib, 
Syria office of BitcoinTransfer (top right of the graph), a Syrian 
cryptocurrency exchange connected to previous terrorism financing 
cases. Another exchange received funds from a Middle East-based MSB 
that had previously received funds from the ITMC (directly beneath the 
BitcoinTransfer cluster), an organization that has also been associated 
with terrorism financing in the past.
    This investigation is a perfect example of the value of blockchain 
analysis, especially when used in conjunction with other open-source 
data. Israeli authorities analyzed and leveraged OSINT to find Hamas' 
donation addresses and, with blockchain analysis tools, were able to 
follow the funds to find consolidation addresses and uncover the names 
of individuals associated with the campaigns. Up-to-date transaction 
data across several blockchains was crucial in this case as agents 
tracked and seized funds denominated in several different 
cryptocurrencies. We applaud the Israeli authorities for a successful 
operation and look forward to providing valuable tools that facilitate 
more such successes for Government customers around the world.
 case 2: terrorist financier designated by the u.s. department of the 
           treasury's office of foreign assets control (ofac)
    On July 28, 2021, the U.S. Department of the Treasury's Office of 
Foreign Assets Control (OFAC) sanctioned Syria-based Tajikistani 
national Farrukh Furkatovitch Fayzimatov for materially assisting and 
supporting Hay'at Tahrir al-Sham (HTS), a Sunni militant group involved 
in the Syrian Civil War. Fayzimatov utilized social media to post 
propaganda, recruit new members, and solicit donations to purchase 
equipment for the benefit of HTS.
    His fundraising efforts have been linked to an address tracked by 
Chainalysis, the details of which are depicted in the graph below.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    On the left side of the graph, we find that Fayzimatov received 
funds directly from centralized and peer-to-peer (P2P) exchanges that 
did not collect Know Your Customer information. This indicates that the 
individuals sending bitcoin to Fayzimatov intended to keep their 
activity anonymous. On the right, we observe that Fayzimatov sent funds 
to Russia-based high-risk exchanges, a centralized exchange that did 
collect KYC information, and a suspected vendor at Hydra Marketplace (a 
Russian-language darknet market that was designated by OFAC on April 5, 
2022). Following the OFAC designation, Fayzimatov's on-chain activity 
ceased.
  case 3: wales-based convicted terrorist caught using darknet market 
                             `bypass shop'
    In December 2021, a 29-year-old man was sentenced to 16 months in 
jail for Bitcoin transactions made on the Bypass Shop, a darknet market 
for stolen credit card information.
    The transactions were made from the man's wallet at an exchange, 
which prompted the company to issue a suspicious activity report. From 
there, the U.K. police identified the man as British citizen Khuram 
Iqbal of Cardiff, Wales, and arranged for his arrest.
    This was not Iqbal's first run-in with the law. Iqbal had 
previously spent time in jail in 2014 for possessing terrorist 
information and disseminating terrorist publications under the 
pseudonym Abu Irhaab, Arabic for ``father of terrorism.'' In total, 
Iqbal possessed 9 copies of al-Qaeda's English-language Inspire 
magazine, and had published more than 800 links to extremist material 
on Facebook.
    Before his arrest, Iqbal had twice attempted to join the jihadi 
cause by fiying to Kenya and Turkey in 2011 and 2012, respectively. He 
was deported on both occasions.
                            recommendations
Ensure adequate funding, resources, and training for government 
agencies charged with investigating the illicit use of cryptocurrency, 
including terrorist financing.
    As terrorist organizations adopt blockchain technologies and 
cryptocurrency fundraising techniques, governments must keep up with 
adversaries' latest techniques, tactics, and procedures. Governments 
that have already embraced blockchain analysis have seized millions of 
dollars in cryptocurrency and stopped a number of terrorist 
financiers--further evidence that with the proper tools, investigators 
can cutoff terrorist organizations the funds they need to survive, 
operate, procure weapons, and carry out attacks. Many government 
agencies have limited or inconsistent personnel dedicated to 
investigating the illicit use of cryptocurrency because of a lack of 
training resources and a lack of funding for new personnel, tools, and 
training. Allocating appropriate financial and personnel resources to 
these efforts would ensure that investigators can trace illicit 
transactions, seize funds, and help bring criminals to justice when 
criminals exploit cryptocurrency.

Improve coordination and collaboration within and between governments.
    The illicit use of cryptocurrency, including for terrorist 
financing, is a global issue and investigations often cross borders. We 
must improve information sharing and coordination between U.S. 
Government agencies and their counterparts in other countries. It is 
important that countries work together and with private industry to 
enable cross-border investigations of ransomware threats. Establishing 
and improving upon coordination and collaboration mechanisms between 
countries can help to streamline investigations and enable law 
enforcement to bring bad actors to justice.

Provide assistance to countries to support their implementation of 
robust AML/CFT laws for cryptocurrency businesses.
    The United States should work with other countries to support their 
efforts to implement comprehensive Anti-Money Laundering/Countering the 
Financing of Terrorism (AML/CFT) laws for cryptocurrency businesses to 
limit illicit actors opportunities for jurisdictional arbitrage. By 
requiring cryptocurrency exchanges, cryptocurrency kiosks, peer-to-peer 
exchangers, over-the-counter (OTC) trading ``desks'', and other 
cryptocurrency businesses to implement robust AML/CFT laws, including 
Know Your Customer (KYC) laws, illicit actors will have fewer cash-out 
opportunities to convert their ill-gotten cryptocurrency into fiat 
currency.
    The U.S. Government should provide assistance through the U.S. 
Department of State and other mechanisms to other countries to assist 
in the development and implementation of these laws, as well as 
capacity building to enforce them. This will help to limit the 
regulatory arbitrage opportunities available to bad actors and make it 
even more difficult for terrorists to fund themselves with 
cryptocurrency at scale because they will more frequently encounter 
regulated, compliant exchanges that implement AML/CFT standards and 
work with law enforcement. Although cryptocurrency can be abused by 
terrorist organizations and other threat actors, it is also a powerful 
tool with the potential to provide meaningful economic opportunity in 
confiict zones or jurisdictions with weak institutions. The U.S. 
Government should encourage private and public initiatives that 
leverage blockchain technology to minimize sanctions exposure and 
greatly improve the traceability of funds in difficult or high-risk 
jurisdictions.

Encourage OFAC to include cryptocurrency-related information in SDN 
List designations.
    Through blockchain analysis, we have seen the effectiveness of 
cutting off the flow of funds to illicit wallets when OFAC has included 
cryptocurrency-related information in SDN List designations. OFAC 
should continue to include as much relevant cryptocurrency information 
in their designations as possible, and update designations when they 
receive pertinent information after the fact. This will help law 
enforcement and the intelligence community, as well as our global 
partners in combatting terrorist financing. This will also help to 
combat evasion of U.S. and international sanctions and will also help 
to cut threat actors off from unregulated cash-out venues. Finally, it 
will help to erode the pseudonymity of threat actors on the blockchain 
and map out connections to other high-risk and illicit services.
                               conclusion
    While terrorist financing comprises an extremely small fraction of 
the total activity we see in the cryptocurrency ecosystem, terrorist 
attacks can be carried out with small amounts of funding. It is 
imperative that government agencies be equipped to address this 
constantly-changing threat. Cryptocurrency's transparency allows for 
not only the disruption of terrorist financing campaigns, but also the 
identification, arrest, and prosecution of terrorist financers. By 
providing the resources necessary to understand this threat, law 
enforcement and the U.S. Government as a whole will be better-equipped 
to mitigate risks and investigate and disrupt terrorist financing when 
it does occur using cryptocurrency.

    Chairwoman Slotkin. Thank you for your testimony.
    I now recognize Mr. Kothanek to summarize his statement for 
5 minutes.

      STATEMENT OF JOHN KOTHANEK, VICE PRESIDENT, GLOBAL 
                  INTELLIGENCE, COINBASE, INC.

    Mr. Kothanek. Chairwoman Slotkin, Ranking Member Pfluger, 
and the Members of the subcommittee, thank you for this 
opportunity to testify on the role of crypto in combatting 
terrorism and criminal activity.
    My name is John Kothanek and I am vice president for global 
intelligence at Coinbase. I am responsible for investigating 
and combatting crypto-related criminal activity on our platform 
and across the internet. My team works with law enforcement 
around the world to provide best-in-class training and 
investigative support to combat crypto-related crime.
    I came to Coinbase in 2014 after meeting with our CEO, 
Brian Armstrong, and co-founder, Fred Ehrsam, to discuss their 
vision for the company and the future of crypto. They were 
laser-focused on becoming the most secure, trusted, and 
compliant on-ramp for buying, selling, and trading crypto. They 
knew they wanted to build a team that was part of the solution, 
not part of the problem. That is why I joined Coinbase and how 
I have built the global intelligence team.
    Our mission is to protect our customers, crypto, and the 
country. As a former Marine and son of an Air Force pilot, I 
spent most of my life thinking about how to stop bad actors 
from hurting good people. I took my experience from the 
military to the private sector where I started Paypal's 
investigation team in 2000. We built a program from the ground 
up that changed investigations for digital transactions and 
became the industry standard. We have done the same at Coinbase 
for crypto.
    Coinbase is a global platform that enables millions of 
individuals, businesses, and developers in over 100 countries 
to participate in the crypto economy. Since our early days, 
Coinbase has strived to set the standard for legal and 
regulatory compliance for digital assets. Specific to the 
interest of this subcommittee, we are Federally registered as a 
money service business with FinCEN and serve on the Department 
of the Treasury's Bank Secrecy Act Advisory Group.
    Coinbase attacks illicit activity from a variety of angles. 
My team works hand-in-hand with our financial crimes compliance 
team, which has developed both robust anti-money laundering and 
Know Your Customer programs and proprietary transaction 
monitoring systems to identify illegal activity. Our programs 
are further bolstered by something called unique to the crypto. 
Every blockchain has a public ledger of transactions. Our teams 
analyze publicly available blockchain data with the aid of 
sophisticated blockchain tools in order to trace criminal 
proceeds and attribute blockchain addresses to potential 
criminals.
    Another key component of our strategy to combat crime is 
our relationship with law enforcement. We have built a 
collaborative partnership with law enforcement agencies in 
concert with our strict privacy commitments to our customers to 
pursue bad actors in the crypto space. We do this in several 
ways. We offer cryptocurrency investigations training free of 
charge to thousands of law enforcement officers around the 
world. We also help law enforcement interpret the blockchain 
information that we provide to them and direct officers to the 
tools and the resources they need to pursue their 
investigations.
    Finally, we participate in public-sector working groups to 
share information that can help and investigate the effort.
    We believe law enforcement that understands cryptocurrency 
and the ways in which our public blockchains could be analyzed 
to detect and investigate criminal activity can more 
effectively affect the public, including our customers.
    While we are proud of our successes investigating criminal 
activity, there are several major challenges to stopping bad 
actors. Specifically, criminal actors tend to rely on a small 
group of non-compliant foreign exchanges to cash out their 
illicit gains because these foreign exchanges are not subjected 
to U.S. regulations. Criminal actors avoid exchanges like 
Coinbase because we have AML and KYC programs and investigative 
teams that freeze accounts or refer to law enforcement.
    Despite the incredible growth of expertise across law 
enforcement agencies, we often run into situations where law 
enforcement, especially at the local level, lack the necessary 
tools and resources to pursue crypto-related crime. We would 
recommend that the U.S. Government develop tailored solutions 
in this space, including three recommendations.
    We need to ensure law enforcement at the Federal level has 
resources necessary to target non-compliant offshore exchanges 
and mixing services that enable criminal actors to monetize 
their activity. We need to ensure the United States develops 
strong international partnerships with governments and overseas 
law enforcement to combat global organized crime activity. We 
would recommend to Congress to help direct and provide 
resources to develop local, State, and Federal task forces to 
share information to combat illegal activity.
    In closing, thank you, Chairwoman Slotkin and Ranking 
Member Pfluger, and the Members of the subcommittee for holding 
this important hearing. Coinbase is committed to working with 
Congress and law enforcement to combat illegal activity while 
also protecting the privacy and security of our customers. 
Combatting illegal activity on our platform is core to our 
mission of enabling economic freedom in a trusted, secure, and 
compliant way.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Kothanek follows:]
                  Prepared Statement of John Kothanek
                              June 9, 2022
    Chairwoman Slotkin, Ranking Member Pfluger, and Members of the 
subcommittee, thank you for this opportunity to testify on the role of 
crypto in combating terrorism and criminal activity.
    My name is John Kothanek and I serve as the vice president for 
global intelligence at Coinbase. I am responsible for standing up, 
training, and managing our teams around the world in investigating and 
combating crypto-related criminal activity on our platform and across 
the internet. We work with all levels of United States and foreign law 
enforcement on large-scale cyber crime and criminal investigations, 
providing best-in-class service, training, and investigative support.
    I came to Coinbase in 2014 after meeting with our CEO Brian 
Armstrong and co-founder Fred Ersham to discuss their vision for the 
company and the future of crypto. They were laser-focused on becoming 
the most secure, trusted, and compliant on-ramp for buying, selling, 
and trading crypto. That has always meant keeping bad actors off the 
platform. They knew they wanted to build a team that was part of the 
solution, not part of the problem. That's why I joined Coinbase, and 
how I've built the Global Intelligence team. Our mission is to protect 
our customers, crypto, and the country. As a former Marine and son of 
an Air Force pilot, I have spent most of my life thinking about how to 
stop bad actors from hurting Americans. I took my experience from the 
military to the private sector, when I joined Paypal's then-new anti-
fraud team in 2000. My goal was to use new technological tools to find 
illicit transactions and distinguish them from legitimate ones. We 
built a program from the ground up that became the industry standard. 
We've done the same at Coinbase.
    Our Global Intelligence team is one piece of the puzzle at 
Coinbase. Our company is a leading provider of end-to-end financial 
infrastructure and technology for the cryptoeconomy. We define the 
cryptoeconomy as a fair, accessible, efficient, and transparent 
financial system for the internet age that leverages digital assets 
built on blockchain technology. Coinbase Global, Inc. (COIN) became a 
public company registered with the SEC and listed on Nasdaq in May 
2021. Our primary operating company, Coinbase, Inc., and our affiliates 
(collectively, ``Coinbase'') make up one of the largest digital asset 
financial infrastructure platforms in the world, including our exchange 
for digital assets.
    Our global platform enables millions of individuals, businesses, 
and developers in over 100 countries to participate in the 
cryptoeconomy. More than 89 million individuals rely on Coinbase to 
provide a safe, trusted, and easy-to-use crypto account to buy, sell, 
store, spend, earn, and use crypto assets. We also offer a 
comprehensive solution that combines advanced trading, custody 
services, and financing for roughly 11,000 institutional customers. On 
top of our retail and institutional services, we provide technology and 
services, such as Coinbase Cloud, that enable more than 185,000 
developers to build crypto-based applications and securely accept 
crypto assets as payment.
    Coinbase is the largest U.S. digital asset exchange. We currently 
list 172 assets for trading and 212 assets for custody on our platform. 
Every asset listed on the Coinbase platform is subject to a rigorous 
legal, compliance, and security review. With an early focus on 
regulatory requirements, Coinbase has strived to set the standard for 
legal and regulatory compliance in the digital asset industry. We are 
licensed as a money transmitter in 42 States, hold a ``BitLicense'' and 
a New York Trust Charter from the New York Department of Financial 
Services, and are authorized to engage in consumer lending in 15 
States.
    More specific to the interests of this subcommittee, we are 
Federally-registered as a money services business with FinCEN and we 
serve on the Department of the Treasury's Bank Secrecy Act Advisory 
Group. Additionally, our activities are subject to Federal oversight 
from the Internal Revenue Service, the Commodity Futures Trading 
Commission, the Securities and Exchange Commission, the Federal Trade 
Commission, and the Consumer Financial Protection Bureau.
    Coinbase has worked to develop best-in-class criminal investigative 
methods. We have trained State, Federal, and international law 
enforcement agencies to identify and pursue illicit use of digital 
asset technologies, and we host law enforcement for in-house 
secondments to partner with my team on blockchain investigations. We 
have twice been recognized by FinCEN for providing essential 
intelligence to law enforcement authorities. In 2019, we received the 
Private/Public Partnership award from Homeland Security Investigations 
for our contribution to major law enforcement investigations.
    Since Day 1, we have gone after the bad guys. We take a 
comprehensive approach to combating illegal activities, looking across 
not only the blockchain but the internet in general. Before we explore 
how we combat terrorism and other illicit activity, it is important to 
level set on a few key terms.
    Blockchain technology is enabled by cryptography. At the core of 
all cryptocurrencies or digital assets are private keys--complex and 
secret numbers used by an individual transacting on the blockchain. A 
private key is mathematically linked to a public key, which is the 
address that others can use to transact with the owner of the private 
key. Put simply, a distributed ledger--a blockchain--is really just the 
history of transactions between public keys. A transaction occurs if 
the private key associated with the public key cryptographically signs 
off on the transaction.
    Blockchain technology creates a ledger of transactions that are 
transparent and immutable. However, unlike traditional ledgers, there 
is no need for a central authority to maintain the database. 
Blockchain-based ledgers are public, distributed, and immutable: Anyone 
can download the ledger and see the entire history of every transaction 
that has ever occurred on a given blockchain and nobody can change it. 
That free public history is an essential feature of a blockchain 
because it ensures visibility into the counterparties involved in the 
transaction. It also enables more robust criminal investigations.
    This is contrary to many of the narratives surrounding crypto, but 
the reality is that blockchain technology can help identify and prevent 
criminal activities. Cryptocurrency is easier to track than fiat 
currency because searchable databases (public blockchains) exist for 
most transactions. The information in these blockchains exists 
permanently, and provides law enforcement with details about crypto 
transactions that are not available with fiat currency. The Department 
of Justice discusses this utility as part of its investigation methods; 
the September 2019 edition of the Department of Justice Journal of 
Federal Law and Practice says:

``Cryptocurrency, despite the purported anonymity it grants criminals, 
provides law enforcement with an exceptional tracing tool: The 
blockchain. While the blockchain's historical ledger will not list the 
names of parties to transactions, it provides investigators with ample 
information about how, when, and how much cryptocurrency is being 
transferred.''\1\
---------------------------------------------------------------------------
    \1\ 67 DOJ J. FED. L. & PRAC., No. 3 at 166 (2019).

    The public blockchains have helped advance law enforcement efforts 
with new tools that reveal the structure of organized ransomware crime 
rings and individual hackers in ways that are unavailable with fiat.
    I would now like to describe in more detail Coinbase's efforts to 
fight crime and protect our customers. From the very early days of the 
company, we have been committed to preventing criminals from abusing 
our platform and our customers. We feel a strong obligation to protect 
our customers, our company, and the crypto ecosystem as a whole from 
bad actors. If this technology is going to succeed, ordinary people 
need to be able to trust and safely interact with the crypto-economy.
    We attack illicit activity on our platform from a variety of 
angles. As one of the first regulated digital asset exchanges in the 
United States, we quickly developed robust Anti-Money Laundering (AML) 
and Know Your Customer (KYC) programs. Our Financial Crimes Compliance 
team uses a proprietary transaction monitoring system to identify 
potentially illegal activity so that we can file Suspicious Activity 
Reports with FinCEN and, if necessary, close those accounts.
    Our Financial Crimes Compliance program incorporates all of the 
traditional components and controls you would expect from a financial 
institution, and it is further bolstered by a characteristic unique to 
cryptocurrency--the public ledger of transactions within the 
blockchain. By reviewing publicly available blockchain data, especially 
with the aid of sophisticated blockchain analysis tools like Coinbase 
Tracer, both our compliance and global investigations teams are able to 
trace the proceeds of crime and attribute blockchain addresses to known 
entities, including criminal entities. Once we confirm that an address 
is associated with crime--for example, an address used to receive 
stolen funds or an alleged terrorism financing address--we are able to 
block other customers from sending to that address and trigger 
automatic alerts for any customers attempting to do so.
    Another key component of our strategy to combat crime is our 
relationship with law enforcement. We have been committed since the 
beginning to building a collaborative partnership with law enforcement. 
In fact, my department, the Global Intelligence team, was created in 
2016 to focus almost exclusively on law enforcement investigations and 
outreach efforts. Our mission in this respect is simple: Do everything 
we can, within the bounds of our strict privacy commitments to our 
customers, to help law enforcement pursue bad actors in the crypto 
space.
    We do this in several ways. First, as I mentioned earlier, we have 
offered cryptocurrency investigations training, free of charge, to 
thousands of law enforcement officers around the world. These trainings 
range from short sessions on the basics of cryptocurrency to day-long 
intensive workshops. Our philosophy is that the better law enforcement 
understands cryptocurrency and the ways in which public blockchains can 
be analyzed to detect and investigate criminal activity, the more 
effectively they can safeguard our customers and the ecosystem as a 
whole.
    Our investigators spend hours with law enforcement each week 
explaining how to interpret the blockchain information in our subpoena 
responses and directing officers to the tools and resources they need 
to pursue their investigations. If we see an opportunity to help a law 
enforcement officer who does not have access to blockchain analysis 
tools, perhaps by helping them trace ransomware payments or stolen 
funds, we do it without hesitation.
    We have also had the honor of being invited to speak at numerous 
law enforcement conferences and we have frequently been asked to brief 
senior law enforcement officials on cryptocurrency trends. For example, 
we recently worked with the REACT Task Force, also know as the Regional 
Enforcement Allied Computer Team Task Force, in San Jose on a joint 
briefing for the Secretary of Homeland Security on the topic of crypto 
account takeovers and investment scams. We have also briefed senior 
leadership within the Secret Service, and we recently hosted a Secret 
Service agent for a 3-month secondment with my team.
    The teaching and sharing go both ways. Some of the world's leading 
crypto investigations experts work for U.S. law enforcement agencies, 
and we are fortunate to be learning from them on a daily basis. We 
frequently participate in various public-private sector working groups 
and meet with law enforcement partners to learn about trends in crypto-
related crime that may be affecting our customers. We, in turn, can use 
this information to enhance our compliance programs.
    An example of this is the quarterly investigative ``sprints'' that 
my department organizes, each focused on a specific crime type, where 
we solicit large amounts of data and blockchain intelligence from law 
enforcement partners around the world and conduct in-depth 
investigations. Our two most recent sprints focused on Child Sexual 
Abuse Material (``CSAM'') and ransomware, and both resulted in 
actionable intelligence to law enforcement. This would not be possible 
without the close relationships we have built with law enforcement.
    While we are proud of our successes investigating criminal 
activity, there are several major challenges we face. A small group of 
non-compliant foreign cryptoexchanges are the venues used by criminal 
actors to cash out their illicit gains, and those foreign exchanges use 
jurisdictional arbitrage to avoid U.S. regulations. The industry as a 
whole is seeing crypto stolen through scams and thefts going to bad 
actors overseas, usually via unregulated exchanges. Criminal actors 
generally avoid exchanges, like Coinbase, that have AML/KYC programs 
because they would likely be identified by us, have their account 
frozen, or referred to law enforcement. As an example, research 
indicates that from 2017-2019, over 80 percent of ransomware cash-out 
activity was handled by just four offshore entities.\2\ Twenty-twenty-
one data so far shows that 64 percent of ransomware cash-outs occurred 
on just 3 foreign exchanges. Of the top 10 recipients of ransomware 
payments, 8 are offshore exchanges and 2 are mixing services.
---------------------------------------------------------------------------
    \2\ Chainalysis 2021 Crypto Crime Report (Jan. 19, 2021).
---------------------------------------------------------------------------
    Further, despite the incredible proliferation of crypto 
investigation expertise throughout law enforcement agencies over the 
last several years, we often run into situations where law 
enforcement--especially at the local level--lacks the tools and 
resources necessary to pursue crypto-related crime. This is especially 
true in large-scale cases where victims may be located across the 
country, or in cases where the criminals are based overseas.
    The U.S. Government should develop tailored solutions in this space 
to effectively target illicit activity that uses crypto. We know that a 
vast amount of illicit activity is happening on a small set of non-
compliant offshore exchanges and mixing services that enable criminal 
actors to monetize their activity. While the Department of Justice has 
authority to prosecute individuals and entities involved in 
facilitating illicit activity, even when that activity is located 
abroad, directing more of law enforcement's investigations and 
resources to pursue those bad actors could very effectively disrupt 
those actors' infrastructure in the near-term. Further, we would 
recommend that Congress ensures law enforcement is well-equipped to 
develop local-State-Federal task forces to share information and combat 
illegal activity, as well as fund international partnerships that will 
help combat efforts by unregulated international entities to move 
crypto in a manner that facilitates illegal activity.
    In closing, thank you Chairwoman Slotkin, Ranking Member Pfluger, 
and Members of the subcommittee for holding this important hearing 
today. Coinbase is committed to working with Congress and law 
enforcement to combat illicit finance and terrorism, while also 
protecting the privacy and security of our customers. Combating illegal 
activity on our platform is core to our mission of enabling economic 
freedom in a trusted, secure, and compliant way. Thank you and I look 
forward to answering your questions.

    Chairwoman Slotkin. Great. I thank all the witnesses for 
your testimony.
    I will remind the subcommittee that we will each have 5 
minutes to question the panel for our Members who come in and 
out.
    I will now recognize myself for questions.
    So I guess the question is, you know, can you help us 
understand--we talk about the transparency in blockchain 
technology, we talk about how in many ways it might be easier 
to trace for the organizations that are playing by the rules 
and doing things right, but I keep hearing--I mean I think the 
average person hears in the news particularly about criminals 
and ransomware attacks where criminals are asking the victims 
to pay in cryptocurrency. The most famous one and the one where 
we had a hearing up here in the Homeland Security Committee was 
the Colonial Pipeline attack where a ransomware attack by 
criminals led to the shutting down of that pipeline and 
resulted in, you know, gas lines in some places in the eastern 
United States. So it affected the average person pretty 
significantly.
    Now, as I understand it, in that particular case--and 
frankly I think it is a rarity, but we--actually the FBI was 
able to get back some of the money that was ransomed. But it is 
more symbolic of what I think the public is hearing, which is 
that these ransomware attacks are being--people are being asked 
to pay in crypto.
    I had recently had all of the superintendents from the K 
through 12 schools in my district in Washington and I said 
raise your hand if you have been the victim--someone has tried 
to attack you and ransom the data of your students. Every 
single superintendent raised their hand. So it is like it is 
mainstream.
    Why--with what you are telling us and the I guess increased 
transparency and traceability through blockchain technology, 
why would these bad actors be choosing cryptocurrencies as 
their demand of choice in all these attacks? Anyone--Mr. Levin, 
do you want to start and then we will go around the horn here?
    Mr. Levin. Thanks, Chairwoman. It is a fantastic question.
    The nature of cryptocurrency, and actually the nature of 
people who attack for financial motivation, is to maximize 
financial return when you are carrying out these types of cyber 
attacks. So, you know, if you think about the way in which a 
ransom, you know, affects these schools is that it is done to 
maximize the profit of the people carrying out the attack. 
Those people carrying out the attack are typically not in your 
district attacking their own schools. So the two features of 
cryptocurrency that are the most relevant in order to achieve 
proper maximization is that, you know, this is a payment system 
that is entirely global in nature and that money can be 
transferred instantaneously and completely globally.
    You know, that feature is, you know, both a feature and, 
you know, in this instance, creating a vulnerability for us, 
but if you think about it, you know, the transparency that we 
have over being able to follow those payments and map out the 
full network that actually facilitates these ransomware like 
attacks is actually our opportunity.
    So, you know, we at Chainalysis help in instances like the 
Colonial Pipeline, help the FBI and Government partners 
actually, you know, recover some of that money, but even more 
importantly, identify the full supply chain that actually leads 
up to these types of attacks. What is the cyber infrastructure 
that is being bought. That is where, you know, real disruption 
can occur.
    Chairwoman Slotkin. Yes, I would just say that--before I 
maybe see if anyone else wants to offer--so while I see the 
opportunities, and clearly we capitalized on those 
opportunities in getting some money back from the Colonial 
Pipeline attack, so many bad actors are using this currency 
that there must be a lot of bad actors back in these home 
countries, wherever they are emanating from, who are willing to 
like pay out that, you know, crypto when it comes out of the 
system somewhere.
    So I guess my question is, you know, like every industry, 
right, there are white hats and black hats, there are good guys 
and bad guys. Obviously you are here, so you are in the white 
hat category. But what is the problem and what should we be 
doing on the bad guys who are so clearly providing 
opportunities to these actors? I mean I don't think it is by 
accident that they are all using crypto as the way they want to 
be paid.
    So, Ms. Smith, do you want to say something to that? Then, 
Mr. Kothanek, do you want to add?
    Ms. Smith. Certainly. I mean I would add that the solutions 
that both Mr. Levin and Mr. Kothanek highlighted in their 
testimony will help with this as well. It is more resources for 
law enforcement so that when these attacks happen and they are 
reported, that people are able to go and track down the source 
of this.
    You know, the challenge I think with ransomware is it did 
exist 20 years before the creation of Bitcoin. It dates back to 
1989. So it does exist. For the reasons that Mr. Levin 
described I do think that it is currently a desirable form of 
payment. But as we see more and more stories of people tracking 
down the source of the ransomware, I think that we will see 
less of that happening.
    I do think, however, we also have a cybersecurity problem. 
I mean in the most benign cases of ransomware are the ones that 
merely want money. There may be ransomware attacks in the 
future that go after our critical infrastructure that are 
looking to cripple our economy and cause harm to our people. So 
we want to make sure that our systems are strong and can 
prevent against these types of attacks happening to begin with. 
I think that would also go a long way toward stopping the 
problem.
    Chairwoman Slotkin. Mr. Kothanek, do you want to add 
something before I turn to my Ranking Member here?
    Mr. Kothanek. Yes, ma'am.
    I think in the time remaining I would like to say that, you 
know, if you are a cyber criminal and you are using crypto, you 
are going to have a bad day. We are going to track you down and 
we are going to find your finance and we are going to hopefully 
help the Government seize that crypto. It is not a great way to 
facilitate crime.
    As Jonathan was saying, the ability to track the crypto 
across blockchain is fairly substantial. If you are going to 
use a system like Coinbase to try to, you know, pull that money 
out, we are also going to find you and we are going to shut you 
down. We will have the information that we can provide to 
Federal law enforcement to help punish you.
    Chairwoman Slotkin. Great. I will turn to Mr. Pfluger. 
Since it is just the two of us, we may ping pong back and forth 
for a bit here.
    Mr. Pfluger. Thank you, Madam Chair.
    Excellent opening statements and it highlights the reason 
for this hearing and there are so many questions. So I will 
start, Mr. Levin, with you and just to ask you if you can 
elaborate on the--maybe some of the foreign adversary use of 
crypto to evade sanctions. Specifically what actions are you 
seeing taken by Iran to mine crypto and is there any Chinese or 
CCP investment in these operations?
    Mr. Levin. Thank you--sorry--Congressman.
    So the way that we see cryptocurrency being used by nation-
state actors is that you have countries like North Korea that 
actually have cyber operations that have been targeting 
cryptocurrency exchanges and projects to steal cryptocurrency 
to raise funds for their operations. We have also seen not so 
much Iranian nation-state-level actors, but we have seen 
ransomware emanate from Iran as well that was actually taken 
down by OFAC sanctioning the main intermediaries that were the 
enablers of these types of campaigns. So, you know, when we 
see--you know, you mentioned mining activity in both Russia and 
Iran, mining is a global competition. What that means is is 
that, you know, the more actually that the United States can 
have clean and efficient mining operations in this country, it 
actually reduces the profitability of any of the operations of 
any of the miners that are operating outside of the United 
States.
    So you are actually--you know, we have not seen a large 
amount of cryptocurrency mining being able to be done at a 
nation-state level due to the fact the private industry is 
actually large and these operations are fairly sophisticated to 
be able to be in that global operation.
    So, you know, when we have seen cryptocurrency used in 
countries like the ones that we are concerned about, you know, 
often times these are, you know, smaller actors, there are, you 
know, organized crime groups that we are concerned about that 
we track very closely. But we don't see sort-of the systemic 
use of cryptocurrency by the nation-state level. You know, 
maybe with the exception of North Korea. The United States has 
also done a good job of actually being able to disrupt and 
seize some of that money that has been stolen by North Korea in 
the past.
    Mr. Pfluger. Thank you.
    Mr. Kothanek, can you walk us through your KYC, Know Your 
Customer, and anti-money-laundering process that you use to 
verify users and ensure that they are not engaged in illicit 
activity and how you balance that with the privacy protections 
that are needed, especially here in the United States for 
Americans? Are you with us? Is----
    Chairwoman Slotkin. I think you need to unmute, sir.
    Mr. Kothanek. Very sorry about that.
    Chairwoman Slotkin. There we go.
    Mr. Pfluger. No problem.
    Mr. Kothanek. Thank you for your question, sir.
    So Coinbase, as alluded to, has a very substantial AML and 
BSA program and KYC. So when a customer signs up for the 
account, we are going to take a risk-based decision on that 
account. We are going to grab their ID, we are going to have a 
copy of that, we are going to have their address, we are going 
to ask them questions, for example, like, how much money do you 
plan on moving through our system? We put that into our system 
and we are constantly updating our algorithms and our TMS 
system to be able bounce off against that information. If 
anything falls out of, you know, spec, so to speak, with that 
information, we will, you know, ask further questions.
    As a regulated money transmitter and money service 
business, the United States will require to maintain a BSA and 
AML program just like any other financial institution that is 
out there. I think the importance of that is that along with 
the device ID, along with the IP addressing, along with the 
other information that we collect and the way we do social 
media checks, we provide something that if you are a bad actor, 
if you are breaking the law, we are going to be able to provide 
that information to law enforcement. It also helps us track and 
monitor transactions and be able to identify that on the 
blockchain. If there is a fraud attempt, for example, and other 
exchanges or law enforcement reaches out to us, we can quickly 
track down that crypto that enters our system and take 
corrective actions on that.
    Mr. Pfluger. Thank you so much.
    Mr. Kothanek. Did that answer your question?
    Mr. Pfluger. Yes. I feel confident we will have another 
round, so I will yield back at this time.
    Chairwoman Slotkin. Indeed.
    The Chair recognizes Mr. LaTurner from Kansas.
    Mr. LaTurner. Thank you, Madam Chairwoman.
    My first question is for Mr. Levin.
    Do some cryptocurrencies tend to be favored by nefarious 
actors over others? How about specific exchanges? Could you 
explain why? Are they more difficult to trace or more 
accessible to the user if you go cryptocurrency by 
cryptocurrency?
    Mr. Levin. Thank you, Congressman.
    The way in which we see the adoption specifically in 
relation to terrorist financing in cryptocurrencies is again a 
profit maximizing and global fundraising effort by terrorist 
organizations. For that, again, the global nature and the 
instant transfer of cryptocurrencies is largely done with the 
most liquid and accessible cryptocurrencies, which are the most 
possible, including Bitcoin.
    You know, there are anonymizing technologies that are 
implemented in some cryptocurrencies and, you know, we do see 
some actors in minority moving to those. But, again, their 
usability is less than the most liquid and popular 
cryptocurrencies where there is better infrastructure. So, you 
know, for the most part we see, you know, the activity centered 
in the most liquid and popular cryptocurrencies, which allows 
us to have the techniques and transparency that allows us to go 
after that.
    In terms of, you know, the different businesses--and you 
referred to the exchanges--I will echo the comments earlier, 
that there are, you know, several international jurisdictions 
where we need to actually help them build capacity to 
investigate and oversee the cryptocurrency markets in those 
countries to be better partners to the United States to weed 
out this activity. Actually I think that is something that, you 
know, this committee in concert with, you know, partners at the 
State Department can actually help, you know, move against 
those gaps in the system.
    Mr. LaTurner. Thank you for that.
    My next question is for Kristin Smith.
    As you know well, cryptocurrency is being used more and 
more by people for legitimate reasons. While most crypto 
transactions are made for legal reasons, criminals and 
terrorists are still benefiting from the anonymity provided by 
cryptocurrencies. How can the Government reconcile policy that 
is beneficial to the expanding cryptocurrency platform while 
also responding to the bad actors who bend the digital asset to 
their will?
    Ms. Smith. Thank you for your question, Mr. LaTurner.
    I think it is important to remember that there is 
regulation in this space. If you go back to 2013, the Financial 
Crimes Enforcement Network was one of the very first agencies 
of its kind globally, but the first Federal agency in the 
United States to put forth policies in this space. I think for 
those of us working and building in the crypto industry, we 
don't want illicit actors to be using these networks either. I 
think the goals there are mutual, that we want to find the 
policies in order to do that.
    So I think we have made tremendous strides in putting the 
right regulatory framework in place and also building out the 
technologies available to help track bad actors on the 
internet. What we need to do is continue, like Mr. Levin was 
saying, to put resources into these efforts, to do the training 
here in the United States of our Federal, State, and local law 
enforcement, but also helping our international counterparts 
make sure that they have the ability to do the same level of 
investigation and analysis we do here in the United States. So 
I think these are mutual goals.
    I would note that--and Chairwoman Slotkin noted this in her 
testimony--if you look last year, the percentage of illicit 
finance by volume was up 79 percent, but if you look at the 
overall increase in transactions in this space, it is up 567 
percent.
    So the good news is as more and more people are using 
crypto networks and transacting using crypto networks, the 
percentage of illicit use is, you know, increasing at a far 
less pace. So I think that as more and more criminals realize 
that these networks are transparent, that there is a very good 
chance that they will be caught if they are conducting activity 
in this space. You know, we are going to to continue to see the 
divide where there is more legitimate uses and far fewer 
illicit financial uses.
    Mr. LaTurner. Thank you very much, Ms. Smith.
    Madam Chairwoman, I yield back.
    Chairwoman Slotkin. Thank you.
    The Chair recognizes for 5 minutes the gentleman from New 
Jersey, Mr. Gottheimer.
    Mr. Gottheimer. Thank you, Chairwoman Slotkin. I thank the 
witnesses for your perspective today on these critical tools.
    I released a draft of the Stablecoin Innovation and 
Protection Act earlier this year that would establish 
definitions and requirements for bank and non-bank issuers of 
qualified stablecoins. Under the bill a qualified stablecoin 
would have to be backed 100 percent by cash or cash equivalents 
to be considered qualified. The bill would also ask the office 
of the comptroller of the currency and task them with 
establishing anti-money-laundering and Know Your Customer 
guardrails for qualified stablecoins.
    Unlike some of my colleagues on this committee, I believe 
digital assets have the potential to revolutionize the way we 
do business around the globe and I believe the United States 
should be a global leader in developing systems to manage this 
emerging technology.
    I guess if I can start with you, Ms. Smith.
    If Congress looks at crypto legislation through a partisan 
lens and fails to enact meaningful reform soon, do you believe 
we will see further volatility like we saw a few weeks ago with 
TERA? Do you believe Congress failing to act on crypto 
legislation poses a threat to our National security?
    Ms. Smith. Thank you, Mr. Gottheimer. Thank you for your 
leadership in the crypto space. I think that your stablecoin 
legislation is by far the most comprehensive proposal we have 
seen over here in the House and appreciate your leadership in 
this space.
    I do think there are some regulatory gaps. As I had 
mentioned before, there is a lot of regulation in this space 
and Federal agencies for the most part have done a very good 
job of interpreting the rules that they have today to apply to 
cryptocurrency. But this is a very different technology and 
there are some holes. I think there are two areas in particular 
that will go a long way toward protecting consumers better, but 
also maybe helping with some of the events that we saw a couple 
of weeks ago where one cryptocurrency sort-of entirely 
collapsed.
    One of them is to provide some guardrails around dollar-
backed stablecoins. I think that is a very important topic. It 
is one that the President's working group has issued a report 
on. There have been several hearings in Congress.
    The other area that I think would go a long way toward 
addressing that is coming up with an appropriate framework for 
spot exchange regulation. This is something that is very 
clearly not authorized to any Federal agency today and it is a 
space where Congress also should act. Your colleagues on the 
House Agriculture Committee have put forth legislation called 
the Digital Commodity Exchange Act, which is by no means 
perfect, but by far the most comprehensive effort we see. I 
think if there was a scenario where exchanges registered with 
the Commodity and Futures Trading Commission as a crypto 
exchange and there were disclosures that the exchanges provided 
to customers about what is backing the cryptocurrency, whether 
it be a stablecoin or other. I think that would go a long way 
toward preventing the problems that we saw a couple of weeks 
ago.
    Mr. Gottheimer. Thank you, Ms. Smith.
    I share the concerns my colleagues have expressed by the 
use of cryptocurrencies by bad actors. Just last year I was 
shocked to see a report that Hamas and its affiliates received 
a flood of donations in Bitcoin after resuming their horrific 
attacks on Israel and the West Bank. My bill, the Hamas 
International Financing Prevention Act, would put sanctions on 
any foreign states that fund Hamas and punish those nations for 
supporting such violence.
    I am concerned, however, that Hamas may operate in 
countries that lack the capacity or willingness to police 
illicit uses of digital currencies.
    I guess I will turn to you, Mr. Levin.
    As you know, the blockchain technology that supports 
digital assets often holds insights that help law enforcement 
and government track the flow of digital assets and can provide 
indications of specific actors that have held them. Even 
though, again, some of my colleagues don't understand the value 
of blockchain, what do you believe are the biggest obstacles 
preventing foreign governments and financial bodies from 
implementing AML, KYC guardrails that would prevent funds from 
reaching bad actors?
    Mr. Levin. Thank you, Congressman.
    I share the concern. The way that we think that many 
countries around the world need to be able to investigate this 
is through actually acquiring technology and adopting it. The 
innovation behind cryptocurrencies mean that these governments 
need to have dedicated people that actually understand 
cryptocurrencies and while they are bolstering their basic 
forms of AML oversight, you know, they need additional help and 
training from experts. We actually in this country have the 
ability to use the State Department and other resources at our 
disposal to add to their capacity, particularly in places where 
we feel like there are gaps in this capacity in those 
countries. But with that, there is no obstacle actually for 
them being able to weed out this activity and collaborate in 
the global effort against terror.
    Mr. Gottheimer. Thanks. May I continue?
    Ms. Smith, can I follow up and ask--get your perspective on 
that same question, if you don't mind? Also if you can give me 
a sense of what areas of the world are you most concerned about 
as well.
    Ms. Smith. Yes, no, absolutely. I mean I echo everything 
Mr. Levin had said.
    You know, the Financial Action Task Force, which is an 
inter-agency kind-of--or an international sort-of working group 
of regulators in this space, meets frequently to discuss these 
topics. Part of the process that they undertake are these 
mutual evaluations of different countries. There is a list that 
they publish every year, it is called ``the grey list'', that 
lists several companies that are really sort-of behind the 
level of standards that we see in other countries. So I will be 
happy to send that list to your staff. It is often countries 
that have less-developed economies, those that are in parts of 
the world that maybe have a little bit less rule of law. I 
think that if we can work to coordinate with them, that this 
will go a long way toward addressing those issues.
    Mr. Gottheimer. Thank you so much.
    Can you just add a little bit more about any other 
obstacles you believe are preventing foreign governments and 
financial bodies from implementing some of these AML, KYC 
critical guardrails?
    Ms. Smith. Well, I think a lot of it is the standard issue, 
right. It is resources, it is training, it is lack of priority 
perhaps within parts of their government. I think that, you 
know, international pressure in this space is important. I 
think that legislation like yours is important. I think that, 
you know, we need to make sure that we continue to have a 
dialog that, you know, this--the nature, as Mr. Levin pointed 
out earlier, of these cryptocurrencies is that they are global. 
So we have to work globally in order to make sure that we have 
appropriate standards that are similar from jurisdiction to 
jurisdiction.
    Mr. Gottheimer. Thank you.
    I yield back.
    Chairwoman Slotkin. Thank you.
    We will now go into a second round and I will recognize 
myself for 5 minutes and I will keep us to better time here.
    Quick questions. Can you help me understand--you know, many 
folks have suggested that the war between Russia and Ukraine is 
sort-of the first moment where we are seeing the introduction 
of cryptocurrencies as an asset, frankly, I think to both 
sides. We certainly know that the Russians and the country of 
Russia are where many of these ransomware and criminal groups 
and sometimes, you know, bad actors representing the state are 
emanating from. But I also understand that in the early days of 
the war, President Zelinski was helping to fund his government 
by setting up around him his own cryptocurrency Dow.
    So can someone speak to kind-of how the crypto is engaged 
in sort-of our most recent war?
    Ms. Smith.
    Ms. Smith. Yes. No, thank you for the question, Chairwoman 
Slotkin.
    It is very interesting. I think at the beginning of this 
there was a tremendous amount of concern that despite the 
sanctions effort by the United States and other countries on 
Russia, that they would perhaps use cryptocurrencies as a way 
to skirt those sanctions. It is important to remember that 
sanctions apply to cryptocurrencies just as they apply to 
dollars or seashells or whatever form of currency might be 
transacting in. That any U.S. person anywhere in the globe has 
an obligation, whether as an individual or a company, to not 
transact with those on the sanctions list.
    So that was certainly though a concern in the beginning 
that cryptocurrency might somehow be used.
    The truth of the matter is it goes to--it is a liquidity 
issue, as Mr. Levin was talking about before. The trading pairs 
with Bitcoin, Ethereum, other popular cryptocurrencies, and 
Rubles, are not large enough to compete with the amount of 
money that Russia needs in order to take on this transaction. 
Folks like Coinbase, Chainalysis, law enforcement, are watching 
very closely to make sure that cryptocurrency isn't being used 
in this way.
    I think where cryptocurrency is being used has been a 
really fascinating thing to observe. There have been two main 
developments. The first is that the last I checked somewhere 
over $150 million of donations have gone directly to the 
Ukrainian government and NGO's that are helping with the 
effort. That was global money that was collected 
instantaneously and quickly in a time of crisis, which I think 
has been really, really heartening to see.
    We have also heard stories though--and I think this is 
incredibly important--that in times of crisis where people are 
forced to flee their homes because they are able to have self-
custody and have assets in cryptocurrency, they can take them 
with them. They don't have to go to a bank that might not be 
open or might have run out of cash, they don't have to deal 
with the inflation that could be happening in their 
environment. So I think that we are seeing a lot of stories 
about individuals who have had to uproot their lives, but are 
still able to take their savings with them. So I think that has 
been an important story that has come out of this conflict as 
well.
    Chairwoman Slotkin. Mr. Levin, do you want to add anything 
to--I just think it is a historic moment in the history of 
warfare; as someone who is from the CIA and the Pentagon, to 
see how cryptocurrency is playing a role on frankly potentially 
both sides.
    So can you speak a little bit to that in the minute-and-a-
half I have left?
    Mr. Levin. Yes, Chairwoman. Thank you so much for this. I 
do agree that this is the first moment that we have really seen 
cryptocurrency enter a modern conflict.
    The way that the donations have occurred actually are that 
it was faster to be able to get money into the Ukraine through 
the use of cryptocurrency than any other financial means 
necessary. Obviously the magnitude of assistance that has been, 
you know, dedicated by United States and allies, you know, 
actually is a lot larger than $150 million. That being said, 
you know, within minutes, you know, money was sent into the 
country that actually provided the ability for the Ukrainian 
government to buy bullet-proof vests, emergency meals when they 
needed it the most.
    So I think that the global nature and the instantaneous 
nature of cryptocurrencies was a very important part of that 
being used in the conflict.
    The other thing that I would note is that, you know, what 
we do observe in the cyber realm is, you know, increased 
attacks, increased threats on Ukrainian infrastructure. Some of 
that does relate to cryptocurrency where we are able to use the 
transparent nature to actually track Russian activity on these 
types of networks. That means that we can actually assess, you 
know, potentially predicated attacks on Ukrainian 
infrastructure and U.S. infrastructure through the use of 
tracking cryptocurrency purchases for infrastructure.
    Chairwoman Slotkin. Well, I think it is a fascinating case 
study and I think it would be super interesting for someone to 
write a piece about, you know, the kind of captures, the 
lessons learned.
    I recognize the Ranking Member, Mr. Pfluger, for 5 minutes.
    Mr. Pfluger. Thank you, Madam Chair.
    Great discussion so far.
    I would like to kind-of just take a step back a little bit.
    Ms. Smith, you mentioned--you made a comment about critical 
infrastructure and if we back out a little bit--we have been 
focused on crypto and how it is being used potentially in the 
terror realm, but what kind of guardrails, policy guardrails 
or--you know, the nature of trade right now is just--it is so 
international and especially with the cyber domain. What are we 
looking at as gaps or vulnerabilities just in the cyber domain 
that we need to be taking a closer look at that then 
potentially open up the vulnerabilities that you mentioned when 
it comes to critical infrastructure and how crypto would 
interact with that.
    Ms. Smith. Yes, no, I think that figuring out how to boost 
the cyber defenses for our critical infrastructure providers is 
incredibly important. I mean I believe it was with the Colonial 
Pipeline hack where there wasn't even two-factor authentication 
or even a password in some cases, right. So a lot of times it 
is making sure that our small businesses or our businesses that 
aren't as technologically savvy, that they have the tools and 
the education and information that they need in order to 
protect their own infrastructure.
    I would say, though, for the crypto industry, which is 
obviously much more technologically sophisticated, that they 
have very strong defenses in place. There have been situations, 
not so much in the United States, but overseas where there have 
been hacks or mistakes that have happened that have caused 
people to lose assets. But I think the thing that is important 
to remember when you are looking at blockchains is that 
blockchains are immutable and they can't be changed. They are 
incredibly strong and the networks that run these blockchains 
are also incredibly strong. I think that the strength of a 
crypto network is that it is decentralized. So unlike a 
comparable network that might be run by a single company, there 
is a lot of vulnerability there when you only have one actor. 
But when you have these decentralized where there are players 
and participants from all over the world that are helping with 
the operation of the network, they are incredibly strong and we 
have not seen situations in the--I don't know, where are we at, 
13 years now with Bitcoin--we have never once seen any sort of 
hack within the Bitcoin blockchain itself. So it is an 
incredibly strong technology and one of the reasons why so many 
people are excited to be building on it.
    Mr. Pfluger. Thank you. I think it speaks to the public-
private partnerships on the security side. I forget who 
mentioned about the mining operations that are happening here. 
Was that you, Ms. Smith? Or was it----
    Mr. Levin. That was me, Ranking Member.
    Mr. Pfluger. Can you talk through--are you talking about 
the facilities being housed in the United States? I mean the 
actual--where the databases and the computers and all that? Is 
that what you are referring to?
    Mr. Levin. Yes, Ranking Member. There are significant 
amounts of operations where you have data centers with mining 
equipment that are using, you know, renewable energy, for 
example, in this country or excess energy in certain cases to 
actually mine cryptocurrency. It is a vibrant industry with--
you know, that--it is actually growing at an increasing pace 
actually.
    Mr. Pfluger. Let me just ask this specific question, 
because a lot of these are actually happening in my district. 
Is this something--and I would like maybe all of your input on 
this--is this something that we should be exploring, we should 
be encouraging per competition to compete with foreign actors?
    Mr. Levin. Yes, Ranking Member. I think that, you know, for 
instance I imagine it is generating a lot of jobs, for example, 
in your district. Encouraging actually the development of, you 
know cryptocurrency security and the provision of these 
networks in this country is about us taking a lead position in 
the industry. It does make it, as I said, less profitable for 
adversaries. You know, the more efficient, the more developed 
that this industry gets in this country, it is a global 
competition by its very nature. So I do encourage us to look at 
how we can bolster the industry domestically.
    Mr. Pfluger. I see head nods from Ms. Smith.
    Mr. Kothanek, your take on that?
    Mr. Kothanek. Yes, sir.
    I think this is a great issue and I believe our country 
should be the first in this kind of technology. We have 
brilliant talented folks across the United States that are able 
to kind-of come up with great solutions to very challenging 
problems. I feel United States is the place where we should be 
investing in this technology.
    Mr. Pfluger. Ms. Smith.
    Chairwoman Slotkin. I am sorry. I am going to try to stick 
us to 5 minutes. I know we have got a couple of other Members 
who have joined us.
    The Chair recognizes for 5 minutes the gentleman from Rhode 
Island, Mr. Langevin.
    Mr. Langevin. Thank you, Madam Chair. Can you hear me OK?
    Chairwoman Slotkin. We can.
    Mr. Langevin. Great. All right. I wanted to thank our--
Madam Chair, thank you for holding this hearing, and the 
Ranking Member, the witnesses for testimony today.
    So I had a few questions. I wanted to start off though, 
unfortunately I was not able to join on the--to the Government 
website as a participant, but I was listening to the entire 
hearing through the public channel, so I did hear the 
testimony. I wanted to start with going back to the 
Chairwoman's opening question, because I don't think it was 
quite fully answered, or at least I missed a step in there. So 
perhaps that's the issue.
    But with respect to crypto and the transparency, and it is 
being used as kind-of the payment method of choice by these bad 
actors that are carrying out ransomware attacks, particularly 
in Colonial, you didn't quite--at least I didn't quite 
understand the reason why it is not more traceable if crypto 
payments are so transparent and you can see where it is going.
    Now I chair the Cyber Subcommittee on the House Armed 
Services Committee. I have had General Nakasone, who as you 
know heads up NSA and U.S. Cyber Command, and we discussed this 
issue. I won't get into the Classified answers that he gave, 
but ostensibly getting some of the money back with that 
Colonial Pipeline attack was more of an anomaly that we were 
able to do that because we had certain information, which I 
won't get into. But why isn't it more traceable or not more 
actionable that we could get all of the money back, not just 
some of the money, which was happened in Colonial? Is it that 
they--I know that your answer you said that they can move it 
around quickly or instantaneously. It is that they take the 
money out and transfer it to something that is more traditional 
currency and that is why we can't get it back and just seize it 
all?
    But if you could more fully answer the Chairwoman's 
question.
    Mr. Levin. Thank you, Congressman. It is a good clarifying 
question and I am happy to sort-of distinguish the difference 
between traceability on the one hand and what I would call 
seizability on the other.
    So if you have the blockchain, you have every single 
transaction that has ever happened. That is always going to be 
there and, you know, through the technology that we have at 
Chainalysis it is possible to trace that the end points where 
it does intersect with local currency. Yes, you know, in this 
instance, you know, traceability is always there. But in terms 
of the actions that can be taken and, you know, not going into 
the specifics on the Colonial Pipeline case, just being able to 
see the money does not mean that we can actually go and take 
the money from the person who is in control of that money.
    So this is where, you know, we need to----
    Mr. Langevin. Why is that? Why is that?
    Mr. Levin. So the way in which cryptocurrency works is 
that, you know, it is controlled by a private key, a secret 
that someone holds. If you do not gain access to that secret, 
you do not have permission on the cryptocurrency network to 
move the funds that are associated with that secret. So, you 
know, it is possible in this--in cryptocurrency to hold, you 
know, currency locally just to you your person, the same way 
that you can hold $100 bill inside your wallet.
    So, you know, we would need to have physical access or, you 
know, cyber access to a private key in order to move those 
funds in this type of case.
    Mr. Langevin. OK. Thank you for clarifying.
    So let me ask this other question before time runs out.
    So do you see opportunities to improve law enforcement 
training and expertise on cryptocurrency and blockchain 
analysis in the context of domestic and foreign terrorism? If 
so, how can Congress support those efforts?
    Mr. Levin. Thank you, Congressman.
    The ability for the different agencies to actually have 
training programs, you know, is a resource--is largely a 
resource question.
    Chairwoman Slotkin. Sorry. Mr. Kothanek, if you can just 
mute for just a second.
    Thank you.
    Mr. Levin. Thank you, Congressman.
    It is largely a question of resources and the need for 
basic levels of training to be given to really all law 
enforcement components that deal with this. You know, it is a 
horizontal issue that crosses not just the cyber realm, but 
across these different agencies. I think it needs to be 
recognized as a basic capability that goes across, you know, 
the entire breadth of Government agencies. That is largely a 
resource and strategy question.
    Chairwoman Slotkin. All right. We will have to leave it 
there.
    The Chair recognizes for 5 minutes the gentleman from the 
great State of Michigan, Mr. Meijer.
    Mr. Meijer. Thank you, Madam Chair. Can you hear me?
    Chairwoman Slotkin. Indeed.
    Mr. Meijer. Thank you. Thank you for holding this panel 
today and to our Ranking Member and to all of our witnesses.
    Earlier this week I was in district talking with a 
constituent who has a business that focuses on both preventing 
but also the recovery of funds that were transferred illicitly 
through business email compromise. I think one of the big 
challenges that sector has, and we have seen just doubling of 
the amount of funds that have been gained through illicit wire 
fraud, you know, getting into a pattern of life analysis, being 
able to compromise someone's email and then sharing inaccurate 
wiring instructions, especially in one-off transactions. Now, 
their goal is to stop that illicit flow prior to it hitting a 
bank account work and then be converted into cryptocurrency 
and, as is often the case--and as Mr. Levin was describing--the 
challenge is then on the traceability side, which is they have 
seen those funds just go into, you know, one wallet and then, 
you know, you have many different wallets that are dovetailed.
    You know, on that initial step of trying to prevent, you 
know, funds that have been illicitly gained or have been stolen 
from getting converted into cryptocurrency--because we have 
discussed some of those traceability problems, are there any 
steps--and maybe this is for both Mr. Levin and also Mr. 
Kothanek--any steps that could be taken so that once we get--
and I think the numbers that we have, that $7.8 billion 
increase in trading volume for illicit addresses between, you 
know, 2020 and 2021, what can we do kind-of left of there, you 
know, recognizing those challenges once those transactions 
kind-of get within the cryptocurrency space?
    Mr. Levin. Thank you Congressman. I will go first and I 
will pass it to my esteemed colleague who will be able to fill 
in the rest.
    The ability for us to take down enabling infrastructure is 
really at the core of preventing further business email 
compromise. If you saw yesterday the Department of Justice 
announced the take-down of a Social Security and fraud shop on-
line that actually, you know, sold these types of credentials 
that actually lead to the types of social engineering attacks 
that cause business email compromise. If we can actually, you 
know, use cryptocurrency analysis to look at, you know, what is 
the proceeds being used for, what is the infrastructure being 
bought by the cyber actors that we are going after, we can cut 
off these attacks before the actually hit our businesses.
    So, you know, I think that that is, you know, at the far 
left of what we want to be doing, is making sure that, you 
know, our Government agencies have the resources to be able to 
go after the enablers in this ecosystem that actually are the 
root cause of, you know, these problems.
    You know, once it gets into cryptocurrency, you know, it is 
important that the Government actually shares information with 
the private sector. You know, it is important that OFAC 
designates addresses and associates that to threat actors so 
that the industry can act. You know, there needs to be much 
greater partnership between private and public sectors in order 
to be able to combat these threats in real time. That is also a 
kind-of global issue. You know, I recognize that FinCEN has 
done a lot of good work on business email compromise 
internationally to help with some of those funds being seized 
in a rapid response program. I think that that, you know, needs 
to be extended and used in the cryptocurrency context as well. 
But, you know, I will say that, you know, at Chainalysis we are 
able to identify, you know, these types of actors and label it 
in real-time systems that helps businesses, you know, actually 
act on this information. The traceability of it means that we 
can then map out the entire network that is involved in, you 
know, going after our businesses and creating the fraud.
    Mr. Kothanek. Yes, sir. If I can add very quickly--and 
thank you for this question. This is right in the wheelhouse of 
my team and I think, very quickly, one of the things that we 
have been working on with our law enforcement partners and 
partners at financial institutions. The faster that we can find 
out about this type of issue or this business email compromise, 
the quicker the action that we can take on the account. So what 
we have, for example, is IC3 with the FBI will very quickly 
reach out to us they have been notified of a compromise. They 
contact us. My duty investigator goes into the account, takes a 
look at the account, is able to very often freeze funds, or we 
can track it very quickly to another exchange that we can 
cooperate with and law enforcement is able to pull back those 
funds, you know, through the seizure process and help recover 
those funds. I think the more practice we have at, so to speak, 
and the more that we are able to communicate with our partners 
in law enforcement and in the financial world that we will help 
them, the better off we are all going to be.
    Mr. Meijer. Thank you, Madam Chair.
    I yield back.
    Chairwoman Slotkin. Thank you.
    We will go into a final round of questions. I apologize, 
the Ranking Member had to head to the floor.
    I will recognize myself for 5 minutes and then I know at 
least Mr. Langevin and potentially Mr. Meijer wanted to do a 
second round.
    So I guess the thing I will say to sort-of--in my 
concluding question is I--part of the reason we have this 
hearing was to try and set us off, the Congress and the 
cryptocurrency community, on a better foot than we now find 
ourselves with the big social media giants. I think the story 
line that at least carries the day up here is that the social 
media companies told us in the late 1990's and 2000's--I wasn't 
here--but the lore goes like don't touch us, don't touch us, 
don't touch us, please don't provide any regulation. You will 
kill entrepreneurialism and all this good spirit. Then kind-of 
things turned on them, particularly recently, and users were 
frustrated with the policies by these private companies. 
Suddenly Facebook is targeting, you know, my Facebook feed, 
saying, Congress, you are so lame, you haven't, you know, 
updated regulations since the 1990's. So it is I would say--a 
charitable view is that they played their relationship with the 
U.S. Congress wrong. We have all kinds of problems up here. I 
would never say we are in a good place on having agreement on 
how to think about dealing with the social media companies, but 
my plea is that we not go down the same road with the 
cryptocurrency community, that we instead work together and 
figure out how to put in the right left and right limits that 
gives the white hats, the good guys in the industry, the 
protections you need and the perception you need, which is that 
you root out bad guys, you don't allow criminals to use your 
networks, and then allows law enforcement to properly hyper-
target the bad guys and go after the bad guys.
    So in that spirit of open arms and wanting to do things 
differently and learn the lessons of a different new industry, 
could you all talk about--I know this is going to be difficult, 
but if you were in our shoes, what would you do to make sure 
that bad actors couldn't credibly use your platforms and other 
platforms? I know we have talked about money, but we can always 
talk about money for law enforcement, but what literal law 
would be advantageous to your community? Knowing that the 
answer of nothing please is not going to boomerang well on you 
all.
    Ms. Smith.
    Ms. Smith. No, thank you. I think it is an important 
question.
    I mean, listen, there is really good policy in place and 
FinCEN and OFAC have been doing a really good job. I do think 
thought that we need to watch very closely what is happening in 
the illicit finance space. If we see that there are changes in 
the types of tokens that are being used, we might need to look 
at enhanced Know Your Customer measures for certain tokens. I 
think that, you know, one exciting development going on in the 
industry right is the development of identity solutions that 
might require an update down the road. Because if you think of 
today, if you go to a bar, you show your ID with your name, 
your address, your height, your weight, you know, all of your 
personal information when all that bar needs to know is that 
you are over 21. They don't need to know anything more specific 
than that. There are really interesting things going on in the 
digital identity space today that will allow for individual 
wallets to be able to carry information with them about the 
person without having to share the information.
    So I think one of the most important things we can do is 
follow the development of that technology, because we might be 
able to change the structure of the regulations that we have in 
place today to be more effective as the technology evolves.
    Chairwoman Slotkin. Thank you.
    Mr. Levin.
    Mr. Levin. Thank you, Chairwoman. It is the question.
    The thing that we need to sort out first is the innovators 
in this country need to know exactly where they stand with 
regulators. Today there is a gray area and a lack of legal 
certainty if you are innovating in, you know, stablecoins for 
example, that, you know, even building sort-of projects like, 
you know, helium and infrastructure that can actually allow 
people to have, you know, physical networks that are joined by 
cryptocurrency that are, you know, the market innovation that 
we all want. So I think that that is really important.
    I think from preventing illicit activity, and I will 
highlight two sort-of big ideas. One is on the information-
sharing side. You know, it is important that Congress provides 
adequate legal frameworks and certainty to be able to share 
information across borders as well as domestically, you know, 
when it comes to sharing information with private industry on 
this.
    Finally, I think it is important that actually we think 
about approaches where we have centers where public-sector 
agencies as well as private-sector agencies can jointly come 
together to actually fight in this and use the nature of the 
technology to detect and prevent illicit activity.
    Chairwoman Slotkin. Thank you. Thank you for that.
    The Chair recognizes for 5 minutes the gentleman from 
Michigan, Mr. Meijer.
    Mr. Meijer. Thank you, Madam Chair.
    One question that I posed when we held a similar hearing 
with the Secret Service and DHS several months ago, and this 
may be an unfounded concern, but given how broad the ecosystem 
is of various digital are in cryptocurrencies, you know, and 
outside of the main, you know, large, better-established--and 
frankly, that we have certainly seen fluctuations in their 
value in the past couple of months--you know, harder to 
manipulate or harder to rapidly inflate the value of a Bitcoin 
versus, you know, some much smaller altcoin where instead--and 
this is my concern and I just want to pose it to our witnesses 
to see if it is well-founded or, frankly, not--that illicit 
actors may--and especially in the ransomware space--may 
request, you know, an investment in a very low-market cap, very 
poorly capitalized coin because that million-dollar transfer 
coming from a ransomware attack then being able to raise that 
overall value of that coin, you know, pump that up and then 
allow them on the flip side, whoever was owning, you know, that 
one cent coin that went to a dollar coin, be able to dump it on 
the other end in a way of evading, you know, some of the more 
well-established ways of tracing those flows. Is that a well-
founded fear? Have we seen any evidence of that yet? You know, 
are there ways in which the large diversity of coins, those 
altcoins that could be, you know, exposing us to risk that--you 
know, above and apart from just the general cryptocurrency 
space?
    Just wanted to throw that out to the witnesses and, I don't 
know if you want to start, Mr. Levin? Then maybe Mr. Kothanek 
and Ms. Smith.
    Mr. Levin. Thank you. Thank you, Congressman.
    Definitely an interesting, you know, thought about how 
exactly, you know, criminals are moving money. I often say 
that, you know, the creativity of this is something that we 
have to keep on top of. There is always new innovation.
    That being said, you know, when it comes to specifically 
ransomware, and even terrorist financing organizations that are 
raising capital, I go back to the idea of profit maximization, 
revenue maximization, which is about using the most liquid 
forms of cryptocurrency. So we don't see, you know, the use of 
this long tail of cryptocurrencies, of coins that no one has 
ever heard of actually being used as a payment instrument 
largely because, you know, the victim has never heard of it and 
maybe doesn't trust it as much and doesn't know, you know, what 
they may be getting themselves into.
    So, you know, where we have seen the use of the long tail--
you know, I would say it goes back to your concerns around 
market manipulation or actually in the laundering process of 
these coins. The good news is is that most of the long tail are 
just carbon copies or, you know, are as transparent as, you 
know, Bitcoin and Ethereum. So, you know, a large transaction 
in a low-volume, low-liquidity coin is very traceable when it 
comes to, you know, it being used in a laundering process. So 
oftentimes doesn't actually, you know, give the sort-of 
anonymity or obfuscation that the person is trying to occur.
    I would say that, you know, when it comes to monitoring for 
market manipulation, you know, I think it is really important 
that we encourage the regulators that have jurisdiction over 
that to actually have the technology to monitor this 
proactively rather than reactively.
    Mr. Meijer. Thank you. Mr. Kothanek----
    Mr. Kothanek. Yes, sir.
    Mr. Meijer [continuing]. Anything to add?
    Mr. Kothanek. Yes, sir, absolutely. Thank you for the 
question.
    So I think that, you know, one of the things that I 
appreciate about this topic is that, for example, when Coinbase 
lists a coin on our system, they go through a due diligence 
process. You know, we interact with these different altcoin 
operators and for the most part they are great people, they are 
good companies, they have solid backgrounds, they have solid 
foundations to their coin. What that means to me and what that 
says to me is they are somebody that we can reach out to and 
they are not going to get in bed, so to speak, with a 
ransomware provider or--you know, they are not going to 
purposely break the law in that way.
    So I think your question is a good one, but it is a little 
bit--you know, it is not very realistic because I think the 
providers of these altcoins are just great companies that are 
going to do a good job, just like Coinbase does, just like the 
other exchanges out there often do. Yes, I think that doesn't 
make it very easy for these companies to be taken advantage of.
    Chairwoman Slotkin. We will have to leave it at that. Thank 
you.
    The Chair recognizes for 5 minutes the gentleman from Rhode 
Island, Mr. Langevin.
    Mr. Langevin. Thank you, Madam Chair.
    So did either Ms. Smith or Mr. Kothanek have anything to 
add on the first question in terms of traceability and, you 
know, to recover Bitcoin when we do know where it is or was the 
answer fully, you know, given? Is that fine? If not, I want to 
go to Mr. Kothanek about law enforcement training and see if he 
had anything to add there.
    Mr. Kothanek. Yes, sir. Great question. Great question, 
sir. Thank you very much for that.
    So I think regarding law enforcement training, if I can go 
back a little bit to when I was with Paypal and a lot of folks 
were--you know, in the law enforcement community were kind-of 
No. 2 pencil folks. They were struggling a little bit with the 
technology. Fast-forward now to when I joined Coinbase in 2014 
and even now, I have been incredibly impressed with Federal law 
enforcement, State, and local, international law enforcement 
and their ability to kind-of keep up with this technology. Some 
of them are enthusiasts and they are very well-versed in not 
only computer technology, the internet, and cyber crime, but 
they understand crypto. Those that don't reach out to us and we 
often provide training. My staff loves to sit down with law 
enforcement, visit with them, and provide soup-to-nuts 
training. We will sit down with them and they will either 
start, you know, at a very basic level or we will go up to 
advanced, you know, blockchain tracking to help them out. 
Whatever they need. I think law enforcement knows that we are 
available. I know, you know, Chainalysis has some great 
training programs as well.
    I think we are very well-covered with law enforcement. We 
just need to help get them some more resources so they can have 
the money to do that.
    Thank you.
    Mr. Langevin. Thank you.
    Ms. Smith, have anything to add?
    Ms. Smith. You know, the only thing I would add is that 
every conversation that I have with someone in law enforcement, 
particularly those who have been involved in these 
investigations, I ask would you rather be dealing with 
criminals that are holding a bag of cash or that have a wallet 
of Bitcoin, and they say wallet of Bitcoin every time because 
they are successful. I think the fact that we see so many 
headlines about different criminal activity involved in 
cryptocurrency is actually a feature not a bug, right. This 
means we are finding them. I think it is the stories that we 
don't see, where criminals are using cash, that we just don't--
aren't able to trace and we don't have any headlines.
    So I think the fact that we are able to trace these 
transactions and in many cases ultimately lead to arrests, is a 
positive thing and would encourage all the training we need to 
get law enforcement to be able to maximize the pursuit of the 
criminals.
    Mr. Langevin. Thank you.
    Let me turn to Mr. Levin if I could. I know we touched on 
this subject a bit, may do a deeper dive on it. In your 
company's analysis, have you observed state-sponsored 
organizations engaging with terrorist groups in pursuit to log 
their cryptocurrency or otherwise engage in illicit activity on 
blockchain? Also in your company's analysis, do you observe 
different terrorist organizations adopting different tactics as 
they use cryptocurrency and cryptocurrency exchanges? If so, 
what factors do you think account for those variances?
    Mr. Levin. Thank you, Congressman.
    The way the different terrorist organizations use funds 
really divides into two types of usage. The first is, you know, 
global finance campaigns where groups are actually using 
cryptocurrency addresses that they publish on-line, that they 
solicit donations on to finance, you know, their operations. 
Then the second way that we see terrorist organizations use 
cryptocurrencies is actually in the purchase of cyber 
infrastructure or enabling infrastructure that helps them with, 
you know, recruitment or radicalization or cyber operations. 
So, you know, the levels of sophistication among these groups 
is really the main determinant of the different techniques and 
strategies that they employ.
    In general, I would say that we see a much lower level of 
sophistication in terrorist organizations' use of 
cryptocurrency than we do in the nation-state actors or 
organized cyber crime groups. So, you know, we tend to see very 
low levels of sophistication, which has led to, you know, law 
enforcement being very successful in actually combatting 
especially the global financing campaigns that have been run by 
these terrorist organizations. Actually, you know, we are able 
to enumerate, you know, exactly how much money they have been 
raising--not a very a minuscule amount compared to their 
overall operating budgets.
    Mr. Langevin. Thank you.
    My time has expired.
    I yield back.
    Chairwoman Slotkin. Thank you.
    I would say, as we conclude here, for me some of the big 
takeaways and hopefully for you all--and thank you to Mr. 
Langevin for putting a fine point on it--the difference between 
traceability and retrievability, which I can imagine from my 
past life is going to be of a lot of interest to the National 
security world and making sure we understand how not just to 
see bad actors and see bad activity, but actually do something 
about it. But then also just I think hopefully you believe the 
bipartisan commitment to try and have a different story that we 
all follow in terms of the relationship between Congress and 
the crypto community. We don't want it to be the same way it 
has been around kind-of the big tech and social media. I hope 
you don't want that either. What I would encourage is that we 
will always be open to white papers or, you know, policy 
papers, ideas that you have because I think the worst-case 
scenario is you get a bunch of people up here who don't 
understand the technology, whose public is saying we don't know 
what this is, our kids are investing in, but we don't know if 
it is a scam, you know, people ransoming us. Basically policy 
based on fear and reactionism. That is what we don't want. That 
would be bad for everybody.
    So I encourage your energy around engaging with us early 
and often.
    To that point, I was really heartened to see actually in 
the United Kingdom that the parliamentarians, the parliament 
there basically invited in the crypto community and they had a 
closed-door--I don't know if it was a meeting or a summit or a 
conversation. I would offer that might be a really useful thing 
to think about doing toward the end of this year, taken out of 
the election cycle, and have that conversation. Again, just 
education for those who aren't on the committee and to just 
keep the dialog open.
    So with that, I want to thank our witnesses for your 
valuable testimony. Thank you for piping in and for the Members 
for their questions.
    The Members of the subcommittee may have additional 
questions for the witnesses and we ask that you respond 
expeditiously in writing if possible to those questions.
    The Chair reminds Members that the subcommittee record will 
be remaining open for 10 business days.
    Without objection, the subcommittee stands adjourned.
    [Whereupon, at 10:36 a.m., the subcommittee was adjourned.]

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