[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
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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
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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
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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\
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\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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