[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
UNDER THE RADAR: ALTERNATIVE
PAYMENT SYSTEMS AND THE NATIONAL
SECURITY IMPACTS OF THEIR GROWTH
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 20, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-98
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
48-838 PDF WASHINGTON : 2022
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on National Security, International
Development and Monetary Policy
JIM A. HIMES, Connecticut, Chairman
JOSH GOTTHEIMER, New Jersey, Vice ANDY BARR, Kentucky, Ranking
Chair Member
MICHAEL SAN NICOLAS, Guam FRENCH HILL, Arkansas
RITCHIE TORRES, New York ROGER WILLIAMS, Texas
STEPHEN F. LYNCH, Massachusetts LEE M. ZELDIN, New York
MADELEINE DEAN, Pennsylvania WARREN DAVIDSON, Ohio
ALEXANDRIA OCASIO-CORTEZ, New York ANTHONY GONZALEZ, Ohio
JESUS ``CHUY'' GARCIA, Illinois PETE SESSIONS, Texas
JAKE AUCHINCLOSS, Massachusetts
C O N T E N T S
----------
Page
Hearing held on:
September 20, 2022........................................... 1
Appendix:
September 20, 2022........................................... 31
WITNESSES
Tuesday, September 20, 2022
Dueweke, Scott, Global Fellow, Science and Technology Innovation,
the Wilson Center.............................................. 6
Jin, Emily, Research Assistant for the Energy, Economics, and
Security Program, Center for a New American Security........... 5
Levin, Jonathan, Co-Founder and Chief Strategy Officer,
Chainalysis Inc................................................ 11
Norrlof, Carla, Nonresident Senior Fellow, Economic Statecraft
Initiative, GeoEconomics Center, Atlantic Council.............. 8
Redbord, Ari, Head of Legal and Government Affairs, TRM Labs..... 10
APPENDIX
Prepared statements:
Dueweke, Scott............................................... 32
Jin, Emily................................................... 33
Levin, Jonathan.............................................. 50
Norrlof, Carla............................................... 67
Redbord, Ari................................................. 88
Additional Material Submitted for the Record
Dueweke, Scott:
``Black Swans and Green Fields: Exploring the Threat and
Opportunity of the Alternative Payments Ecosystem to the
West,'' dated August 2022.................................. 101
Jin, Emily:
Written responses to questions for the record from Chairwoman
Waters..................................................... 121
Norrlof, Carla:
Written responses to questions for the record from Chairwoman
Waters..................................................... 138
Redbord, Ari:
Written responses to questions for the record from Chairwoman
Waters..................................................... 151
UNDER THE RADAR: ALTERNATIVE
PAYMENT SYSTEMS AND THE
NATIONAL SECURITY IMPACTS
OF THEIR GROWTH
----------
Tuesday, September 20, 2022
U.S. House of Representatives,
Subcommittee on National Security,
International Development
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Jim A. Himes
[chairman of the subcommittee] presiding.
Members present: Representatives Himes, Gottheimer, San
Nicolas, Auchincloss; Barr, Hill, Williams of Texas, Davidson,
Gonzalez of Ohio, and Sessions.
Ex officio present: Representative Waters.
Also present: Representative Taylor.
Chairman Himes. The Subcommittee on National Security,
International Development and Monetary Policy will come to
order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
I would like to welcome today's witnesses.
We will be doing this as a hybrid hearing, so members will
be both physically present as well as piping in on the screen,
which is visible to us behind you. It should be visible on
either side. We beg your indulgence for any technical issues
that may pose, but we do anticipate a good dialogue, both in
person and remotely, today.
Today's hearing is entitled, ``Under the Radar: Alternative
Payment Systems and the National Security Impacts of Their
Growth.''
I now recognize myself for 4 minutes to give an opening
statement.
Payment systems are the lifeblood of the financial sector.
They make sure that banks, businesses, and individuals around
the globe can send and receive money without delay and keep the
world's economies connected.
The United States and the U.S. dollar in particular occupy
a privileged role in the payments sector. As the world's
primary reserve currency, our dollar is the most widely used in
global trade and cross-border payments. This gives U.S.
authorities who are tasked with oversight immense capabilities
to impose financial sanctions and isolate regimes who act
against broadly-shared international values.
Earlier this year, we saw how U.S. dollars and the payments
system can be leveraged to respond to bad behavior by our
adversaries. After Russia invaded the sovereign nation of
Ukraine, the United States and our allies acted swiftly to
counter Putin's attack by limiting the Russian government's
ability to obtain U.S. dollars, and restricting Russian banks
from accessing vital international financial messaging systems.
As a result, the Russian economy began to erode, and Putin
and his cronies became international pariahs. The world was
reminded how U.S. leadership and the U.S. dollar can tighten
the screws on governments that violate longstanding norms.
But the strengths and privileges of the dollar are far from
uncontested. Around the globe, allies and adversaries alike are
taking critical steps to de-dollarize their economies, to
develop new methods to facilitate cross-border money transfers,
and to control the plumbing of global finance.
In some cases, these alternative payment systems are
proactive measures taken by governments to mitigate the
expected brunt of economic sanctions and international
vilification. In other instances, these systems illustrate the
ways that foreign regimes expand their influence in the global
payment sector, weaken U.S. competitiveness, and jeopardize the
era of dollar dominance.
These systems each pose unique challenges that will require
U.S. regulators and the international community to refine our
sanctions strategies, closely monitor worldwide financial
trends, and keep pace with the rapidly-evolving payment
ecosystem to make sure that we are not caught flatfooted.
Our panel this morning will help us understand these
challenges and highlight how Congress and the Administration
can prepare for alternative payment systems to grow beyond our
financial integrity capabilities and compromise our national
security. In order for the U.S. to retain its status as a
leader in the international payments arena, we must be ready to
overcome the obstacles that await us, both in the near term and
in the years ahead.
Global leadership in the 21st Century will be determined in
part by the oversight and influence of the payment sector.
Today I look forward to learning how the United States can best
preserve and maintain its status in the global payment system,
defend against threats presented by alternative payment
systems, and give policymakers and national security officials
the right tools to defend our economy against the threats that
lie ahead.
With that, I would like to again welcome our witnesses and
thank them for helping us to shed light on this important
topic.
I now recognize the ranking member of the subcommittee, Mr.
Barr, for 5 minutes for an opening statement.
Mr. Barr. Thank you, Mr. Chairman.
And I join the Chair in welcoming our panelists to this
hearing.
The rise of alternative payment systems abroad,
particularly in China, has deepened Congress' interest in
ensuring that our own payments infrastructure remains
preeminent. Beijing's development of a digital RMB has also
raised the specter of China removing itself and other countries
from a dollar-based financial system, with uncertain effects
for our national security.
I look forward to hearing our witnesses delve into these
issues today, but let me offer some preliminary thoughts on how
we can meet the rise of new payment technologies promoted by
U.S. rivals.
First, Congress must foster innovation in our own backyard
so that dollar payments are quick, efficient, and secure. This
means continually upgrading our payment capabilities, not
resting on our laurels.
Already, the Federal Reserve's Fedwire system processes
nearly $4 trillion a day, with double-digit annual growth in
the volume and value of its transfers. Next year's rollout of
FedNow should further facilitate dollar payments for
individuals and businesses.
Committee Republicans have been pushing the Fed to
prioritize cybersecurity in order to defend these critical
functions. We have also underscored the importance of data
privacy and cooperation with commercial banks as the Fed
considers concepts for a central bank digital currency (CBDC).
If the world is to continue opting for the dollar, we must
reject the Chinese model of using financial technology as a
tool for government surveillance and control. We cannot and we
should not compete with China by becoming more like China.
The private sector is also key. While massive foreign
players like Alipay and WeChat loom large, the United States
and Europe have launched a diverse array of new payment
services, from fintech startups to major technology companies.
I am confident that our commitment to competition, free
enterprise, and the rule of law will point the way for global
standards and payments, not the heavy hand of dictatorships
like China.
Second, it is essential for Washington to stop politicizing
the institutions that have historically made our financial
system the envy of the world. Whether it is the Federal
Reserve, the Securities and Exchange Commission, banks, or
Silicon Valley, we must resist the call of activists who want
to mobilize them against anyone who doesn't share their
beliefs. See: ESG.
Just last week, for instance, we held a hearing on de-
risking in the Caribbean, where our committee was able to
examine how law-abiding businesses in the region are being
denied financial services like correspondent banking.
This is a real problem. I only wish our Majority would show
a similar concern when their supporters demand that financial
institutions pick and choose customers here at home based on
environmental and social litmus tests. In the long term,
infecting our financial system with political agendas of the
day will only make other countries' payment services and
currencies more attractive.
Finally, the effectiveness of our sanctions and anti-money
laundering regime rests on the dominance of the dollar. As long
as this is the case, foreign countries' attempts to evade U.S.
law enforcement will be limited. Just ask the Russian Central
Bank or cryptocurrency exchanges abroad that have been targeted
by the Office of Foreign Assets Control (OFAC).
The dollar is king because its value is market-determined;
because we support free capital flows; because our legal system
protects investors, rather than preying on them. Dollars give
you a claim to countless high-quality goods and services
produced by a $25 trillion economy.
Ultimately, it is economic dynamism and our responsible
stewardship of the financial system that will stymie our
adversaries' efforts to escape the dollar's reach, as long as
we don't stray off course.
China, for its part, is running out of feet to shoot. Its
zero-COVID policy is producing urban dystopias throughout that
country. Its real estate sector is teetering. And Beijing has
shackled itself to Moscow, while the West stands united behind
Ukraine. These aren't the moves of a regime that deserves
greater sway over the world's financial architecture. And that
is a bipartisan sentiment, fortunately.
While China is betting on its financial governance as the
wave of the future, global markets have been betting on ours.
We must do everything we can to keep it that way.
I look forward to our witnesses' testimony, and I yield
back.
Chairman Himes. I thank the ranking member. I now recognize
the Chair of the full Financial Services Committee, the
gentlewoman from California, Chairwoman Waters, for 1 minute.
Chairwoman Waters. Thank you very much, Chairman Himes, for
convening this hearing on the current and future national
security challenges related to the growth of alternative
payment systems. These systems can drive inclusion and offer
convenience, but because they are generally outside of the
western Federal financial system, they also offer opportunities
for sanctions evasion and other financial crimes. Further, they
rival U.S. dollar-led trade and payment systems, potentially
undermining the strength of the dollar and our ability to
leverage tools like economic and trade sanctions.
I look forward to hearing from today's witnesses on what
Congress needs to consider regarding this growing concern.
I yield back.
Chairman Himes. I thank the Chair of the Full Committee,
and turn now to our witnesses.
Today, we welcome the testimony of our distinguished
witnesses: Emily Jin, a research assistant for the Energy,
Economics, and Security Program at the Center for a New
American Security; Scott Dueweke, a global fellow for science
and technology innovation at the Wilson Center; Dr. Carla
Norrlof, a nonresident senior fellow at the Atlantic Council's
GeoEconomics Center; Ari Redbord, the head of legal and
government affairs at TRM Labs; and Jonathan Levin, the co-
founder and chief strategy officer at Chainalysis.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You should be able to see a timer that
will indicate how much time you have left. I would ask that you
be mindful of the timer so that we can be respectful of both
the other witnesses' and the committee members' time.
And without objection, your written statements will be made
a part of the record.
Ms. Jin, you are now recognized for 5 minutes for an oral
presentation of your written testimony.
STATEMENT OF EMILY JIN, RESEARCH ASSISTANT FOR THE ENERGY,
ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW AMERICAN
SECURITY
Ms. Jin. Chairwoman Waters, Ranking Member McHenry,
Subcommittee Chairman Himes, Subcommittee Ranking Member Barr,
and distinguished members of the subcommittee, thank you for
the opportunity to testify before you today and for your
interest in the important policy area of payment systems and
national security. It is an honor to share the panel with my
fellow witnesses.
I study China's alternative payment systems and rails,
principally the Cross-Border Interbank Payment System (CIPS),
and the digital RMB, or eCNY, in the context of great-power
competition between the United States and China.
My testimony addresses China's progress in building out
these two alternative payment systems, the implications of
growth in these payment systems, and recommends a policy
posture to prepare America for a future where alternative
payment systems are more prominent than they are today.
First, on CIPS, we should understand what CIPS is and what
it is not. It is an RMB clearing and settlement mechanism that
facilitates cross-border RMB transactions. It is not China's
version of the Society for Worldwide Interbank Financial
Telecommunications (SWIFT)--yet--as it does not provide
messaging services broadly to global financial institutions.
Second, on the digital RMB, the digital RMB, or the eCNY,
is the digital version of the Chinese national currency, the
RMB. It is a national payment structure that is mostly domestic
and retail which has been implemented across all levels of
Chinese society. It, however, increasingly has potential cross-
border applications and implications.
At their current stages, these two alternative payment
systems are not threats to the mainstream financial system.
However, they are growing in technical sophistication and
domestic adoption. CIPS use is on an upward trajectory, and
digital RMB pilot projects are penetrating through all levels
of Chinese society.
Under an ambitious Chinese leadership that envisions more
prominent roles for Chinese institutions and international
finance, these systems could gain traction internationally and
scale up accordingly, with the right geopolitical conditions,
over the long run.
In such a scenario, Chinese alternative payment systems and
coalitions of alternative payment systems could eventually
erode the ability of the United States to use financial
sanctions as a deterrent or a punishment in the event of a
Taiwan crisis or other geopolitical scenarios.
Moreover, these payment systems could challenge the
institutions under the current financial order. The United
States, as a leader in the global financial order, needs to
respond to this long-term risk today.
The United States cannot control the way other countries
are developing their systems. The United States can, however,
craft sound policy to influence the march of global payments
innovation and maintain U.S. leadership in the international
financial system.
Out of my list of recommendations, I will highlight three.
First, the United States Government should support
institutions that conduct research on America's and China's
financial statecraft. The Department of the Treasury, the
Federal Reserve Board of Governors, and the Federal Reserve
Banks should designate units of analysts to conduct annual
assessments of currency flows in the global payment systems.
These analytical units should monitor the use, growth, and
connectivity of these alternative payment systems.
Second, Congress should consider mandating the drafting of
a long-term strategy document, updated every 2 to 4 years, to
signal the direction of U.S. financial statecraft and the
United States' thinking for the future of the dollar. This will
not only instill confidence in the American private sector that
U.S.-dollar preeminence is a priority, but it would also
provide clarity to our allies and partners on the United
States' financial statecraft posture.
Third, the Treasury Department should develop policy
measures to prevent sanctioned entities from taking advantage
of alternative payment systems. There should be predetermined
policy triggers. If there is proof that Chinese financial
institutions cleared and settled transactions with sanctioned
individuals or organizations through CIPS, the Treasury's
Office of Foreign Assets Control (OFAC) should consider
financial sanctions or secondary sanctions on financial
institutions that facilitated these transactions. The
Department of the Treasury should study the impact of such
sanctions prior to levying such tools, given the high
likelihood of knock-on effects from such actions.
In summary, I recommended a policy posture that is
informed, anticipatory, but not overly alarmist. After asking
the question on how alternative payment systems are developing,
the United States should focus on how it can maintain
leadership in international finance and continue to exert
influence in the global financial economic system to serve
American national interests.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Jin can be found on page 33
of the appendix.]
Chairman Himes. Thank you, Ms. Jin.
Mr. Dueweke, you are now recognized for 5 minutes.
STATEMENT OF SCOTT DUEWEKE, GLOBAL FELLOW, SCIENCE AND
TECHNOLOGY INNOVATION, THE WILSON CENTER
Mr. Dueweke. Thank you.
Esteemed members of the House Financial Services Committee,
Chairman Himes, Ranking Member Barr, Chairwoman Waters, and
Ranking Member McHenry, I would like to thank the committee for
inviting me to testify on this often-ignored area of the modern
financial world.
I would like to briefly describe the outlines of the risks
presented by the use of virtual currencies to the United States
and its allies in the Western world.
Please also refer to my written testimony for greater
detail regarding my thoughts on the great advantages of many,
but not all, of these systems to the billions of unbanked and
underbanked people around the world. It is not all bad.
The scope of virtual currencies extends far beyond Bitcoin
and other cryptocurrencies and includes many alternative
payment systems you are familiar with, such as PayPal or
Western Union, but also included are hundreds more that you
might not be familiar with. Some of these, such as Russia's,
``dark PayPals,'' as I call them, including WebMoney and
Perfect Money, have often been used by criminals, especially
Russian criminals.
QIWI, as I previously testified before the Senate Judiciary
Committee, was used to purchase Facebook ads attempting to
influence the 2016 U.S. Presidential election. The nexus
between adversarial, illiberal regimes and cybercrime cartels
acting as their proxies using these systems is clear.
These alternative payment systems are not small, with
China's centralized virtual currencies, WeChat Pay and Alipay
processing 294.6 trillion yuan, or about $45.6 trillion, in
2020. This dwarfs the $15.8 trillion in all crypto-related
transactions that Mastercard's CipherTrace estimated occurred
in 2021.
While public blockchain intelligence systems, like
Chainalysis, TRM, and CipherTrace, are beginning to do peel-
chain analysis, where cryptocurrencies are exchanged for others
to obfuscate their origins or usage, they do poorly when
assessing where the money goes after conversion into a privacy
coin, a centralized virtual currency like Alipay, or other
alternative payment systems.
Traditional, follow-the-money approaches often miss the
role played by the alternative payments ecosystem--I will call
it the, ``APE,'' for short--especially when executed without a
generalized understanding of the varied and constantly-morphing
set of companies and services that are part of it.
Focusing only on cryptocurrency risks misunderstanding this
global thriving ecosystem. Combined, these virtual currencies,
mobile payment systems, remittent systems, and stored-value-
card systems fuel the shadow economy, as well as enabling very
positive changes for the world's unbanked and underbanked. I
define this as an ecosystem because they are all connected
through hundreds of virtual currency exchanges, converting one
alternative payment system for another and another or to and
from fiat.
Anonymity or misattribution lives there, where Know Your
Customer (KYC) practices are being poorly applied or ignored
entirely, especially outside of the West. Financial Open-Source
Intelligence (FOSINT), should be developed as a discipline, as
well as building tools to understand and monitor this ecosystem
as a whole.
The very stability of the global financial ecosystem, at
least as we are familiar with it today, is being threatened as
this APE has exploded in popularity and viability, becoming
woven into the global social fabric. It provides a growing and
capable set of interconnected, non-bank financial channels that
may or may not ever touch the traditional financial system.
The internet has connected them, just as SWIFT and
automated clearing house (ACH) messaging networks provided the
original connectivity for banks and other financial
institutions to build our current payment system. These
traditional bank-centric financial systems are under siege as
the ground beneath them shifts amid the awakening of the
unbanked and underbanked as well as the burgeoning global
middle class.
Frequent use of financial sanctions has contributed to this
shift, as Chinese and Russian new payment systems bypass SWIFT
and other Western-dominated financial backbones. No longer the
domain of fintech startups, nor just limited to
cryptocurrencies, nation-states are playing, ``the Great
Game,'' on this new terrain.
Increasingly, the high ground of that terrain will be
central bank digital currencies. Nine countries have launched
central bank digital currencies (CBDCs). Another 15 are in
pilot and 16 are in development. The United States is not one
of them, although President Biden's recent Executive Order on
digital assets is a positive statement of intention to enter
that arena.
Currently, the United States is able to monitor and
regulate most global payment flows of dollars, but CBDCs and
other new payment systems are already limiting our ability to
track cross-border money flows. In the long term, the absence
of U.S. leadership in standard-setting will have geopolitical
consequences, especially if China maintains its first-mover
advantage in the development of CBDCs.
If China, alone or with other BRIC countries, is able to
combine their non-crypto virtual currencies with a viable CBDC,
then soon there will be a real financial and national security
problem beyond your ability to regulate. If that day comes--and
it could be sooner than most think--the West's ability to
dominate the world's financial sphere of soft power will
lesson. Without action, our ability to lives in a rules-based
financial system will fade with it.
Thank you.
[The prepared statement of Mr. Dueweke can be found on page
32 of the appendix.]
Chairman Himes. Thank you, Mr. Dueweke.
Dr. Norrlof, you are now recognized for 5 minutes.
STATEMENT OF CARLA NORRLOF, NONRESIDENT SENIOR FELLOW, ECONOMIC
STATECRAFT INITIATIVE, GEOECONOMICS CENTER, ATLANTIC COUNCIL
Ms. Norrlof. Thank you, Chairwoman Waters and Ranking
Member McHenry, and also Subcommittee Chairman Himes and
Ranking Member Barr, for inviting me to testify on this
important topic. I am deeply honored.
My testimony is based on an upcoming report written for the
Frankfurt Forum, organized by the Atlantic Council's
GeoEconomics Center and Atlantik-Brucke.
Alternative payment systems pose national security risks
because they could undercut the dominant role of the dollar in
the international currency system. The dollar is by far the
most frequently and widely used currency by both governments
and private actors. It is used across all currency functions,
and it is the only currency that is truly global.
There is no immediate- or even medium-term threat to the
dollar's dominance. Even over the long term, it is likely to
stay dominant in absolute terms. Other payment systems could,
however, threaten the dollar's relative dominance. And we are
already seeing a relative decline in the dollar's status.
For at least 2 decades, the international currency system
has been strictly unipolar, but after 2017, the system became
less unipolar, and in some years, came very close to becoming a
bipolar or multipolar system. Even if relative decline towards
other currency majors persists, an end to the dollar's absolute
dominance is nowhere in sight. But relative decline could
become an issue.
Sanctions are likely motivating some countries to diversify
away from the dollar and to devise alternative payment systems
to avoid use of the dollar and storing assets in countries
where they can be seized.
As a countervailing tendency, however, countries joining
U.S. sanctions efforts, as well as countries supporting
sanction objectives short of imposing sanctions themselves,
continue to have geopolitical incentives to diversify into the
currencies by the sanctioning coalition, including dollars.
Preliminary analysis of diversification out of Western
currencies following the sanctions on Russia in February 2022
suggest very modest diversification out of dollars, some
diversification out of pound and yen as well, and
diversification into Chinese RMB, other currencies, and euros.
If alternative payment systems expand to involve many
countries and private users and cover a wide array of
commercial and financial transactions, the dollar will
inevitably play a less prominent role than it has in the past.
And this is a scenario worth considering.
With the decline in the dollar's importance in the
international economy, the economic and geopolitical benefits
the United States enjoys as a result of issuing the dominant
currency will also decline. An acute weakening of the dollar's
global role will jeopardize the United States' ability to
influence, stabilize, and enforce international order. The
national security ramifications could be quite significant.
Whenever possible, the United States should, therefore,
work with allies to gain support for major sanction
initiatives, as in the case of the recent sanctions against
Russia. To mitigate the growth in alternative payments, the
United States should avoid sanctions considered to be unfair or
overly harsh. The United States should exhaust softer
diplomatic influence attempts before reaching for sanctions,
even when maximum campaigns, such as blocking a central bank's
reserves, are not being considered.
By signaling a commitment to dialogue and cooperative
solutions in the overall use of sanctions, undecided nations
are more likely to remain within the familiar, liquid dollar
system than to sign up to uncertain, less-liquid alternative
payment systems.
Lastly, the United States cannot afford to simultaneously
adopt a hard line towards foes and allies. The sharpest decline
in the polarity of the international currency system coincides
with an uptick in sanctions at a time when President Trump
adopted a tough stance against allies, making them insecure
about U.S. security commitments.
Thank you very much.
[The prepared statement of Dr. Norrlof can be found on page
67 of the appendix.]
Chairman Himes. Thank you, Dr. Norrlof.
Mr. Redbord, you are now recognized for 5 minutes.
STATEMENT OF ARI REDBORD, HEAD OF LEGAL AND GOVERNMENT AFFAIRS,
TRM LABS
Mr. Redbord. Thank you.
Thank you, Chairwoman Waters, Ranking Member McHenry,
Subcommittee Chairman Himes, Subcommittee Ranking Member Barr,
and members of the committee for holding this hearing and
inviting me to participate. I am humbled by the critical role
this institution plays in protecting our democracy.
My name is Ari Redbord. I am head of legal and government
affairs at TRM Labs, the blockchain intelligence company.
What is blockchain intelligence? At TRM, we analyze public
data from 25 blockchains and from over a million different
digital assets. We then combine that publicly-available data
with advanced analytics and proprietary threat intelligence to
provide unique insights on fraud, financial crime, and national
security risks to cryptocurrency businesses, financial
institutions, law enforcement, and regulatory agencies
worldwide.
I hope that through my written and oral testimony today,
the subcommittee can benefit from some of those unique
insights.
I have spent my career working to protect the financial
system from illicit actors, first for over a decade as a
Federal prosecutor at the U.S. Attorney's Office for the
District of Columbia, and then at the Treasury Department as a
Senior Advisor to the Under Secretary for Terrorism and
Financial Intelligence.
During my time at Treasury, every morning I walked past the
Secretary's office, where there was a painting of Alexander
Hamilton. That painting reminded me of what we were there to
protect: a complex financial system filled with both challenges
and opportunities. Today, our financial system faces new and
emerging challenges, but it is also filled with opportunity.
Both adversaries and allies alike are exploring alternative
payment systems that may circumvent the U.S. financial system,
impacting the primacy of the U.S. dollar, the efficacy of U.S.
sanctions, and the ability for the U.S. to monitor financial
crime.
However, as non-democratic regimes attempt to build
alternative payment rails through centralized government brute
force, there is an alternative: We can enable the free market
to innovate faster on solutions that incorporate democratic
principles.
One place this is happening today is with blockchain
technology. We are already seeing blockchain technology lead to
more competitive markets, grow the economy, and advance
national security. For instance, financial services such as
stablecoins enable consumers to seamlessly send money between
companies across the globe. This could spur financial
inclusion, lead to more competitive markets, and give consumers
lower prices and greater choice.
And, according to TRM's analysis, 99 percent of fiat-backed
stablecoin value is tied to the U.S. dollar. Supporting the
growth of dollar-backed stablecoins operated by regulated U.S.
entities by establishing rules that ensure stability, security,
and interoperability can help protect dollar primacy, ensure
the efficacy of sanctions, and spread democratic principles
across the world.
The native properties of public blockchains--data that is
transparent, traceable, public, permanent, private, and
programmable--can enable law enforcement and regulators to more
readily identify risks and more effectively and efficiently
detect and investigate financial crime.
The nature of public blockchains even facilitates the
implementation of effective sanctions. For example, after North
Korea's March 2022 hack of the Ronin Bridge, where
cybercriminals stole over $600 million in cryptocurrency, OFAC
used blockchain intelligence to quickly trace the stolen funds.
OFAC then sanctioned both the blockchain addresses to which
the funds moved, and the mixing services that North Korean
cybercriminals had utilized to launder over a billion dollars
of cryptocurrency. These rapid sanctions designations were
possible only because of the transparent nature of public
blockchains.
According to TRM analysis, total monthly deposits into one
of those mixers, Tornado Cash, decreased by 68 percent in the
month after it was sanctioned.
The strength of U.S. sanctions comes not from the primacy
of the U.S. dollar alone, but also from the fact that the U.S.
is home to innovative companies and people who are transacting
in a global economy. The key to effective U.S. sanctions is to
ensure that businesses that are leading in the new digital
economy remain in the U.S. and serve U.S. customers. Just as
the most significant companies of the internet age were born in
the United States, the U.S. can be home to leaders of this new
economy.
As the White House wrote in the framework for digital
assets published last week, U.S. companies lead the world in
innovation. Digital asset firms are no exception. This should
be a clarion call to a race to create and serve businesses in
this new economy.
Every morning when I walked by that painting of Alexander
Hamilton, I reflected on a quote from Lin-Manuel Miranda's
musical, ``What is a legacy? It is planting seeds in a garden
you never get to see.'' This is our legacy, our opportunity to
plant the seeds to ensure that democratic principles thrive in
a growing financial system.
Thank you, and I look forward to answering your questions
today.
[The prepared statement of Mr. Redbord can be found on page
88 of the appendix.]
Chairman Himes. Thank you, Mr. Redbord.
Mr. Levin, you are now recognized for 5 minutes.
STATEMENT OF JONATHAN LEVIN, CO-FOUNDER AND CHIEF STRATEGY
OFFICER, CHAINALYSIS INC.
Mr. Levin. Thank you.
Chairwoman Waters, Ranking Member McHenry, Chairman Himes,
Ranking Member Barr, and distinguished members of the
committee, thank you for inviting me here today to testify in
front of you.
My name is Jonathan Levin, and I am one of the co-founders
of Chainalysis. Chainalysis is the world leader in
cryptocurrency investigative and compliance solutions.
Before Chainalysis, 15 years ago, I spent a summer in
Shanghai, and at that time the Chinese financial payment system
was broken. I couldn't withdraw cash at the same bank when I
went on a trip to Beijing. In the past 15 years, however, China
has made enormous progress when it comes to financial
innovation and mobile payments.
They are now looking to export their domestic systems
internationally through their domestic companies and through
their foreign investments in other financial technology firms,
and further innovation with a CBDC, as previously mentioned in
this witness testimony.
We must have a response.
I have spent the last decade building Chainalysis and
sitting on many task forces to actually improve our domestic
payment system. All of this has been targeted at our domestic
payment system and not at international competition.
Cryptocurrencies actually mark the first innovation that is
consistent with U.S. values and poses a real competitive threat
to China's financial innovation strategy and their bid to own
the financial rails for the 21st Century.
China cannot have a financial payment system that
prioritizes strong guarantees over property rights and
financial privacy. We must therefore mitigate the national
security risks that arise from cryptocurrencies to unlock their
strategic potential.
Chainalysis' tools are used by government agencies around
the world to investigate the illicit use of cryptocurrencies.
And I want to highlight that the transparency of
cryptocurrencies enhances the government's ability to detect,
attribute, and ultimately disrupt the illicit use of
cryptocurrencies. In many instances, it is actually, in fact,
easier to investigate cases involving the illicit use of
cryptocurrencies than other traditional means of payment or
some of the alternative payment systems that we are talking
about.
Furthermore, the percentage of illicit activity in
cryptocurrencies is well below the 3- to 5-percent estimates,
globally, of money laundering in our financial system.
That being said, because of the transparent nature of
cryptocurrencies, there are many stories about illicit activity
and funds being identified and actually being recovered.
Recently, in the Ronin Bridge hack that Ari just mentioned,
we were proud that our tools could assist the Department of
Justice (DOJ) in actually recovering $30 million worth of
cryptocurrency stolen by North Korean-linked hackers, which I
know is something of great importance and meaning to this
committee.
There are many more success stories of how the government
has been able to leverage this technology to disrupt illicit
activity, starting back at cases that I testified about in
front of this committee a few years ago, including the Mt. Gox
hack.
In my written testimony, I discuss global trends in
cryptocurrency, and provide the background on Chainalysis and
how blockchain analysis can be leveraged in investigations. We
also delve into the national security threats that are key to
this committee and understanding the risks posed by these
systems, including its abuse by actors in Iran, North Korea,
Russia, and China, and provide recommendations for improving
our response to this threat.
In the 20th Century, the United States built the most
mature financial system in the world. The guard rails were
established to foster innovation and capital formation where
individuals and corporations have clear knowledge of property
rights, counterparty risks, and the costs of transacting. The
U.S. regulation around commerce on the internet gave rise to
the largest corporations in the world.
Cryptocurrencies and stablecoins are already providing
these services to consumers and businesses. In fact, we
released our global adoption index this week at Chainalysis,
highlighting that Vietnam, the Philippines, and Ukraine are
among the top adopting countries in the world.
We can ensure that our payment rails are used around the
world and that it is built by U.S. companies to serve U.S.
principles.
I look forward to answering your questions.
[The prepared statement of Mr. Levin can be found on page
50 of the appendix.
Chairman Himes. Thank you, Mr. Levin.
I now recognize myself for 5 minutes for questions. I will
begin with one question that has a strategic philosophical part
and then a request for, kind of, policy recommendations.
My question is this. There is an understandable instinct
here to really go hard after the Chinese for their behavior in
Hong Kong and Taiwan and Xinjiang and their stealing of our
intellectual property, all--the long bill of indictment. And it
is an understandable instinct, but it concerns me, because,
unlike the situation with Russia, where we do negligible trade
and have negligible economic ties, the situation with China
could not be more different. They hold $1 trillion of U.S.
sovereign debt. They do $2.5 trillion of global trade annually,
$600 billion or so of that with the United States.
If we took the approach with China that we have taken with
Russia, the devastation to our economy and the global economy
would be remarkable. Therefore, I am concerned about proposals
to isolate them, to shut them down from the capital markets--
some of the proposals around here.
My philosophical question is, strategically, how should we
think about countering China in a way that doesn't bring
economic apocalypse to us and to the globe?
And then my much more specific policy question is, whatever
your answer might be, what specific thing should we be doing
with respect to platforms like Alipay and CIPS? Shut them down?
Demand accountability?
Again, I will let whomever wants to take the jump-ball, but
help me with both that strategic and those specific questions.
Mr. Levin. I'm happy to take the jump-ball, although the
analogy is a little bit lost on me, but I think I get it.
I think it is a great question. Let me answer the first
part first.
I think that when it comes to global competition, there is
a big difference between Russia and China. We need to think a
lot about what I call asymmetric defense.
The symmetric defense that we have against Russia is the
exclusion of them from the financial system. When it comes to
China, we have to play a more long-term game. And what I mean
by that is that we have a technology race on things like chips,
AI, et cetera, where we need to build things that are the most
advanced in the world, but that can be easily co-opted and suit
the regime in China.
What I think is interesting when it comes to payments is
that, actually, our values on financial systems are completely
different to that which exists in China. And, therefore, if we
can actually foster a place where there are strong property
rights, where people's financial privacy is actually
guaranteed, with regulation and oversight, we can actually have
a financial system for the world that mirrors American values
rather than the Chinese.
I think that it is one of these domains where we can
actually try and foster a world of financial innovation which
actually is diametrically opposed to the values of the Chinese
Communist Party.
Chairman Himes. Mr. Levin, what I am getting from you is
that the strategic answer is to build a better mousetrap. Don't
worry quite so much about shutting down their product, just
build a much better product.
Mr. Dueweke, I saw you raising your hand.
Mr. Dueweke. I totally agree with everything Mr. Levin just
said.
In addition, emphasizing that the technology, the
capabilities to build out on especially blockchain-based
solutions--the eCNY is a distributed ledger system. It is not
truly the type of blockchain system that we think of, because
the Chinese don't want the auditability, the transparency, the
ability to provide things like property rights that are not
challengeable. What the Chinese want is the ability to collect
information on people and to consolidate that information for
their own purposes.
So, by basically unchaining the ability of our industry to
go ahead and compete, along with much better cybersecurity so
that we are not giving up these secrets that we are working on,
that is very important.
Second, from all of the other alternative payment systems,
we just need to make sure that the Chinese aren't able to
expand into areas where they can benefit from having
geolocation baked into their systems for all of the users.
Certainly, that is something they have tried to do in Europe.
We have successfully kept them out of the United States.
And where there are problems with money laundering, threat
finance, et cetera, respond to them and to those systems
specifically the way--
Chairman Himes. Let me stop you, Mr. Dueweke.
I have two witnesses now saying, really, the path here is
to build out a system consistent with our values, that will be
attractive. Is there a dissenting voice or anything added? I
only have about 10 seconds, so--
Mr. Redbord. This is certainly not a dissent, but I would
say, look, there is important work to be done on the pressure
side as well. The Permanent Subcommittee on Investigations has
some great--particularly in the intellectual-property-theft
space.
That said, really, sort of, the key to winning here is
certainly what we are hearing from Mr. Levin, and Mr. Dueweke,
and that is building a better mousetrap.
We are seeing this in the blockchain space today, where
China has essentially built blockchain infrastructure that
doesn't have the democratic values baked in, that is intended
for surveillance and state espionage.
Chairman Himes. Thank you. I'm sorry. We will hopefully
have a chance to continue this conversation, but I need to be a
little bit disciplined on time, so that is it for me.
And I now recognize the ranking member for 5 minutes for
questions.
Mr. Barr. Mr. Chairman, thank you for convening such an
important and interesting and timely hearing.
Let me start with kind of a threshold question. There are
two narratives about the advent of digital assets and
cryptocurrencies in law enforcement and sanctions evasion.
One is that the pseudonymity of digital assets and
cryptocurrencies enable/facilitate criminal activity, enable
money laundering, and help ransomware, and it assists sanctions
evasion and cyber attacks and the like.
There is another narrative, Mr. Redbord and Mr. Levin,
which is that your firms are able to use blockchain technology
to assist law enforcement to crack down on these types of
illicit activities.
Which narrative is right? Is it a little bit of a
combination? Speak to that for us.
Mr. Redbord. Thank you for the question.
I think you nailed it. The same qualities that make
blockchain such a force for good--permissionless,
decentralized, cross-border value transfer at the speed of the
internet--also make it attractive to illicit actors who want to
move funds quickly cross-border.
But the reality is, we have more visibility on financial
flows than we have ever had before. When I was a prosecutor, I
worked these cases. And now with TRM, we assist law enforcement
in investigating fraud and financial crime. And they can trace
the flow of funds in ways that you never could with bulk cash
smuggling and networks of hawalas and shell companies. And I
think the reality is, we are seeing that play out.
For example, there was a recent arrest in a case involving
a 2016 hack of the cryptocurrency exchange Bitfinex. But
because of the nature of blockchains--this immutable, public
ledger that is forever--law enforcement was able to go back and
use tools to trace and track the flow of funds in ways you
never would be able to in the traditional financial system.
There are certainly ways to sort of move funds in crypto,
but there is also more visibility on those financial flows than
ever before.
Mr. Barr. Mr. Levin?
Mr. Levin. Yes. Thank you, sir, for the question.
I think the one thing I would say is that, to make the
second narrative work, we have to change our mindset. We have
never had a financial system that is as open as
cryptocurrencies and presents the types of opportunities to
monitor for illicit activity. And it has to start with a change
in mindset for our Executive Branch of how they can actually
proactively go after the types of threats that exist.
And what we have demonstrated over the last 8 years is that
it is definitely possible, with this technology, to go after
criminals and to find them and to take sanctions actions and
seizures and really hold people to account.
But actually, as this system proliferates, we need to get
proactive with our type of monitoring of the types of threats
that exist. And we need to charge our Executive Branch with,
how do you do that proactively in an age where this information
is out there online, and how do you take a technology-first
approach to dealing with these problems in a way that
modernizes the type of approach to financial intelligence that
we have seen in the past?
Mr. Barr. Let me shift gears to central bank digital
currency for a minute. What is the better approach to
preserving and protecting and maintaining the dollar's
dominance? Is it a Fed-issued digital currency, a central bank
digital currency in the United States to compete with the
digital RMB? Or is it a regulatory framework for fiat-backed
stablecoins to preserve the utilization of the dollar as the
world's currency, harnessing private-sector innovation to
advance a U.S.-centric version of frictionless, cross-border,
secure use of digital currency backed by the dollar?
Which is the better approach, and why?
Mr. Redbord. I will take a quick crack at it.
I think what is interesting about the question, and
certainly, what we hear from the Executive Branch is that there
is continued work in the CBDC space. Even as late as last week,
we heard from the White House in a very detailed technological
discussion that they are still working on a CBDC. And the jury
is really still out on whether that will happen at all.
But the reality is that stablecoins are proliferating today
globally. And as I said in my statement, 99 percent of those
that are backed by fiat currencies are backed by the U.S.
dollar, which gives us an incredible opportunity to export our
values and our principles abroad through private technology of
that kind.
And I think this is a really extraordinary moment, when we
see that level of commerce happening in U.S. dollars in the
digital space, that this is really a moment to really provide
legislative legal clarity to that space today as we still work
on figuring out whether or not a CBDC makes sense.
Mr. Barr. My time has expired, but I think it speaks to
competing with China, not by becoming more like China, but by
doing this the American way.
Mr. Redbord. Well said.
Chairman Himes. The gentleman's time has expired.
The Chair of the Full Committee, Chairwoman Waters, is now
recognized for 5 minutes.
Chairwoman Waters. Thank you so very much.
I am so pleased with this hearing and the witnesses that
are here testifying today, because we have gained substantial
information already, and the questions that are being raised by
our members here will help us in so many ways as we move
forward.
As you know, we are focused on stablecoins right now, and
we are developing legislation because of the volatility,
because of the fact that we discovered that the representation
for assets that were being held by some of these companies was
really not real. It was a lot less than what they said.
And so I really want to know, for Mr. Redbord, with what
Mr. Dueweke has described, can you please address the need for
the U.S. to develop a legal and regulatory framework to deal
with stablecoins, the market for which is already over $152
billion?
Can we afford to do nothing or delay further Federal
action, especially on ensuring that anti-money laundering and
sanctions protections are included in this alternative payment
method's growth?
Mr. Redbord. Chairwoman Waters, thank you for the question.
On the one hand, it is critical to ensure that regulation
in an emerging space like this is done right. You want to
ensure the open process that you have been engaging in and the
opportunities for stakeholders to engage.
But, on the other hand, the time is now. In the wake of the
collapse of Terra, an algorithmic stablecoin, we have seen
policymakers and regulators globally move to provide frameworks
for stablecoins. We have seen safety nets through regulation.
And it is really a moment to assert U.S. leadership by
establishing rules that ensure the stability, security, and
interoperability of regulated stablecoins.
In any discussion, it is critical to point out that Terra
was very, very different from what we are talking about today,
these U.S.-backed stablecoins that will allow us to transact
globally in U.S. dollars or U.S.-backed stablecoins.
But as we continue to study the CBDC, the time really is
now to act to provide clear regulatory guidance or clear
legislative guidance to stablecoin issuers, particularly in
this U.S.-backed space, to really give us the opportunity to
lead here. The time is really now in this space.
Chairwoman Waters. Thank you very much.
And since you talked about blockchain quite a bit in
responding, I think, to one of our members, what significant
role can blockchain play in the identification of alternative
payment systems that may not be in the best interests of the
U.S. or internationally?
Mr. Redbord. Absolutely. I think, as we discussed a little
bit earlier, blockchains allow for unprecedented visibility on
financial flows. And it allows us to identify not just illicit
finance and bad actors but also instances that affect market
integrity.
And what blockchains really allow, with that permanent,
immutable, public ledger, is it allows us to track trends in
ways we never could before. Even in preparing for this hearing,
we have a blockchain intelligence team at TRM, and they
continuously provided updates to me on key insights on data.
And this would be impossible without the extraordinary power of
open blockchains. We have more insights on financial flows, not
just financial crime, than we ever had before.
And we just need to ensure, as we are building blockchain
frameworks, just like they are building blockchain frameworks
in China, that we are baking U.S. principles and democratic
principles into that process.
Chairwoman Waters. I want to thank you all for your
testimony today.
This is so important. As I have described, our first major
legislation is dealing with stablecoins. And we know a lot
about what has happened with stablecoins up to this point. But
we are moving, as you know, to consider where we are going to
stand with a CBDC. And so, everything that we could understand
and learn about how to deal with alternative payments, I think
is going to be very important.
And while I share our Subcommittee Chair's concerns about
China, you must know that many of us are looking very closely
at China for everything and trying to make sure that their
cooperation with Russia or North Korea is not such that they
are gaining ground on us in any aspect of our economy and our
democracy.
Thank you so very much for being here today.
Chairman Himes. The gentlelady's time has expired.
The gentleman from Texas, Mr. Sessions, is recognized for 5
minutes.
Mr. Sessions. Mr. Chairman, thank you very much. And my
thanks to you and the Chair of the Full Committee, Chairwoman
Waters, for providing an insightful and timely opportunity to
hear from our witnesses.
And let me congratulate each of you. I think you have given
us not only good insight but fair warning of what lies ahead.
I want to go back to--because I think my thinking is a lot
like our ranking member, the gentleman from Kentucky, Mr. Barr.
And I have changed four or five times in my thinking since then
as each of you have spoken.
I only have a few minutes, but let me say this. I have a
question, and that question revolves around, if the United
States, as we migrate to this stablecoin and we finish the
legislation that the gentlewoman has and we move forward--two
questions: Number one, can we see, other than knowing what
China is after--that they are after more personal information
on people, which, here in the United States, we don't want to
do that, personal information and data that could be used to
control anybody; and, second, about the excessive amount of
money that was stolen by gangs as we provided our COVID relief
and other things, that goes into the billions of dollars.
How stable and secure are these processes? And do you have
any feedback on that?
I guess I would ask, Mr. Levin, if you have an idea, Mr.
Redbord, or Mr. Dueweke, because, in particular, I think I
focused on specific areas that you have addressed. So if you
would take the remaining 3 minutes and 10 secs, perhaps a
minute each--
Mr. Dueweke. Certainly.
Mr. Sessions. --and provide me some context.
Mr. Dueweke. And it is a great question because it gets
to--especially for the COVID relief, it gets to the very porous
natures of a lot of these processes, where you don't have good
control.
And the underlying technology of cryptocurrency, including
Bitcoin, is, of course, the blockchain. And people often
conflate blockchain with strictly financial applications, but,
in fact, I have done a lot of work with the healthcare
industry, where the blockchain was being used, at least in
pilot form, to share identity and to avoid the leaking of
personally identifiable information.
It certainly would lend itself well to a process where you
are trying to get money out there but you need to understand
who it is going to. Now, it is not something you are going to
be able to set up immediately in a crisis, but if you have such
a system prepared, certainly blockchain would help do that.
Second, as far as stablecoins in general, I think what
people are sometimes missing when they focus on it--I agree
that it is a way to focus innovation, focus the American way,
to building new systems like that. But don't forget that it is
part of an ecosystem, and don't forget that it is fungible. And
without having controls on that from stem to stern, you are
going to lose control quite often.
And even with the stablecoins that are out there today, you
oftentimes will see it be converted out of that stablecoin and
into something else that isn't trackable--it might be a privacy
coin; it might be one of these centralized virtual currencies
based in Russia--and then come back in, and you are not going
to be able to track that.
Better Know Your Customer (KYC) requirements, I think, are
part of this too. We do this first layer of KYC pretty well for
who is going to be your customer. Who they are dealing with
does not go as well. And, in fact, there are person-to-person
exchanges even in the United States where there are publicly-
posted requests to buy or sell cryptocurrency and they say that
they don't need to have identity of that person.
So, even meeting the requirements of the current
regulations and laws as they exist, if they are still allowed
to facilitate that type of kind of semi-anonymous transfers at
a premium, it is kind of like having the 21-year-old kid next
door stand outside of a Kwik-E-Mart and be able to buy legally,
and then there will be a line of kids there getting it from
him.
It is just not making sense. We have to do better at KYC.
Mr. Sessions. Thank you very much.
Mr. Chairman, one last word. I would like to bring down my
information to you and have you engage me. I know we have run
out of time.
Mr. Chairman, thank you very much. Most interesting, well
worth my time.
And the gentlewoman from California, thank you very much.
I yield back.
Chairman Himes. The gentleman's time has expired.
The gentleman from Guam, Mr. San Nicolas, who is coming to
us remotely, is recognized for 5 minutes.
Mr. San Nicolas. Thank you so much, Mr. Chairman. And I
would like to echo the sentiments of my bipartisan colleagues.
I think this is the second subcommittee hearing we are having
that I think has a lot of bipartisan interest.
And Chairwoman Waters, thank you so much for your
leadership in helping us to come together on very key issues
that are affecting the globe.
I wanted to first just make sure we have it clear on the
record, if we can just get a quick, ``yes'' or ``no'' across-
the-board from the witnesses, but what I am hearing is that
every single person on this panel agrees that the United States
needs to, in some form or another, whether it is a CBDC or a
stablecoin, we need some form of digital currency.
Is that a, ``yes,'' across the panel?
Chairman Himes. I think he is asking for a, ``yes'' or
``no,'' from all of the witnesses, so we will start with Ms.
Jin and just move to the right.
Ms. Jin. Yes.
Mr. Dueweke. Yes.
Ms. Norrlof. Yes, for CBDC.
Mr. Redbord. Yes.
Mr. Levin. Yes.
Mr. San Nicolas. Thank you.
And, actually, Dr. Norrlof, I would like to direct my next
question to you, because--and this is kind of tied into, I
think, where Mr. Barr was going earlier, about the difference
between CBDCs and stablecoins.
We have the Federal Reserve, and they are responsible for
monetary supply and a various host of other responsibilities in
the financial system. We also have the U.S. Treasury, and one
of their primary responsibilities is the production of coin and
currency.
As we navigate going forward what we see as a unanimous
need for us to adopt some form of digital currency, where
should the leadership really come from? Should the leadership
come from the Federal Reserve, or should it come from U.S.
Treasury that has a responsibility to produce coin and
currency?
Dr. Norrlof?
Ms. Norrlof. I think that the leadership should come from
the Federal Reserve.
I also want to say that, for the CBDC, I think that
progress in this area is especially important because that is
really where China can make a difference to undercut the
dominance of the dollar. If the Chinese CBDC goes forward, we
will see a very strong push towards a convertible renminbi,
which will put the Chinese currency--really make it much more
attractive for international investors.
I would also like to highlight that, for the CBDC, it is
not just a China issue; it is a general issue. According to the
Atlantic Council's research, there are about 104 countries that
are currently exploring CBDCs. And I think that there are real
opportunities for the Federal Reserve to assume leadership in
this critical area.
Mr. San Nicolas. Thank you.
Mr. Chairman, I just wanted to, I guess, pose the question
across-the-board, because I am still trying to come to grips
with the idea that what has historically been a Treasury
responsibility on the production of coin and currency will now
potentially become also a Federal Reserve power, if they are
authorized to do so on the digital currency sphere.
And so, I would like to also pose it to the remaining
panelists: Is there a consensus that there is a belief that the
Federal Reserve should be the one taking the lead on the
digitization of U.S. currency, or should it be the Treasury?
I guess we can go from right to left.
Chairman Himes. Mr. Levin, that would be you. I guess we
are going the other way this time.
Mr. Levin. Oh, okay. Thank you, sir.
I think that the question of oversight here is primarily
about technology.
And I would say that one clarification that I would like to
sort of put forward is that, actually, we already have a lot of
digital dollars in existence. In fact, a lot of our payment
system is digital. We are not, sort of, sitting here with
dollar bills.
The Federal Reserve is primarily responsible for the
technology that supports how we clear and settle those dollars.
And so, it does make sense that as a pure technology play, we
think about what the future of that technology stack looks
like, and that would come under the Federal Reserve.
And there is some significant work in making sure that all
of the institutions that are actually transacting in dollars
and have access to that system, actually can have buy-in and
weigh-in on the cybersecurity concerns and the AML concerns.
Mr. Redbord. I agree with Mr. Levin in that it really
depends on the technology itself.
If we are talking purely about a CBDC, a central-bank-
issued digital dollar, then certainly, obviously, the Federal
Reserve is--that is the function that the Federal Reserve has
always taken when it comes to our currency.
But when we are talking about U.S.-backed stablecoins
globally for payments, that could very well be something that
is regulated or the oversight comes from the Treasury
Department, just like other sorts of technology, whether we are
talking about securities or commodities, could be handled by
other regulators.
I think, today, it really depends on the technology.
But, to the first question, the U.S. doubling down on the
need for a digital asset that holds our values and exports
those values, whether it is a stablecoin or a CBDC, I think is
certainly important.
Chairman Himes. The gentleman's time has expired.
Mr. San Nicolas. Thank you.
Chairman Himes. The gentleman from Texas, Mr. Williams, is
now recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. And thank
you for calling this hearing today.
Being from Texas, when I hear about payment systems funding
illegal activities, my mind--you know where it goes. It goes to
the southern border. This year alone, we have seen the
numbers--expecting to see over 2 million people illegally come
into this country. It is pretty unbelievable. And this massive
influx of people has created a booming industry for drug
cartels and human-trafficking organizations.
And it is amazing how much these criminal enterprises have
grown over the last few years. Just in 2018, there was an
estimated $500 million in illicit revenues along the border.
This year, that number has grown to $13 billion.
And I have been to the border. I have been going to the
border for many, many years and have witnessed firsthand how
chaotic the situation is for the brave men and women on the
Border Patrol. We need to pray for them every single day.
The Biden Administration needs to stop turning a blind eye
to the disaster--President Biden and Vice President Harris have
not even been down there--and get serious about ending this
national problem that we have.
When I talk with Border Patrol agents, they say
traditionally cash is king for these criminal organizations.
However, with the advent of cryptocurrencies, there is some
concern that the ease of cross-border payments has helped fuel
this rise in revenue.
Mr. Levin, can you describe the scale that cash is used for
illegal activities compared to cryptocurrencies? And,
additionally, can you give us a recommendation on how we can
better implement technology to track the illicit money flows?
Mr. Levin. Thank you, sir, for the question. And it is a
very important issue.
The feature of cryptocurrencies is that it does work
seamlessly across borders anywhere in the world
instantaneously, the same way as the internet. And people think
that represents real problems when it comes to the issues that
you are talking about.
However, I would say that, in networks, in my experience,
where it comes down to drug trafficking, human trafficking, and
criminal activity, there are very established means of moving
money, and those networks tend to rely heavily on existing
financial networks of money laundering, which are very cash-
dependent still today.
When it comes to being able to track this more proactively,
it is actually possible to look at the flow of funds that go
between borders when it comes to cryptocurrencies.
That is what Chainalysis does and it provides that type of
intelligence to the agencies that are responsible for tracking
down the illicit use of cryptocurrencies--drug trafficking and
human trafficking--that can be tied back to specific instances.
And, indeed, I have been sort of familiar with several
investigations where cryptocurrencies have actually led to the
discovery of these types of networks and the arrests of the
people who are perpetrating these crimes.
Mr. Williams of Texas. Thank you for that.
We have seen a news report for several months that the
Biden Administration is trying to revive some form of the Iran
nuclear deal. And, unfortunately, the President has been
keeping Congress in the dark about how these negotiations are
progressing, which is extremely bothering to me and a lot of
others, considering this country is still a state sponsor of
terrorism.
Just this week, the OFAC took actions against 10 Iranian
individuals and multiple businesses for their role in various
ransomware attacks.
Again, Mr. Levin, can you describe the methods that Iran is
using to commit these cybercrimes?
Mr. Levin. Thank you, sir. And it is a very important and
timely issue.
According to OFAC, the Islamic Revolutionary Guard Corps
(IRGC)-affiliated group is perpetrating cybercrime attacks
using known vulnerabilities and gaining unauthorized computer
access to devices to extort victims in order to unlock those
computers.
What is then possible, due to the transparent nature of
cryptocurrency, is that OFAC can, with their partners in other
law enforcement agencies, actually track and trace those funds
and manage to actually list some of the addresses that were
being used to extort their victims, which definitely puts a
dent in the financial motivations, if there were some, to
perpetrate those attacks.
And what I have seen historically is that we are actually
able to track down some of the networks that enable the
ransomware and cybercrime actors within Iran that are causing a
disruption to our healthcare system, our education system, and
targeting U.S. businesses, and, with the right tools, those
agencies can go after them and prevent from financially
benefiting.
Chairman Himes. The gentleman yields back.
The gentleman from Massachusetts, Mr. Auchincloss, who is
also the Vice Chair of the Full Committee, is recognized for 5
minutes.
Mr. Auchincloss. Thank you, Mr. Chairman.
Ms. Jin, my question is for you, to begin with, on China's
digital currency.
In January, you published research entitled, ``China's
Digital Currency: Adding Financial Data to Digital
Authoritarianism.'' The article states that, ``The Chinese
government hopes to leverage Digital Currency/Electronic
Payment, or DCEP, for the Chinese Communist Party's (CCP's)
domestic political agenda.'' This furthers the belief that the
CCP's digital currency will have to be taken up at the expense
of privacy and individual freedoms.
I want to add my voice to what we have heard from the
Republican side of the aisle, that, to contest China's uptake
of a CBDC, we do not need to respond with our own CBDC but,
rather, with a regulated, competitive marketplace of
stablecoins and to let American entrepreneurialism and
competition surface the best.
I welcome your input on that, both how the United States
might create that ecosystem and also how it might help us
compete with the Chinese digital yuan.
Ms. Jin. Thank you so much for your question. To answer it,
I might offer a heuristic that I use when I think about the
Chinese system and the American system, which is this concept
of legibility.
``Legibility'' is kind of an old political science term
that talks about using simplistic metrics to understand the
populace or the citizenry that you are serving. So, it is
coming from the perspective of a state.
And we can clearly see in the way that China runs its eCNY
or DCEP--it has many names--that the idea is to have an
enhanced sense of state-run digital legibility. The idea is to
collect as much data as it can on the citizenry. And the data
might over time have predictive property as well, depending on
the advanced nature of the PBOC's Big Data analytic skill set.
But this has proven to be a very useful way for me,
personally, to think about how the United States' and China's
systems are different.
On the other side of digital legibility is this respect for
digital financial privacy, which is, I would say, the crux of
how the U.S. innovation system works, how the U.S. financial
technology innovation systems and economic actors work
together.
I personally envision, and just according to my research,
that the United States' innovation system will be a lot more
productive if the regulations, first of all, are clear, but,
second, the government is not cracking down or limiting certain
innovative actors in essentially doing their jobs or conducting
their businesses.
Mr. Auchincloss. To jump in there--
Ms. Jin. Yes.
Mr. Auchincloss. And we are making progress on bipartisan
stablecoin legislation, which is encouraging.
Do you think it is necessary, just to really burrow down
into this point, for there to be a U.S. CBDC for us to
outcompete what the Chinese Communist Party is trying to do by
creating an alternative financial payment system and digital
currency?
Ms. Jin. I don't think it is a necessary condition.
However, I do think there is a lot of effort inside the U.S.
Government from many different branches considering the
possibility for--
Mr. Auchincloss. So R&D, fine, could help us set the table
and enforce international norms, but not actually the
production?
Ms. Jin. Not actually the production. But one--
Mr. Auchincloss. Does anybody on this panel want to
disagree with that?
Ms. Norrlof. I have a point to this.
I think that a lot of the focus here is on digital
currencies, and I think that it is important, but I also think
that the United States today is not really competing with
China. China is trying to catch up, and they are using various
methods in order to catch up.
So, the United States does not have to have a central bank
digital currency at this point. It could become more
interesting at some future point in time. For the Chinese,
however, it is quite crucial to have a central bank digital
currency in order to get anywhere close to where the United
States is today.
Mr. Auchincloss. Yes, because, Dr. Norrlof, you have
written about this, I know, in The Washington Post, about
dollar dominance and the Chinese trying to catch up. And you
are saying now that we don't need a CBDC to persist dollar
dominance?
Ms. Norrlof. If we are looking at the role of the dollar in
the international system, China is nowhere near the United
States.
Mr. Auchincloss. Yes.
Ms. Norrlof. China is trying to find inroads and various
avenues in order to compete with the United States, but it is
coming from a very, very low floor.
Mr. Auchincloss. And could a well-regulated stablecoin
marketplace in the United States help us box the CCP out from
trying to contest us?
Ms. Norrlof. I am not sure that it is necessary. I think
that it would be, actually, more productive to think about
alternative payment systems more broadly. What are other
countries doing in order to bypass the dollar? Are they trying
to use other currencies, notably the Chinese currency but also,
I don't know, like, the Indian rupee--
Mr. Auchincloss. I need to unfortunately interject--
Ms. Norrlof. Okay.
Mr. Auchincloss. --because I am out of time.
And I will yield back to the Chair.
Chairman Himes. The gentleman's time has expired.
The gentleman from Arkansas, Mr. Hill, is now recognized
for 5 minutes.
Mr. Hill. Thank you, Chairman Himes.
Thank you to the panel for sharing your views with the
committee today.
And thank you, Chairwoman Waters, for convening this
hearing.
And let me say that, first, Chairman Himes and I have a
bill, the 21st Century Dollar Act, which essentially asks the
Treasury to do a study that outlines exactly this debate, which
is: What are the conditions present that we have to do in this
country to make sure the dollar remains the reserve currency of
the world and is an effective medium of exchange across the
world? And that is important, because right now it is a major
advantage to have things denominated in dollars, and we want to
maintain that. And part of that would be looking at what role
tokenization of the dollar might play.
But, Dr. Norrlof, is the Chinese RMB extremely
exchangeable?
Ms. Norrlof. No. It--
Mr. Hill. No, I am not asking you--just, is it, yes--
Ms. Norrlof. No.
Mr. Hill. No.
Do they have the rule of law in China, where you would want
to be in a Chinese court adjudicating a claim? Would that be--
Ms. Norrlof. No.
Mr. Hill. --your perfect place?
Ms. Norrlof. No.
Mr. Hill. No.
And so, no rule of law, no freely exchangeable. The Chinese
RMB is not a competing currency, unless we make it one by
increasing its basket in the SDR basket at the IMF or doing
anything that diminishes the power of the United States to have
that valuable dollar.
And I would say that running huge budget deficits and
racking up debt and spending money like drunken sailors puts
the dollar far more at risk than this debate about digital
currency.
But I urge our bill to be marked up and passed into law so
that we can have a definitive all-of-government review of how
we maintain a 21st-Century, competitive U.S. dollar.
Let me turn to the actual subject of the hearing, if I
could, and talk about sanctions-related issues and alternative
payment systems. And, again, let me commend the Majority for
the hearing.
Since 2014, Russia has attempted to diversify away from the
dollar. We have seen that. They have bought the euro, they have
bought the yen, they have bought the RMB in their central bank.
They have fewer dollars.
When we cut them off in 2014, they decided they would start
their own domestic credit card company, be less dependent on
Visa/Mastercard. How has Visa and Mastercard's suspension of
services in Russia affected domestic issuance and acceptance of
Mir cards?
Who wants to answer that?
Yes, sir?
Mr. Dueweke. I don't have the exact numbers, but Mir is
still a shadow of what Visa and Mastercard had in the country.
And what is interesting, post-2014, post-Crimea, is the way
they diversified. In fact, in 2014, I was at The Hague on
behalf of the DEA, talking on this topic actually, and the FSB
was there. They still had two parts: anti-child-sex-rings, et
cetera--they were still working with us on that--and anti-drug.
And they talked about how, at that time, the Russian WebMoney
system, which is now in over 80 countries, was the, ``primary
drug money movement mechanism globally for Russian organized
crime.'' Within a year, it had become their PayPal.
Mr. Hill. Yes.
Mr. Dueweke. And now, we have Yandex Money and various
others, like QIWI, that are found around the world. These
alternative payment systems have also then become banks. There
is QIWI Bank--
Mr. Hill. Let we interrupt you there. Has China complied
with the secondary sanctions, in your view, to prevent UnionPay
from being a global interchange for those Mir cards, to replace
the interchange that they were getting internationally from
Visa, Mastercard, and American Express?
Mr. Dueweke. Judging by the Russians who are going into
Finland to use their UnionPay cards at ATMs, it doesn't
necessarily appear so.
Mr. Hill. So, that is an area that we should talk to
Treasury about vis-a-vis secondary sanctions and from a
compliance point of view?
Mr. Dueweke. Correct.
And I still think it speaks to what the last two speakers
have described, which is that China, Russia, the BRIC
countries, need that, one of them, to have a big system, much
more than we need to have a CBDC. Right? They need a way to do
trade amongst themselves.
They have these messaging systems that they can use, the
big alternative payment systems. My goodness, Alipay and WePay
are just huge--much bigger than all of the crypto times four.
Mr. Hill. Right.
Mr. Dueweke. Right? Those systems exist in secure
messaging. Using all of those, if you went then and converted
it or combined a CBDC, the eCNY, with the mobile payment
systems and all of the platforms on phones that people have,
you would have a very robust system--
Mr. Hill. Thank you.
Mr. Dueweke. --pretty quickly.
Mr. Hill. Thank you. I appreciate it. If you have more,
please respond in writing.
And I think this really speaks, Mr. Chairman, to why
secondary sanctions and the use of FinCEN is important, because
it links all of this together in enforcing our sanctions.
I yield back.
Chairman Himes. The gentleman's time has expired.
The gentleman from Ohio, Mr. Davidson, is recognized for 5
minutes.
Mr. Davidson. Thank you, Mr. Chairman.
And I thank the witnesses for your work in this space.
Chairwoman Waters, thank you for hosting this hearing and
paying a lot of attention to this space. I think the future of
money is perhaps the most important policy debate going on in
Western civilization.
Dr. Norrlof, as you highlight, there are over 100 countries
around the world studying central bank digital currencies. My
concern is that, of the countries studying it, I am not aware
of a single country that is studying a true distributed ledger
system that facilitates permissionless, peer-to-peer
transactions.
It seems like everyone is tripping over themselves to find
a way to develop a tool that is the same creepy surveillance-
state system that China is developing, a centrally-managed,
centrally-controlled, central bank digital currency that
creates a monopoly on money, essentially to turn it into a tool
for coercion and control more than what money is supposed to
be, which is a store of value and an efficient means of
exchange.
This is a corruption of the whole concept of money. And
that is why I think that the future of money is so important to
Western civilization. If we see money turned into this, the
principles and values that have built Western civilization are
truly threatened. It might not be this government, but some
government will eventually use that power the wrong way. And
for people who doubt that, just imagine whomever your political
rival is having control of the system of money.
I have been a little concerned as I watch the debate as to
the role for Treasury versus the Federal Reserve. It was a good
question by Mr. San Nicolas. And I would just point out that,
looking at our money, the Secretary of the Treasury's signature
is on it, not the Chairman of the Federal Reserve. Looking at
our money, it says, ``This note is legal tender for all debts,
public and private.'' And cash is actually the only current,
truly permissionless, peer-to-peer transaction system. There
are a lot of digital systems that are working to rival that.
And I would just ask quickly, so we can continue the
conversation, maybe starting from right to left, Mr. Levin, do
permissionless, peer-to-peer transactions pose a threat to the
financial system?
Mr. Levin. Thank you, sir, for the important question.
I think that the permissionless, peer-to-peer transfer is
part of the way that the economy works. And we have to find
ways where our payment system actually reflects the type of
innovation and industrial revolution that we have.
Mr. Davidson. Yes. That is a recognition of fact. Does it
pose a risk?
Mr. Redbord?
Mr. Redbord. I think that it is a major part of the
financial system moving forward--permissionless blockchains,
peer-to-peer transactions. And we can now enable that with
technology.
And I do think, at the end of the day, the choice of what
the reserve currency is, is not going to be governments; it is
going to be entrepreneurs and people who are transacting in
that world. And they are always going to choose the freedom to
transact without surveillance and potential state espionage. I
believe that, ultimately, entrepreneurs will make the choice
for a more permissionless system, and the technology will allow
for that.
Mr. Davidson. Yes. Thanks for recognizing that. I think it
is an important observation.
And I think governments are trying to cling to the power,
fundamentally, which decreases trust. And I think Mr. Hill
highlighted why no one is going to adopt--outside of China,
people aren't going to rush to adopt a Chinese central--because
it is the creepiest surveillance tool developed. They want to
link it to a social credit system.
And, frankly, there are Western governments that are
tripping over themselves to find ways to do the same thing. I
think people should be alarmed that the Bank for International
Settlements, the central banker to the central banks, is trying
to develop protocols that are this creepy surveillance-state
version.
What we should be studying--and we can't get the language
adopted yet--would be--if we are going to study this with
central banks, it would be, how do you do a true distributed-
ledger, permissionless, peer-to-peer system if you are going to
digitize money for your own currency?
Right now, the dollar is the dominant currency and likely
will be for the foreseeable future. But the nature of that, how
that is moved, people care about what does it translate to in
dollars, even the most ubiquitous forms of central bank digital
currency.
And I would say just one last observation, Mr. Redbord, on
your comments. One is, if you kill the use cases for
permissionless, peer-to-peer transactions because of your
desire to corrupt money and turn it into a tool for control,
you kill the use cases for all kinds of things that aren't
meant to be payment systems.
So, I think it is an important thing that we protect that
permissionless, peer-to-peer transaction system in all the ways
that we talk about how to address our payment systems in the
economy.
I wish we had more time. Thanks for having the hearing.
And thanks for your expertise. I would love to continue the
dialogue with every one of you.
And I yield back.
Chairman Himes. The gentleman's time has expired.
The gentleman from Ohio, Mr. Gonzalez, who is coming to us
remotely, is now recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman. Thank you
for holding this important hearing.
And thank you to our witnesses for your insights.
Mr. Redbord, I am going to start with you. There are some
who believe that, absent a U.S. CBDC, we won't be able to
implement sanctions or administer effective foreign policy. My
contention is that private stablecoins, provided those coins
are dollar-denominated and reserves are denominated in U.S.
dollars, allow for sanctions to continue.
Where do you land on this specific question around the
ability to conduct sanctions and foreign policy in a world of
dollar-backed stablecoins versus a CBDC?
Mr. Redbord. Thank you so much for the question.
I think there are two parts to this. I think, first, you
have punitive sanctions measures. And we have seen those taken
in the, sort of, private blockchain-based world. We have seen
OFAC go after noncompliant exchanges, Russia-based, and
essentially shut down their ability to move funds--ransomware
payments, sanctions evasion. We have seen, as Mr. Levin and I
both mentioned, them go after Lazarus Group, North Korea's
cybercriminals, through the use of sanctions.
So, I think we have seen effective sanctions taken by OFAC
in the private blockchain space already.
And then, I think the second piece of that is to really
ensure that we are harnessing the power of, sort of the
entrepreneurial spirit in the United States to build a better
mousetrap. And that is really where the importance of this
committee and this institution come in, to really ensure that
we are fostering innovation, that we are encouraging people to
build.
And, as I mentioned in my opening statement, we are seeing
today that 99 percent of stablecoins are--or stablecoins that
are fiat-backed are tied to the U.S. dollar. And that means,
already today, that we are ensuring that people who transact
globally in this new digital system are transacting U.S.
dollars, which really maintains the efficacy of U.S. sanctions,
even in this new digital world where we keep hearing about the
ability to move outside of the U.S. financial system.
Mr. Gonzalez of Ohio. Thank you. I could not agree more
with that sentiment.
I want to shift now towards Tornado Cash, which,
admittedly, I am still trying to wrap my head around fully.
They were recently sanctioned by the Biden Administration on
the logic that Tornado Cash is primarily a tool used by money
launderers.
And I think the implication is twofold: one, that the
technology--if you believe the Administration--is inherently
evil and used for evil purposes. That is, sort of, one
contention. And the second is that, once funds enter Tornado
Cash, law enforcement becomes impossible or highly unlikely.
I want to take the second part first. Is it possible to
still conduct law enforcement oversight and sanctions once
funds enter a mixer like Tornado Cash?
Mr. Levin. I can take this, Congressman.
It is actually possible to follow funds through mixing
services. And I know that sounds counterintuitive, but, in the
case of the Ronin Bridge hack, we have just demonstrated that
it is actually possible to seize funds on the other side of a
mixing service.
It is not always possible; it is not always impossible. But
it is actually a technology that Chainalysis has developed in
order to be able to help law enforcement actually conduct those
investigations.
Mr. Gonzalez of Ohio. Thank you.
And then back on--
Mr. Redbord. If I could--
Mr. Gonzalez of Ohio. --the first point--quickly, on the
first question, because I am running out of time, what
legitimate uses might one have for using a mixing service? And
I am thinking specifically about something like getting
cryptocurrencies to Ukraine, but I don't want to preload that.
But either of you can answer that.
Mr. Redbord. Sure. That is a great example, Congressman.
But, also, in a world in which transactions are happening
more and more in open blockchains, people are going to want a
level of privacy. We see that people's cryptocurrency addresses
have been made public through social media and other places.
They are going to want to be able to transact with some level
of privacy in those transactions. We see employers who may
start paying in cryptocurrency, who know the various wallets
they are sending funds into. Those people will want some level
of privacy. You may want privacy from potential state
surveillance.
But the reality is, I think the key to, sort of, the
question around Tornado Cash is, as I thought Jonathan said
very well, in terms of the new capabilities of tools like TRM
and Chainalysis to trace through mixers. But, also, it is
important to ensure that regular users are not affected by
these sanctions.
On the one hand, I think regulators are focused on going
after illicit actors who are using these types of services,
and, on the other hand, ensure that regular users are not being
affected. And I think the key to that is having great data to
really, really understand, sort of, what wallet addresses you
are transacting with.
Mr. Gonzalez of Ohio. Thank you.
Privacy is a core American value. Let's not make it de
facto illegal.
And, with that, I yield back.
Chairman Himes. The gentleman's time has expired.
It would appear that we have no more Members with
questions. Is that correct?
Okay.
I would like to thank our witnesses for their testimony
today. This was a terrific conversation, as evidenced by the
fact that every single member went over their time.
I think there remains a great deal of interest in following
up on a lot of this, and we will certainly do that, including
on some topics that we--obviously, the chairwoman has released
some draft stablecoin legislation which will be fodder for a
lot of consideration and thought. And I think there was also a
desire, as you sensed, to look deeper into what, if any, a CBDC
would make sense and what is the path there, if there is one.
So, again, I would like to thank all of our witnesses for
their testimony.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that, I thank our witnesses one more time, and this
hearing is adjourned.
[Whereupon, at 11:38 a.m., the hearing was adjourned.]
A P P E N D I X
September 20, 2022
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]