[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
CRYPTO CRIME IN CONTEXT:
BREAKING DOWN THE ILLICIT
ACTIVITY IN DIGITAL ASSETS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY,
AND INCLUSION
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 15, 2023
__________
Serial No. 118-58
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-097 PDF WASHINGTON : 2026
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HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffmann, Staff Director
------
SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND INCLUSION
FRENCH HILL, Arkansas, Chairman
WARREN DAVIDSON, Ohio, Vice STEPHEN F. LYNCH, Massachusetts,
Chairman Ranking Member
FRANK D. LUCAS, Oklahoma JOSH GOTTHEIMER, New Jersey, Vice
TOM EMMER, Minnesota Ranking Member
JOHN W. ROSE, Tennessee BILL FOSTER, Illinois
BRYAN STEIL, Wisconsin RITCHIE TORRES, New York
WILLIAM R. TIMMONS, IV, South BRAD SHERMAN, California
Carolina AL GREEN, Texas
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
ERIN HOUCHIN, Indiana
C O N T E N T S
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Wednesday, November, 2023
OPENING STATEMENTS
Page
Hon. French Hill, Chairman of the Subcommittee on Digital Assets,
Financial Technology and Inclusion, a U.S. Representative from
Arkansas....................................................... 1
Hon. Stephen F. Lynch, Ranking Member of the Subcommittee on
Digital Assets, Financial Technology and Inclusion, a U.S.
Representative from Massachusetts.............................. 2
STATEMENTS
Hon. Patrick T. McHenry, Chairman of the Financial Services
Committee, a U.S. Representative from North Carolina........... 4
WITNESSES
Mr. William C. Hughes, Senior Counsel & Director, Global
Regulatory Matters, Consensys Software Inc. and former
Associate Deputy Attorney General, U.S. Department of Justice.. 5
Prepared Statement........................................... 7
Mr. Jonathan Levin, Co-Founder & Chief Strategy Officer,
Chainalysis.................................................... 10
Prepared Statement........................................... 12
Ms. Gregory C. Lisa, Chief Legal Officer, DELV (f/k/a Element
Finance); Senior Counsel, Hogan Lovells; and former Interim
Director, Office of Compliance and Enforcement, Financial
Crimes Enforcement Network (FinCEN)............................ 18
Prepared Statement........................................... 20
Ms. Jane Khodarkovsky, Partner, Arktouros; and former Human
Trafficking Finance Specialist, U.S. Department of Justice's
Money Laundering and Asset Recovery Section.................... 31
Prepared Statement........................................... 33
Ms. Alison Jimenez, Economist, and President, Dynamic Securities
Analytics, Inc................................................. 62
Prepared Statement........................................... 64
APPENDIX
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hon. French Hill:
Letter to President Biden and Treasury Secretary Yellen from
various Members of Congress, dated November 15, 2023....... 94
Chainalysis report, ``Correcting the Record: Inaccurate
Methodologies for Estimating Cryptocurrency's Role in
Terrorism Financing,'' dated October 18, 2023.............. 100
Written statement of the Chamber of Digital Commerce......... 108
Letter to Attorney General Merrick Garland from Chairman Hill
and Senator Cynthia M. Lummis, dated October 26, 2023...... 110
Letter from a group of United States military servicemembers,
intelligence officers, and national security professionals,
dated November 15, 2023.................................... 113
Memorandum from the National Credit Union Administration
(NCUA) in response to a question posed by Chairman Hill
during the hearing, dated December 14, 2023................ 122
TRM Insights, ``In Wake of Attack on Israel, Understanding
How Hamas Uses Crypto,'' dated October 10, 2023............ 127
``Report to Congress on Renewal of Iraq's Sanctions Waiver
for Electricity Payments''................................. 134
RESPONSES TO QUESTIONS FOR THE RECORD
Hon. Maxine Waters:
Written responses to questions for the record submitted to
William C. Hughes.......................................... 138
Written responses to questions for the record submitted to
Alison Jimenez............................................. 140
Written responses to questions for the record submitted to
Jane Khodarkovsky.......................................... 141
Written responses to questions for the record submitted to
Jonathan Levin............................................. 143
Written responses to questions for the record submitted to
Gregory C. Lisa............................................ 145
CRYPTO CRIME IN CONTEXT:
BREAKING DOWN THE ILLICIT
ACTIVITY IN DIGITAL ASSETS
----------
Wednesday, November 15, 2023
U.S. House of Representatives,
Subcommittee on Digital Assets,
Financial Technology,
and Inclusion,
Committee on Financial Services
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the subcommittee] presiding.
Members present: Representatives Hill, Davidson, Rose,
Steil, Timmons, Flood, Lynch, Foster, Sherman, Green, Casten,
and Nickel.
Ex officio present: Representative McHenry.
Chairman Hill. The Subcommittee on Digital Assets,
Financial Technology, and Inclusion will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time.
Today's hearing is entitled, ``Crypto Crime in Context:
Breaking Down the Illicit Activity in Digital Assets.''
I now recognize myself for 4 minutes to give an opening
statement.
HON. FRENCH HILL, CHAIRMAN OF THE SUBCOMMITTEE ON DIGITAL
ASSETS, FINANCIAL TECHNOLOGY AND INCLUSION, A U.S.
REPRESENTATIVE FROM ARKANSAS
Today, we are building on our previous hearings and our
classified briefings to better understand the full picture of
the illicit use of digital assets. The goal is to dive deeper,
debunk some of the myths, and ensure that we, as policymakers,
have all the facts.
I would be remiss if I began this hearing without
acknowledging the reports that digital assets have been used to
help Hamas fundraise for the attacks carried out against
Israel. In the aftermath of these attacks, there was an article
in The Wall Street Journal which reported that Hamas received a
significant portion of its funding from digital assets.
A subsequent letter sent by Members of Congress stated that
Hamas and the Palestinian Islamic Jihad raised over $130
million in crypto, to which the blockchain analytics firm cited
by The Wall Street Journal issued a correction that, ``There is
no evidence to suggest that crypto fundraising has raised
anything close to this amount, and the data provided by
Elliptic and others has been misinterpreted.''
So, despite the reports of the relatively small role that
digital assets are reported to have played in Hamas's
fundraising efforts, I want to be unequivocally clear today
that this committee is in favor of all available means to shut
down illegal, illicit terror finance, period, full stop,
whether it takes place through crypto, cash, or through hawala.
That is why Senator Lummis and I sent a letter to the DOJ
about the need to go after specific bad actors within the
crypto industry. More than 50 Members also joined an effort led
by Whip Tom Emmer, Chair Patrick McHenry, Congressman Torres,
and myself to better understand the size, scope, and duration
of Hamas's fundraising through digital assets.
At the end of the day, bad actors will continue to use any
means possible to conduct their illicit activity, but phones
and the internet are not to be blamed for terrorist financing
and crypto should not either. We must examine these issues
head-on and separate fact from fiction, and that is why we are
here today.
Based on the Member engagement on this issue on both sides
of the aisle, our fact-finding mission is not partisan in any
way. Members in this room must better understand the degree of
illicit activity, understand how we can use blockchain
technology to combat illicit activity, examine the analytical
tools that are currently available to combat this activity, and
explore gaps that may prevent and detect illicit activity.
As the Department of the Treasury itself has acknowledged,
``most virtual currency activity is licit, not illicit.'' So,
blockchains do provide law enforcement with unique and novel
insights into criminal organizations and their funding
networks. Law enforcement has been very adept at leveraging
this information to clamp down on criminals, in part by choking
off their access to the on- and off-ramps.
The witnesses today are best suited to ensure that we leave
no stone unturned and fully discuss the issues at hand.
I thank the witnesses for being here today, and I look
forward to our discussions, and to working with Ranking Member
Lynch and the members of this subcommittee.
Now, let me turn to the ranking member of the subcommittee,
Mr. Lynch, for a 5-minute opening statement.
HON. STEPHEN F. LYNCH, RANKING MEMBER OF THE SUBCOMMITTEE ON
DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND INCLUSION, A U.S.
REPRESENTATIVE FROM MASSACHUSETTS
Mr. Lynch. Thank you, Mr. Chairman, and I want to thank our
witnesses for your willingness to help out the committee with
its work. This is an important hearing to examine the efforts
to combat illicit activity in the digital asset sector.
In the wake of the devastating terrorist attacks
perpetrated by Hamas against Israel on October 7th, the
Treasury Department has continued to evaluate the role of
digital assets, including cryptocurrencies, in financing
terrorist and other criminal activities. As stated by Deputy
Treasury Secretary Wally Adeyemo this month, ``The Biden
Administration is already working with Congress and crypto
stakeholders to identify additional actions that might further
prevent illicit activity in the digital asset space.''
This committee has received multiple classified briefings
from Treasury and U.S. intelligence officials on the extent to
which the Iranian regime and its proxies, including Hamas and
Hezbollah, have utilized digital assets in financing regional
and global terrorism. While we will continue to evaluate the
precise sources of revenue for Hamas and other militant groups,
public reports do indicate that there is some cause for
concern. Notably, The Wall Street Journal estimated that
digital currency wallets linked to the Palestinian Islamic
Jihad received as much as $93 million, with Hamas receiving
about $42 million between June 23rd and August 22nd.
The Financial Crimes Enforcement Network (FinCEN) also
recently publicly identified the illicit use of so-called
international convertible virtual currency mixing by North
Korea, Hamas, and other malicious state and nonstate actors as
an acute money laundering concern and a serious national
security risk.
The crypto currency industry and its advocates have been
quick to defend themselves, claiming that the amount of funding
that has flowed through crypto channels is overestimated and is
small in comparison to the amount of terrorism financing that
flows through traditional finance. I do not necessarily buy
that argument, as we have learned that it does not take much to
fund terrorism.
It is beyond argument, however, that crypto remains the
preferred currency of organized crime and various cyberattacks.
The criminal use of crypto has also dramatically escalated as
high corruption governments that operate as safe havens for
money laundering have continued to court unvetted crypto
investors through purposeful deregulation.
There are key features of crypto assets, such as inherent
pseudonymity and their decentralized nature, that make them
vulnerable and highly useful for illicit activity, including
ransomware attacks. Treasury's recent, ``action plan,'' to
address the illicit finance risks of digital assets recognizes
that cyber criminals often require ransomware payments in the
form of digital assets, frequently Bitcoin.
According to an industry report, crypto payments to
ransomware attacks reached $449 million in the first half of
2023, which is up 40 percent from the same period last year.
Victims of the largest ransomware attacks include hospitals,
government offices, energy centers, and other critical entities
that cybercriminal gangs identify to generate the largest
ransoms.
Just this week, we learned that the U.S. Financial Services
Division of China's ICBC Bank was hit by a massive ransomware
attack that disrupted trades in the U.S. Treasury market. The
likely perpetrator of the attack? The hacking group LockBit has
received tens of millions of dollars in Bitcoin as ransom
payments in relation to over 1,400 attacks.
I look forward to working with this subcommittee to examine
further the ways in which cryptocurrency vulnerabilities are
being used for all types of crimes, including money laundering,
financial sanctions evasion, tax evasion, and other corruption-
related crimes such as bribery and embezzlement. Again, I
appreciate the willingness of this esteemed panel to add their
expertise to this debate.
With that, Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back. The Chair now
recognizes the distinguished Chair of the full Financial
Services Committee, Mr. McHenry of North Carolina.
HON. PATRICK T. McHENRY, CHAIRMAN OF THE FINANCIAL SERVICES
COMMITTEE, A U.S. REPRESENTATIVE FROM NORTH CAROLINA
Chairman McHenry. Thank you, Chairman Hill and thank you
for holding this hearing. It is our job to cut through the
noise and get to the facts, and I appreciate the witnesses
being here today to testify about important things for Members
of Congress to better understand the use of digital assets for
illicit purposes. We want to know the extent of it and the ways
that we can combat it.
There have been conflicting reports regarding Hamas's
fundraising efforts through digital assets. We know they use
the traditional banking system, we know that they misuse cash
and other forms of currency, and we know that bad actors prey
on vulnerabilities wherever they can find them. There is
bipartisan agreement, though, that we must hold these bad
actors accountable in every way possible, and specifically when
it comes to digital assets and the digital asset ecosystem.
It is important to note that digital assets are built on
transparent and open distributed ledger technology which makes
it far easier to detect and track illicit activity. That is a
good and useful thing, and I hope we can put aside the
frequency of notions some may have and rely on the testimony of
our witnesses today to draw conclusions.
Thank you, Mr. Chairman, for your leadership, and I thank
the Members for indulging the subcommittee this afternoon after
a long week, and a long 10 weeks that we have been in session.
Thank you, Chairman Hill.
Chairman Hill. Thank you, Chairman McHenry.
Today, we are proud to welcome the testimony of Mr. William
Hughes, the senior counsel and director of global regulatory
matters at Consensys Software, a blockchain technology company,
and a former Associate Deputy Attorney General at the
Department of Justice; Mr. Jonathan Levin, the co-founder and
chief strategy officer at Chainalysis, one of the largest
blockchain analytic firms; Mr. Gregory Lisa, the chief legal
officer at DELV, a DeFi startup, a senior counsel at Hogan
Lovells LLP, and the former Interim Director of the Office of
Compliance and Enforcement at FinCEN; Ms. Jane Khodarkovsky, a
partner at Arktouros, a law firm dedicated to emergent
technologies, and a former trial attorney, and a former Human
Trafficking Finance Specialist at the U.S. Department of
Justice's Money Laundering and Asset Recovery Section; and Ms.
Alison Jimenez, the president of Dynamic Securities Analytics,
Inc., a litigation consulting firm specializing in securities,
cryptocurrency and money laundering.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, each of your
written statements will be made a part of the record.
Mr. Hughes, you are recognized for 5 minutes.
STATEMENT OF WILLIAM C. HUGHES, SENIOR COUNSEL & DIRECTOR OF
GLOBAL REGULATORY MATTERS, CONSENSYS SOFTWARE INC. AND FORMER
ASSOCIATE DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Mr. Hughes. Thank you, Chairman Hill, Ranking Member Lynch,
and distinguished members of the subcommittee. My name is Bill
Hughes, and I thank you for the invitation to testify on the
important issue of illicit activity in digital assets. This is
a critical topic for the Congress to debate, and I applaud your
leadership in bringing this to the attention of the committee,
and this subcommittee specifically.
I work as a senior legal counsel at Consensys Software
Inc., a blockchain software developer that is headquartered in
Fort Worth, Texas. Our firm develops and offers the most-
popular unhosted wallet software in digital assets, the
MetaMask wallet. This wallet is an interface that allows the
user to read and write to the blockchain without any
intermediary's help, akin to how a web browser is a consumer's
direct connection to the Web. The wallet also safeguards a
user's private key, which is the cryptographic password which
the user must have to control a particular blockchain account,
also called a public address. Users in the U.S. and across the
globe are free to use a long list of wallets to read and write
to the blockchain and to securely store their private keys.
As a U.S.-based blockchain technology company, we believe
that it is good that technology providers are expected to
follow the law. In our experience, U.S.-based blockchain
projects generally do. Permission-less blockchain networks are
new technologies that have real value and present exciting new
opportunities, but at the same time, we must not accept or
equivocate about bad actors using these technologies to commit
crimes. How the law should evolve to meet the dynamic threat of
illicit finance is an important issue, and we are glad to be
part of that discussion.
Combating money laundering is a difficult task in any
space, but digital assets present capabilities with respect to
tracking and disrupting money laundering that law enforcement,
and the public at large, have never had before because open,
permissionless blockchain ledgers are reviewable by anyone,
anywhere, transactions can be traced using blockchain analytics
technology, even those transactions that are purposely
complicated to obfuscate the flow of funds. Any policy response
to the threat of money laundering should embrace the
transparency of the blockchain and bolster the power of
transaction analytics if it hopes to be successful. While
analytics technology is helpful now, it must continue to
improve if illicit finance and digital assets is going to be
sufficiently addressed.
We think on-chain user security is also essential, and that
is a core focus of Consenys when we think about MetaMask users.
Digital assets also present some new challenges. Today,
critical weaknesses remain in the centralized entities,
specifically those that provide central order book exchanges
services. It is important to keep in mind during our discussion
today that traditional finance remains the overwhelmingly-
popular space for launderers to operate, and the estimated
volume of illicit on-chain activity, when compared with illicit
activity, is remarkably low. Regardless, illicit finance is a
serious concern that deserves our attention, and we must be
vigilant that such use of digital assets does not become more
prevalent.
This can be done by getting more global uniformity in
regulating exchanges and stablecoins. Policymakers should
consider regulatory sandboxes to improve not only blockchain
analytics technology, but also technologies around digital
identity. Blockchain offers the opportunity to actually improve
privacy protections and data security, while also achieving
compliance, and we should not turn it down but rather fully
explore what is possible. We must also improve public-private
collaboration on difficult policy issues such as those
presented by decentralized finance, and bolster intelligence
sharing to put law enforcement in the best position to trace,
stop, and recover laundered funds.
Productive policies with respect to combating money
laundering using digital assets is a net good for the
blockchain ecosystem, and I am encouraged by this
subcommittee's attention to these important matters.
Thank you very much.
[The prepared statement of Mr. Hughes follows:]
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Chairman Hill. Thank you, Mr. Hughes.
Mr. Levin, you are recognized for 5 minutes.
STATEMENT OF JONATHAN LEVIN, CO-FOUNDER & CHIEF STRATEGY
OFFICER, CHAINALYSIS
Mr. Levin. Good afternoon, Chairman Hill, Ranking Member
Lynch, and members of the subcommittee. My name is Jonathan
Levin, and I am one of the co-founders of Chainalysis, the
leading blockchain analysis company. I am grateful for the
opportunity to testify again before this committee at this
important time, as the current issue at hand is particularly
close to my heart.
The tragic events beginning on October 7th have shined a
light on our core focus at Chainalysis: detecting and
disrupting bad actors that use cryptocurrencies for terrorist
financing and other illicit purposes. We have spent almost a
decade working with law enforcement agencies and intelligence
services in the United States, Israel, and other allied
countries around the world to maximize disruption of these
networks. Our many joint successes have marked the dawn of a
new era of financial intelligence for governments around the
world.
Financial intelligence has historically been composed of
government collections and reporting from financial
institutions. This is typically not real-time and is highly
dependent on domestic services and institutions to report on
suspicious activity. Insights into international transactions
is often mired in complex international collaboration and
information-sharing arrangements. Cryptocurrencies mark a
departure from this era. It enables all governments around the
world to have access to every single transaction that has ever
happened in cryptocurrencies, and the information sharing about
these transactions allows for full networks to be uncovered.
Cryptocurrency transactions are inherently public, and the
data from those transactions is preserved on a transparent and
immutable ledger. At Chainalysis, we analyze these transactions
from blockchain networks, and in conjunction with open source
information and our proprietary data collection we map the
ecosystem of participants in these networks. We then provide
software solutions, data, and investigative support to allow
investigators to trace the flow of transactions and identify
potential illicit activity.
To that end, I want to offer some additional context on the
use of cryptocurrencies to finance Hamas and other similar
groups and how that activity actually gets disrupted when
governments work with Chainalysis and the industry.
There is evidence of terrorist organizations operating in
Gaza attempting to raise funds using cryptocurrency as early as
2016. This involves both the use of cryptocurrency directly but
also networks of enablers and facilitators that leverage
otherwise legitimate services to finance terrorist activities.
These services could be hawala service and over-the-counter
exchanges.
Historically, the broader network of enablers has been very
difficult to detect and disrupt when moving fiat currency.
However, the utilization of crypto by these networks has now
made it possible for law enforcement to detect and disrupt
these terror financial donation campaigns.
For example, in August 2020, the Department of Justice
announced that with the aid of Chainalysis it had dismantled
the terrorist financing campaigns by the military wing of Hamas
and by ISIS, and seized millions of dollars' worth of
cryptocurrencies. Similarly, in the past 2 years the Israeli
government, again with the support of Chainalysis, has
undertaken multiple successful seizures of cryptocurrencies
intended for groups supporting Hamas, and including those of
the Hezbollah and Iran's Quds Force. In practice, this has
involved international collaboration, trusted public-private
partnerships, and working with the private sector to freeze
both the accounts at cryptocurrency exchanges and other wallet
addresses associated with this financing.
In 2023, Hamas publicly announced that it was shutting down
its campaign to accept cryptocurrency as donations, citing
successful government efforts to prosecute donors. Despite
their own acknowledgement of them ceasing to stop using
cryptocurrencies and the inherent ineffectiveness of this
method, we continue to work with law enforcement around the
world to detect and disrupt the use of cryptocurrency by Hamas
and the different entities facilitating and enabling their
actions.
The reality, though, is more can be done. First, the
Federal Government should provide a path to compliance with the
digital asset industry in order to increase the amount of
domestic touchpoints for stablecoin issuers and cryptocurrency
exchanges for appropriate Federal regulation. Second, we need
to continue to close the gap on international partners that
allow for unlicensed exchanges to continue to operate.
Finally, and perhaps most importantly, the United States
should prioritize arming the government with the necessary
resources to disrupt this activity with real-time data,
sophisticated technology, and cutting-edge expertise.
I look forward to answering your questions.
[The prepared statement of Mr. Levin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Hill. Thank you very much.
Mr. Lisa, you are recognized for 5 minutes.
STATEMENT OF GREGORY C. LISA, CHIEF LEGAL OFFICER, DELV (F/K/A
ELEMENT FINANCE); SENIOR COUNSEL, HOGAN LOVELLS; AND FORMER
INTERIM DIRECTOR, OFFICE OF COMPLIANCE AND ENFORCEMENT,
FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN)
Mr. Lisa. Thank you so much, and good afternoon, Chairman
Hill, Ranking Member Lynch, and members of the subcommittee. I
very much appreciate the opportunity today, and I also wanted
to extend my thanks to your staff. They have been nothing short
of exceptional in arranging this today.
My name is Greg Lisa, and I am the chief legal officer at
DELV, a DeFi startup. I am also a senior counsel at Hogan
Lovells, where I was a partner for 5 years.
Most of my career, though, has been in government service,
starting at the U.S. Department of Justice for 12 years, 10 of
which I was a Federal prosecutor in the Organized Crime
Section, prosecuting organized crime and illicit finance in
public corruption cases. After that, in 2011 I joined the
Consumer Financial Protection Bureau (CFPB) as one of the
agency's first enforcement attorneys, and then shortly after
that, I joined FinCEN, first in the Casinos and MSB Section,
where we had some of the very first anti-money laundering (AML)
cases against crypto companies, and then later, I headed up the
Office of Compliance and Enforcement at FinCEN.
I would like to address a couple of issues, if I may, first
around blockchain analytics and financial investigations, and
then also, the illicit finance risk connected to crypto.
I think almost all criminal activity, maybe with the
exception of crimes of passion and a handful of others, are
connected to profit motive, and are connected to the desire to
gain money. Even absent some of those crimes, for instance, in
ideological terrorism, those cannot succeed without equipment,
logistics, and funding. So, it is not surprising that the
mantra of every prosecutor and every regulator is, follow the
money, because if you find where the profits are flowing you
find where the leaders are, where the financiers are, and where
the organization is actually going to be most impacted by
disruption.
The reality is that for investigators and prosecutors,
traditional financial investigations are difficult and
cumbersome. Sometimes, they are ineffective for that reason.
Smoking guns are incredibly rare. Those investigations are put
together one brick at a time, with bank records, with mutual
legal assistance treaty (MLAT) requests for foreign records, or
opaque or sometimes misleading business documents, so
sometimes, it just requires a bit of luck for investigators to
actually disrupt a criminal enterprise.
Blockchain investigations are different. The
characteristics and nature of most blockchains--transparency,
accessibility, immutability, and reliability--provide
significant advantages in helping to detect and prevent illicit
finance. Over the last several years, public-private
partnerships have yielded some amazing successes: Silk Road,
Bitfinex, Welcome to Video, BTC-e, and countless others.
Let's talk about the illicit finance risk connected to
crypto, and it depends on who you ask if you are looking for
metrics and data, because the estimates range from anywhere
north of 50 percent of all crypto use being illicit, to less
than a fraction of a percent.
Respectfully, I think that both numbers are wrong. I try to
lay that out, the reasons why, in my formal testimony. It is
clearly important that we not underestimate the risk around
crypto, as with any financial instrument, because we cannot
have crypto being the source of an economic meltdown or the
source of the next 9/11. We cannot forget the fact that
criminals and terror financiers are adaptive, they are
innovative, they are often tech-savvy, and they are always
resourceful, but there is also a very real chance that
overreaction, especially overreaction in regulation, will
simply serve to drive crypto underground, offshore, and beneath
the radar. Regulation can work, and it should, but overreaction
with regulation can undermine exactly what we are trying to do.
It can make compliance impossible. It can divert resources away
from actual risks. It can make unregulated environments and
jurisdictions the only places where companies succeed and
survive. As a result, an overreaction can jeopardize national
security, and it can make our problems far worse. Ceding ground
to China, Russia, or other jurisdictions may be far worse.
The U.S. is the center of the international financial
system because it is known for its strength, its stability, its
resilience, and its safety. It is home to much innovation and
many of the world's entrepreneurs. It is hardly perfect, but
the U.S. also leads in anti-money laundering (AML) oversight.
Other countries and economies look to us for responsible, bold,
and thoughtful leadership but there is no guarantee that will
always be the case. If we fail in U.S. leadership, either by
underreacting or by overreacting, we run the risk that we
relinquish our role and other nations look elsewhere, including
to other jurisdictions that might not have our same national
interests, and may even be even hostile to us. The national
security implications of that would be far-reaching and
potentially irreversible.
Getting this right is essential for the industry as well.
People will not put their funds in a system that they do not
trust. Nobody wants to provide liquidity to Hamas or to the
North Korean weapons regime or to have a Russian oligarch or a
drug lord as their counterparty. Getting this right and
addressing this risk is critical to the legitimacy of this
industry, and to our national security.
Thank you again for the opportunity, and I look forward to
the committee's questions.
[The prepared statement of Mr. Lisa follows:]
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Chairman Hill. Thank you, Mr. Lisa.
Ms. Khodarkovsky, you are recognized for 5 minutes.
STATEMENT OF JANE KHODARKOVSKY, PARTNER, ARKTOUROS; AND FORMER
HUMAN TRAFFICKING FINANCE SPECIALIST, U.S. DEPARTMENT OF
JUSTICE'S MONEY LAUNDERING AND ASSET RECOVERY SECTION
Ms. Khodarkovsky. Thank you, Chairman Hill, Ranking Member
Lynch, and members of the subcommittee, for holding this
hearing and inviting me to participate. I am honored to speak
with you today and grateful to contribute to this discourse.
In 1992, when I was a child, my family and I left Odessa,
Ukraine, as refugees. I sit before you the product of the
United States' leadership in innovation and promotion of
democratic ideals while countering illicit finance and
autocratic regimes.
As a Trial Attorney and Human Trafficking Finance
Specialist in the Money Laundering and Asset Recovery Section
of the U.S. Department of Justice, I investigated and
prosecuted financial crimes. It was critical to follow the
money to detect, dismantle, and disrupt criminal activity and
to ensure that assets could be seized and forfeited, depriving
criminal networks of their ill-gotten gains.
I am often asked why I transitioned from the DOJ to the
private sector to work in the blockchain space. The answer is
quite simple: I believe that this technology is critical to the
future. As a particular technology and the way in which it is
used evolves, so, too, should the risk-based analysis of
whether the legislative, regulatory, and legal frameworks
should follow.
The U.S. has robust anti-money laundering and
counterterrorist laws and regulations that apply to the digital
asset ecosystem. This framework has helped stop illicit
activity, while leveraging the attributes of the blockchain:
traceability, transparency, and immutability. U.S. centralized
cryptocurrency exchanges and fiat on- and off-ramps conduct
transaction monitoring using blockchain forensics to identify
suspicious activity, regardless of whether the transaction
occurred on their platform, and cut off bad actors. This
contrasts with traditional financial institutions, which only
have visibility into customers or transactions that occur
within their bank.
In response to Office of Foreign Assets Control (OFAC)
sanctions, U.S.-based stablecoin issuers can blacklist
interactions within an application and freeze assets in
wallets. The ability to freeze wallet addresses on the
secondary market to comply with sanctions is unique to
blockchains, not banks.
While Chainalysis 2020 data suggests that the percentage of
all cryptocurrency activity associated with illicit activity
was 0.24 percent, bad actors continue to exploit traditional
finance. Related to Russia, DOJ seized yachts worth just under
$1 billion, real estate worth an estimated $75 million, and
more. None were reported to be purchased with cryptocurrency.
Russia continues to evade sanctions using gold, oil, and other
strategic sectors. Human traffickers from China, Mexico, and
elsewhere use cash, funnel accounts, and shell companies to
profit from the exploitation of others.
Terrorist organizations also diversify their funding
streams. In recent weeks, news headlines focused on
cryptocurrency, but terrorists also use global investment
portfolios, charities, foreign aid, hawalas, and cash. There is
no public ledger for cash or hawalas.
No amount of funds for terrorism is acceptable, but we
cannot be myopic. So, while autocratic regimes and terrorist
organizations use every tool in their arsenal, vulnerable
populations turn to the digital asset ecosystem. When Russia
invaded Ukraine, my family scrambled to assist loved ones.
Owners' compliance processes at banks and money services
businesses (MSBs) caused long delays, leaving many with limited
to no access to necessary funds. Ukraine has raised $100
million in crypto after soliciting for donations, and
Ukrainians used Bitcoin and Ether to support themselves.
In the aftermath of the barbaric terrorist attack by Hamas
on Israeli civilians, once again, humanitarian aid came in the
form of crypto. I believe U.S. lawmakers must recognize that
juxtaposition. The U.S. must lead to stop the jurisdictional
arbitrage foreign actors are exploiting. In July 2023, the
Financial Action Task Force (FATF) urged countries to implement
travel rule requirements, as only about 29 of 98 jurisdictions
had done so.
With this context, I recommend lawmakers consider: first,
ensuring that compliant U.S.-based companies in the digital
asset ecosystem remain in the United States to avoid increased
criminal activity offshore, technological decline, and the
undermining of U.S. interests; second, using tools to isolate
autocratic regimes that use technology to surveil their
civilian communities, undermine basic liberties, and fund
terrorism; and third, leaning into innovation through genuine
sandboxes where the private sector showcases, in a prudent and
compliant manner, tools to leverage activity-based risk
management on public ledgers.
I am grateful to share my experiences to ensure that the
United States continues to be the epicenter for innovation and
stands staunchly against autocrats and terrorists.
Thank you.
[The prepared statement of Ms. Khodarkovsky follows:]
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Chairman Hill. Thank you.
Ms. Jimenez, you are recognized for 5 minutes.
STATEMENT OF ALISON JIMENEZ, ECONOMIST, AND PRESIDENT, DYNAMIC
SECURITIES ANALYTICS, INC.
Ms. Jimenez. Thank you for the invitation to appear before
you today to discuss illicit activity in digital assets.
My name is Alison Jimenez. I am an economist and the
president of Dynamic Securities Analytics. For 25 years, I have
been examining financial crime and money laundering issues.
Recently, much of my research has focused on the use of
cryptocurrency in illicit finance.
Before addressing cryptocurrency crime specifically, it is
useful to understand how a bad actor evaluates financial
products generally. When a bad actor wants to conduct a
financial transaction, they will assess whether a financial
product can move funds: first, fast; second, far; third, in
large amounts; fourth, irreversibly; fifth, anonymously; and
sixth, to a third party. There is no one feature that drives a
bad actor to a particular financial product, and anonymity is
just one feature that bad actors weigh. While a truckload of
nickels and dimes is anonymous, it cannot be moved far or fast.
Cryptocurrency is attractive to bad actors because it has
so many of the features they value in a financial product.
Blockchain-based cryptocurrency transactions move far, fast, in
large amounts, irreversibly, anonymously, and to third parties.
Dismissing cryptocurrency as a useful tool for illicit finance
just because some transactions are recorded on the blockchain
is misguided and wholly inconsistent with cryptocurrency
suspicious activity reports, FBI advisories, and victim
complaints.
My research into cryptocurrency Suspicious Activity Reports
(SARs) found that first, the number of SARs related to
cryptocurrency is growing exponentially. There were 92,000
crypto SARs filed in 2021, more in that one year than from 2013
to 2020.
Second, some bad actors prefer to use cryptocurrency over
many other financial products. For example, there were more
cryptocurrency SARs in 2021 than for all security and all
investment type SARs for a 6-year period from 2014 to 2020.
Third, the dollar value of cryptocurrency SARs hovers
around $1 million, with more than $96 billion in suspicious
transactions reported in 2021. Take, for example, ransomware.
The number of ransomware SARs is increasing dramatically. Bad
actors are exclusively demanding payment in cryptocurrency, and
the average Bitcoin ransom was over $900,000.
Cryptocurrency-related SARs filings overwhelmingly
contradict the thesis that bad actors do not use crypto.
Next, the FBI has issued numerous advisories based on
victim complaints from your constituencies about cryptocurrency
scams, and I will focus just on one: ``pig butchering.'' ``Pig
butchering'' is a horrific crime, and it is a type of romance
scam which leverages the features of cryptocurrency to defraud
Americans. Scammers fatten up the victims by faking intimacy
via an online relationship before turning the conversation to a
cannot-lose crypto investment scam. Last year, the FBI received
over 30,000 complaints about cryptocurrency investment scams,
and victims reported over $2.6 billion in losses.
Compounding the horror to the American victims, the
scammers on the other end of the text messages or emails are
often victims of human trafficking who were lured by fake job
ads and are being held against their will in scam compounds in
Southeast Asia, and forced to meet quotas under the threat of
violence from transnational organized crime groups.
Turning to blockchain analytics, if all cryptocurrency
transactions were in iceberg, the crypto transactions that are
subject to blockchain analytics is just the tip. Here is why.
Most crypto transactions occur off the blockchain within
exchanges, thereby evading blockchain analytics and for those
transactions that are on-chain, bad actors have taken multiple
steps and have used multiple methods including mixers, chain
hopping, and side chains, for example, to obfuscate their
activity.
Finally, attribution remains an ongoing challenge,
especially in the private sector, which may not have the same
access to data and information as law enforcement and U.S.
intelligence.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Jimenez follows:]
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Chairman Hill. Thank you very much. As everybody can see,
we have an excellent panel who will be very good on this topic.
We are now going to turn to Member questions, and the Chair
recognizes himself for 5 minutes of questioning.
On the last comment Ms. Jimenez made, as a banker for 40
years, filing a SAR does not necessarily mean a crime has taken
place but it would not surprise me that crypto SARs go up,
because no one knows what crypto is in banks. So if they see a
crypto-type transaction, they may file a SAR, which is a good
thing. That is what we want them to do, to provide that data,
and that is how we learn and have a better supervisory process.
I want to start out with Mr. Levin, and talk a little bit
about this Wall Street Journal story, which is, in some ways,
what prompts us all to be here today--not completely, we would
be talking about illicit finance with crypto, period but with
what has happened in the last month and the publicity around it
certainly is a triggering event.
You testified that DOJ and Israel have used blockchain
analytics and other tools to shut down Hamas, ISIS, and Iran's
use of crypto. My first question is, when you look at The Wall
Street Journal story saying that $130 million worth of digital
assets over the past few years has been sent to ISIS, and you
are suggesting that was severely misinterpreted, tell us how
that is the case?
Mr. Levin. Thanks, Mr. Chairman. The information and the
figures quoted are a representation of both the amounts that
can be linked to actual terrorist financing, such as a group
like Hamas, but also the broader network of facilitators and
intermediaries that were caught up in the network of financing
terrorism. So, when you look at these headline figures, they
can contain a lot of legitimate activity over the years that
those businesses were in operation, and the amount that is
strictly linked to terrorist activity has to be investigated by
government agencies and shown that these specific amounts were
actually linked to Hamas financing.
That is where the distinction that we show in our work is
that when the Israeli authorities list addresses, or when OFAC
lists addresses that are associated to bad actors, there has to
be a distinction between the enablers that are being disrupted
and the actual money that is being given to terrorists.
Chairman Hill. Just on the ransomware topic, which is also
connected to this general theme, the FBI, for example, on
Colonial Pipeline, used chain analytics-type analytical tools
to basically get that money back. Ms. Jimenez is saying, for
example, that people use side chains, off-chain mixers to
inhibit their being identified on the blockchain. Do you agree
with that, and if so, how does this committee direct the
Executive Branch to stop that?
Mr. Levin. The Executive Branch needs the tools and
capabilities at their disposal to go after these issues, and my
thought about the way that should happen is that they need
better access to data, and better access to software and
expertise to actually affect those types of operations.
Chairman Hill. Are you saying that if you have that, those
actually do not obfuscate somebody's identity? You can
penetrate that and find it?
Mr. Levin. Yes. You can find ways to penetrate these
networks, particularly those that are sophisticated and large
scale because those are ones that the government can actually
put resources behind to get after.
Chairman Hill. This is a really important, because,
particularly over in the Senate, we are talking about rewriting
all of the rules of the road here, and I want to make sure the
tail is not wagging the dog. In other words, I want to make
sure that we provide the resources to the intelligence
community, and to the Treasury Department to look through that
pseudo-anonymity and convince Members of Congress that is a
doable thing, and not go off on a side, chasing down something
that is very challenging to do.
Can you give us more specifics in writing on precisely
what, so that our Members can be more informed about how to
make that happen?
Mr. Levin. Yes. We would be happy to provide sort of
additional support in writing on the current state. I would say
that the government has come a long way since I first testified
in front of this committee on being able to actually leverage
this technology. There is a lot more that can be done with
proactive detection and data that I think the government needs
in order to take extra steps in being able to prevent the next
sort of terrorist financing.
Chairman Hill. Thank you very much. I look forward to that.
My time has expired. I now call on the ranking member of
the subcommittee, Mr. Lynch, for his 5 minutes of questions.
Mr. Lynch. Thank you, Mr. Chairman. Ms. Jimenez, the
decentralized, borderless, and pseudonymous features of digital
assets as well as their convenient access, storage, and
transfer features are highly attractive to bad actors, as you
mentioned. They satisfy the needs and the preferences of bad
actors, criminal enterprises as well as other actors who would
operate globally, and much to the detriment of the integrity of
our financial system.
So, we have much to lose here, because there is so much
faith and trust in the U.S. financial system that, again, the
advantages of having the reserve currency of choice and having
trusted financial institutions would disappear if that were
undermined.
I know you have had some experience in dealing with some
state-operated criminal enterprises such as North Korea, and I
wonder if you could talk about the dangers--we have talked
about this before, but I wonder if you could just explain how
that state operator is operating in this space and the threat
that it offers to our national security here in the United
States?
Ms. Jimenez. Thank you for that question. Broadly speaking
about national security threats via the use of cryptocurrency,
North Korea is a prime example. North Korea is very technically
advanced in the hacking of cryptocurrency exchanges and other
virtual asset service providers. They use those stolen funds to
help fund their nuclear program. Not only do they steal funds
from both U.S.-based and global cryptocurrency exchanges, they
then cash out the cryptocurrency that they stole.
In addition to North Korea, there are other national
security risks. We talked about terror finance briefly, but
there is also the transnational organized crime risk of
organized groups, whether it is drug cartels remitting profits
over international borders, that see this as a useful tool
because of that borderless nature, a large dollar value. Unless
you have that intelligence that this particular transaction is
linked to illicit activity, it just gets blown in with the
transactions. It is not particularly identified as suspicious
without some sort of intelligence that is external to the
blockchain.
Another use is the sanction evasion and the movement of
funds for Russian oligarchs. So, there are a variety of threats
that cryptocurrency is currently being exploited for that pose
national security threats to the United States. Thank you.
Mr. Lynch. What would you suggest? We have had a number of
bills come through this committee that, for instance, would
take away jurisdiction of the SEC, which has been a primary
mover in this space, and place it with the Commodity Futures
Trading Commission (CFTC). What would you recommend in terms of
our response to try to deal with some of these vulnerabilities
that are present in the digital asset space?
Ms. Jimenez. I think the first step in something that
legislation can do is address U.S. institutions that are
dealing with this. There have been a lot of good proposals
about adding transparency, and whether that regulator is the
SEC, which has a lot more broad experience investigating
financial crimes compared to the CFTC, which also does a good
job, but the depth and breadth of what the SEC has been doing,
just purely from the number of SARs filings--the CFTC barely
gets a couple hundred a year, and there are tens of thousands
that the SEC receives. So, the SEC is just a little bit more
used to dealing with that financial crime aspect.
With the U.S. legislation, it still does not change the
underlying features of the cryptocurrency, and I am concerned
that we might have great rules, and if the U.S. institutions
follow them, that is wonderful but U.S. citizens and customers
will still be victims of those external organizations that are
going to come here because we have a robust economy and we have
people with money that they can steal through these exchanges.
So, we might be able to adjust and limit some of the issues we
have seen within exchanges, but it is not going to stop being a
useful tool for criminals, since they are international in
nature.
Mr. Lynch. Thank you. Mr. Chairman, my time has expired. I
yield back.
Chairman Hill. The ranking member yields back. Now, we turn
to the Vice Chair of the subcommittee, the gentleman from Ohio,
Mr. Davidson, for 5 minutes.
Mr. Davidson. I thank the chairman and thank you to our
witnesses. I appreciate having this hearing to kind of correct
the record. There is a lot of misinformation and disinformation
out there on this topic in particular, and no, I am not calling
for a disinformation governance board or a ministry of truth to
set the record straight. We can have hearings like this, and
hopefully, an honest, free press will get the word out as well.
Mr. Hughes, in your testimony you state that, ``any policy
response to the threat of money laundering should embrace the
transparency of the blockchain and bolster the power of
transaction analytics.'' At that basic level, the idea that it
is on a public, immutable, distributed ledger that is fully
auditable answers a lot of the misinformation and
disinformation. Do you believe that our current Bank Secrecy
Act/Anti-Money Laundering (BSA/AML) framework for all money
services businesses and banking and financial services in the
United States allows for sufficient reporting requirements in
this space?
Mr. Hughes. I think currently, you see the majority of
digital asset activity on the centralized intermediaries like
exchanges, so the big exchanges in this country are the money
services businesses subject to the BSA. I believe they report
SARs. So, that is a very important piece of the puzzle.
I think you are exactly right. Blockchain analytics is
crucial. Everybody, not only law enforcement, but everybody in
the industry really uses it because you all have services and
you want to maintain the integrity of the services. You want
them to be used for lawful purposes. So, they are a very great
tool to ensure you are safeguarding your services in that way
but it can be improved.
You have an immutable record that goes back to the
beginning of the chain. The information about what wallets are
problematic and what transactions may be illicit could speed
up. You could get that out to people faster, so their services
can safeguard themselves more quickly. You can spot exploiter
wallets, and you can spot illicit flows more quickly. I think
that technology is going to develop as blockchain analytics
continues to be used, especially as more collaboration between
private industry and law enforcement occurs.
Largely, I think a lot of the debate about what to do on-
chain with security and stopping flows has to do with the basic
debate about regulating software, the development of it and the
use of it. That is not a debate that we have really had in this
country or anywhere else. It is just beginning in this country
as well as overseas, and I think that there are a number of
legislative proposals which actually propose----
Mr. Davidson. We definitely have people who want everyone
to get permission to do virtually everything from the
government or via their credentialed third-party agent, and
that is just kind of dystopian for a lot of us. I think a lot
of the people back home--prosecutors, law enforcement folks--
are just looking at it and saying, ``How do we catch the bad
guys?'' They are used to using the current framework to catch
the bad guys, and they just want to know that in a new era,
they can continue to use some sort of framework to catch the
bad guys.
Ms. Khodarkovsky, I thought you did a nice job in your
written testimony. It was pretty thorough and extensive. I
enjoyed everyone's testimony, but I particularly thought you
did a nice job of explaining the architecture of blockchain, in
particular. When you look at one of the things that people
target, anything that you would anonymize, one of the
challenges with some blockchain applications is if you have
hundreds of Bitcoin, as an example, in self-custody, in a
wallet, which is still permissible and legal in this country,
and you move it, then it is obvious to somebody that you have
that many coins in a wallet.
So, there are legal and rational reasons why someone would
want to provide a little more anonymity. That alone should tell
you that it is not entirely secret. Could you elaborate on
that, and on legitimate uses of anonymizing transactions?
Ms. Khodarkovsky. Thank you for your question, and speaking
as a former prosecutor, it is very important to balance
combating criminal activity and preserving some of the
fundamental rights in the U.S. that we hold dear, which include
privacy. There are ways for law enforcement to investigate and
trace assets on the blockchain because of its traceability and
immutability, even if individuals are using self-hosted
wallets, because they will interact under our current, robust
U.S. AML framework with centralized exchange or on/off ramps
when they exchange their digital assets for fiat, and they will
go through that process.
Mr. Davidson. Yes, thank you. I wish I had longer with each
of you, and in particular the idea of debunking the idea that
lots of SARs equals lots of illicit activity but my time has
expired, and I yield back.
Chairman Hill. Time has indeed expired. Dr. Foster is now
recognized for 5 minutes.
Mr. Foster. Thank you. I would like to first get an idea of
actually where we are in terms of anonymity. Just to be
specific, Ms. Jimenez, if you had $10,000 of Bitcoin that you
had just gotten from a ransomware attack, do you believe that
you know what is necessary to make that anonymously arrive as
dollars in your bank account through a series of whatever
transactions are necessary? In a way that Mr. Levin could never
discuss, how could you return that money to yourself?
Ms. Jimenez. Thank you. I believe there are ways, and let
me cite a statistic for that, since I am an economist. These
was previously cited the Colonial Pipeline ransomware, and
there was a success in that case where part of the ransomware
was recovered, and that is with knowing that ransomware, in
fact, happened. It was a public event that was in June of 2021.
In the next 6 months of 2021, there were another almost 800
ransomware attacks that were about $488 million, and there was
zero recovery on any of those, to date. It is possible
something in the future might be uncovered. There are
occasionally successes, and I applaud the efforts of blockchain
analytics, but there are many, many, many more instances that
are not caught at all, and the people who have been damaged by
ransomware maybe eventually getting that money back does not
undo the damage. Your business has already shut down. You
already were waiting hours in line for gasoline because the
pumps were not working. Your health care provider was sending
you to the----
Mr. Foster. No, the damage is clear. It is a technical
question.
Ms. Khodarkovsky, do you believe that you could take a
bunch of stolen Bitcoin, where everyone knows that is a
criminal wallet, and then go through a series of transactions
and make it return to your bank account in a way that no one
could figure out who it was?
Ms. Khodarkovsky. I believe that we have tools that would
make tracing the Bitcoin, which is on a public ledger----
Mr. Foster. No, you are allowed to put it through mixers,
convert it to Monero, whatever is necessary, take it offshore,
put it through self-hosted wallets. You are allowed all of
those things. Do you believe that you could launder it and put
it back in your bank account in a way that no one could detect
it, with what is in place right now, internationally?
Ms. Khodarkovsky. I believe in the U.S., we have strong
laws that would----
Mr. Foster. What is in place internationally? Could you do
it? If you were allowed to go offshore, could you do it?
Ms. Khodarkovsky. I think the U.S. needs to help our
foreign partners----
Mr. Foster. Not all of our foreign partners are going to
cooperate. With what is in place internationally--I just want
to try to get an answer.
Mr. Lisa. I'm sorry, Congressman. I think the short answer
to your question is yes, I think you could. The easiest way to
do that would be to go to an exchange like Garantex in Moscow,
where you could go offshore to a noncompliant exchange----
Mr. Foster. Right. So, what you are saying is regulating
the on- and off-ramps is insufficient to prevent money
laundering, that as long as you can take the on-ramp, go
offshore with it, with self-hosted wallets or whatever, do all
your dirty work offshore, and then return it back on an on-
ramp, it is actually--what are the regulatory regimes that
could work to prevent that? Does someone propose something that
would actually prevent that from happening, and what would be
necessary for it?
Mr. Lisa. Thank you again for that question. There are
efforts, I think, there are tools that the U.S. currently has
and currently is attempting to use. At the end of the day, I
think it is attempting to try to close gaps. One of those tools
that OFAC used was sanctioning Garantex. There could be other
efforts as well, largely by attempting to use the leverage that
we have against foreign actors, which might include through our
alliances, through our attaches, to ensure that those offshore
exchanges, the ones that are noncompliant, become isolated.
They effectively become radioactive to the rest of the world.
That is not a perfect system, but frankly, there are no
perfect systems in this. I respectfully suggest that it is much
better to have an offshore-compliant, noncompliant exchange
than it is to be driving the compliant exchanges here in the
U.S., so that I could not do that out of my Coinbase account or
out of my Kraken account. I agree, that is a gap.
Mr. Foster. Yes. Mr. Levin, do you have any ideas on how
you could actually prevent this internationally, given the
number of noncompliant entities offshore?
Mr. Levin. Yes. I think we need to be focused on the
disruption efforts that are possible with the existing
authorities, both in the intelligence community and in law
enforcement. We have assisted in helping the U.S. Government
also seize foreign exchanges like BTC-e, where that was taken
down, and all of the assets were seized by U.S. authorities,
where that type of problem exists.
Mr. Foster. Thank you. I yield back.
Chairman Hill. Thank you. The gentleman yields back. Mr.
Rose of Tennessee is recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Hill, and thank you to our
witnesses for being with us today.
Mr. Lisa, I kind of want to pick up where you just were. We
see a lot of illicit financial activity occur on a global scale
and it involves cross-border transactions. Therefore, whatever
we do from a policy perspective will be of limited effect
unless we can facilitate coordination with foreign regulations
and law enforcement, it seems to me.
Would you describe how we can improve this coordination
going beyond or building on what you were just saying?
Mr. Lisa. Yes, and thank you for that question, Congressman
Rose. I think there are a couple of different approaches to it.
There are some things, of course, that the U.S. can do
unilaterally. If you are a foreign MSB, FinCEN has had the
authority to charge you since 2011. You can use sanctions
authority or Section 311.
Internationally, however, we are more limited in terms of
our ability. We cannot fly to Moscow and apprehend the Garantex
officials.
What we can do is drive capacity-building overseas with our
attaches. We can drive further expertise so that firms like
Chainalysis and other blockchain analytics firms are being used
elsewhere through our foreign allies to ensure that financial
crime detection technology is effectively exported, and not
exported in the literal sense, but that it is used by our
allies and by those with a common interest, which, at the end
of the day, is maintaining U.S. leadership in this space by
maintaining the leadership that we have as the tip of the spear
when it comes to financial crime intelligence.
Mr. Rose. Thank you. Ms. Khodarkovsky, would you like to
expand on that or give us your view?
Ms. Khodarkovsky. Yes, thank you for the question. I think
it is important to look inward before we look to support our
foreign partners. In the U.S., in my experience both at the
Department of Justice and in the industry, there is a lot of
work being done to identify bad actors who are using loopholes
and arbitrage of foreign jurisdiction, but it is not just
limited to the digital asset space.
So when we look to help our foreign partners close
loopholes to stop illicit finance, we should do that in a way
that is not just focused on cryptocurrency but on hawalas or
banking systems or sectors like gold and other commodities
around the world that Russia or China are exploiting because
ultimately, we live in a global society where movement of
funds, even outside of the U.S., could have a detrimental
impact on U.S. national security and business interests.
Mr. Rose. Thank you. Mr. Hughes, we are seeing certain
rules and regulations implemented abroad related to market
structure as well as to requirements to prevent money
laundering and terrorist financing. Do you believe that it is
necessary for the U.S. to copy other countries' regulatory
regimes in order to effectively combat illicit finance in
crypto?
Mr. Hughes. Thank you for the question. I would not say it
is necessary to copy. I think we can, to the extent someone is
ahead of us, gain a little inspiration about what they are
doing. I particularly think of Europe in this regard. With the
market in crypto assets regulation, they have put the first
thing first, which is regulating centralized entities that
perform traditional finance-like functions, like actually
serving as intermediaries for digital assets. Then, they have
really focused on those entities on a whole range of issues,
investor protection issues, but in addition to that, money
laundering issues as well.
The issues with how you regulate software, the DeFi
question, they have put off to a second round of policymaking,
which they are just now starting, and they are starting in
earnest. Some initial proposals and conclusions in that regard
are not going to be due out of the EU commission until the end
of 2024. I think there is plenty of time and opportunity now
for us to start engaging in these conversations, so we can look
to that model to see how to structure our debate.
Mr. Rose. As my time runs out, maybe for the record, you
could share with us other views of what we can learn from the
efforts of other countries that seem to be making more progress
in bringing digital assets inside the regulatory perimeter. If
you could answer that in writing for the record, I would
appreciate it.
My time has expired, and I yield back.
Chairman Hill. The gentleman yields back. Mr. Casten of
Illinois is recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. Mr. Levin, in your
written testimony, you describe the inherent ineffectiveness of
using crypto for terrorism finance because of the blockchain.
You are nodding your head. I want to make sure I am not
misquoting you.
I read that was because a 2020 report from the Trump
Administration DOJ said that criminals use cryptocurrency to
facilitate crimes and avoid detection in ways that would be
more difficult with real money. It also said that criminals use
cryptocurrency in large amounts transferred across
international borders as a new means to fund criminal conduct,
from child exploitation to terrorist fundraising.
A 2021 GAO report stated that virtual currencies have been
central to the rise of drug sales in the U.S., especially
fentanyl and synthetic opioids.
In 2022, the Senate Homeland Security Committee said that
crypto is almost exclusively the required method of payment for
ransomware attacks, and in May of 2023, a senior intelligence
official said that half of North Korea's nuclear missile
program has been funded by cybercrime and cryptocurrency and
those are legit national security experts.
Do you stand by your statement that cryptocurrency is
inherently ineffective for terrorism finance? Just a yes or a
no?
Mr. Levin. Cryptocurrency has been ineffective for Hamas
crowdfunding.
Mr. Casten. Okay. I am going to come back to that in a
little bit, but I will take your limitation.
My second question for you, Mr. Levin is, in February,
Chainalysis estimated that there were $21 billion of illicit
transactions, but noted that depends solely on on-chain
intelligence. Does Chainalysis have any tools to quantify
illicit activity that happens off-chain?
Mr. Levin. No. We focus on, on-chain activity.
Mr. Casten. Thank you for that, because in a Wall Street
Journal report from October 27th, blockchain analysis shows
that wallets seized by the Israeli government for being
connected to Hamas, as you just noted, received some $41
million in cryptocurrency between 2020 and 2023, according to
Israeli blockchain firm BitOK. More than 99 percent of that
came in Tether. That would be an off-chain transaction.
Mr. Levin. No. Tether transactions would be on-chain.
Mr. Casten. Ms. Jimenez, would you like to comment on that?
Ms. Jimenez. It depends on the type of transaction, whether
it happened within an exchange or not. I am not familiar with
that exact back pattern, but many terror finance fundings
happen within exchanges. I do not know the details of that
exact example, but both have happened on-chain, terror
financing and terror financing within exchanges.
Mr. Casten. Okay. Does anybody know how much Tether is in
circulation?
Mr. Levin. Approximately $86 billion.
Mr. Casten. How do you know that number? Tether does not
report it.
Mr. Levin. Yes, they do. You can look on the blockchain of
every Tether that has ever been issued. I am happy to provide a
briefing and show you the amount.
Mr. Casten. Okay. We will follow up on that.
In October, as we have mentioned, The Wall Street Journal
reported that Hamas received $41 million in crypto. There was
another $93 million, but I want to just focus on the $41
million that Hamas received.
On November 12th, The Wall Street Journal followed up with
a second report. They said that a significant portion of the
funds received by Gazan exchanges were for Hamas. Since 2020,
crypto has been an essential part of Hamas's operational
activity. There are a lot more quotes. I would encourage
everybody to read it but they note at the end that to obscure
the money trail, these exchanges changed the wallet addresses
they used each day and sent funds through mixers.
Ms. Jimenez, from your research, can you explain to the
committee how terrorist organizations use cryptocurrency mixers
and other anonymizing technologies for illicit financial
activities?
Ms. Jimenez. Yes, thank you. As we discussed, there is some
insight via blockchain analytics for that portion. So, methods
that they try to use to hide their illicit activity would be--
there are actually some blockchains that have less
transparency. There are mixers that pool together transactions
from many different parties and then spit them out in different
amounts, so you may not be able to tell which funds went into
receiving wallets on the other end but there are many different
methods they can use, and a very easy one is just to go off-
chain entirely.
I want to push back on the myth that all crypto
transactions are reported on the blockchain. That is just not
true. There is different research I can cite, but the number I
said in my written testimony was, I believe, about only 10
percent is on the blockchain. There is all this talk about
blockchain analytics, but it is very limited. It is helpful,
and I applaud the effort, and it has successes, but it does not
give a full picture of what is happening in the cryptocurrency
crime space.
Mr. Casten. I would echo that point, and I want to just say
I think there are a lot of interesting things being shared in
this conversation about why the blockchain is traceable, and we
can talk about how it gets decrypted. To your point, that is
sort of like saying you cannot get fat from eating because
nonfat foods exist. There is a rich conversation that goes way
beyond the blockchain, and if I am a bad guy, it is easy to get
on and off.
I yield back.
Chairman Hill. I thank the gentleman. Mr. Nickel is now
recognized for 5 minutes.
Mr. Nickel. Thank you, Chairman Hill, and Ranking Member
Lynch.
On October 7th, Iranian-backed Hamas terrorists killed more
Jews on one day than any single day since the Holocaust. This
atrocity is a tragic testament to the relentless threats Israel
and its people endure. As a nation, we must stand firmly with
Israel, our unwavering ally, in these incredibly difficult
times, and we must support Israel's right to defend itself
against such terror and work diligently to dismantle the
financial arteries that enable and embolden terrorist
organizations like Hamas. Defeating Hamas is also vital for the
safety and well-being of the Palestinian citizens and the
civilians in Palestine
The actions of Hamas call for a decisive response, and I am
glad our committee successfully marked up bipartisan bills
yesterday to address Iran's financing of terrorist acts against
Israel.
According to Treasury's National Terrorist Financing Risk
Assessment (NTFRA), the vast majority of terrorist funds still
move through banks and money transmitters or are in cash. When
they do use digital assets, Hamas and other terrorist groups
disproportionately rely on unregulated, offshore digital assets
like Tether and Binance that have next to no compliance
controls.
It does not seem appropriate to me that these unregulated
bad actors can provide U.S. dollars to a terrorist
organization.
Mr. Levin, how can the U.S. ensure that overseas actors
effectively enforce its regulations, and how can Congress
bolster the jurisdiction of U.S. enforcement agencies, allowing
them to extend their reach internationally?
Mr. Levin. Thank you so much, Congressman, for the
question. The examples that you cite are relevant for the
regulatory regime that we put in place, but just to address the
quick tactical disruption efforts that are ongoing, actually,
Binance and Tether have both taken action under the direction
of the Department of Justice to freeze funds that are
associated with Hamas terrorist financing campaigns and the
affiliates and network of facilitators on which Hamas has
relied.
So, we need to continue to foster international
collaboration on a tactical, operational level to make sure
that we can freeze and seize assets. Those relationships could
be strengthened a lot by a better regulatory regime
domestically that would allow, for example, stablecoin issuers
to be able to have Federal oversight at a regulator in the
United States, and there would be a better regime of how you
can actually foster this type of collaboration between public
and private that is necessary for that disruption.
That is really where we need to focus, on building
international cooperation on these exchanges that are
registered in foreign jurisdictions, and also making sure that
we strengthen our domestic industry so that, for example,
stablecoins can be issued and administered in this country.
Mr. Nickel. My next question is to you, Mr. Levin, again.
Do you agree that the bipartisan market structure and
stablecoin legislation that passed in this committee in a
bipartisan way would limit the harm from companies like Tether
and Binance by regulating digital assets and bringing companies
back to the United States?
Mr. Levin. I do believe that market structure legislation
is essential in creating an environment where regulated
entities can operate here, and I think that it is important
that stablecoin bills are passed so that we can have Federal
prudential supervision of them in this country, and I think it
would help, yes, in preventing further harm to the industry.
Mr. Nickel. Thank you. My next question is for you, Ms.
Khodarkovsky. U.S. financial services company, Cantor
Fitzgerald, reportedly manages Tether's $72-billion portfolio
of Treasury bonds, effectively giving them access to U.S.
dollars. Is this really appropriate, and what should Congress
do about it?
Ms. Khodarkovsky. I think we need to appreciate the
regulatory framework that we have in the U.S., which ensures
that U.S.-based stablecoin issuers are already required under
our current anti-money laundering framework to conduct
compliance and have proactively and quickly been able to freeze
and blacklist accounts that OFAC has sanctioned.
As it relates to intermediaries or those who support
companies, they have to do their own due diligence and
understand the risks that they are taking on if they are
funding or supporting companies that may be offshore, that are
engaging or facilitating other criminal activity. That is
something that, at the Department of Justice, in the money
laundering section, we looked at gatekeepers and third-party
facilitators who knowingly benefitted by helping bad actors
commit their crimes.
Mr. Nickel. My time has expired, but I would love to follow
up with you on what Congress should be doing here. Thank you.
Chairman Hill. Thank you, Mr. Nickel. Just as an
announcement, we are going to complete our first round of
questioning with Mr. Timmons of South Carolina, and then
Members will be offered a second round of questioning at 2
minutes each.
Mr. Timmons is recognized for 5 minutes.
Mr. Timmons. Thank you, Mr. Chairman. Mr. Levin, an article
in the Department of Justice's Journal of Federal Law and
Practice states that despite its purported anonymity,
cryptocurrency equips law enforcement with an exceptional
tracing tool, the blockchain. In the same article, the authors
describe the highly-valuable dataset that comes from the
blockchain. Would you describe what information is available to
law enforcement and how this data can be leveraged to identify
criminals using digital assets and halt their activity?
Mr. Levin. Thank you, Congressman, for the question. Yes,
the blockchain essentially provides a record that is immutable
and permanent of every transaction that is recorded on that
ledger. What then is necessary is that you need to link those
transactions to the entities that have put them there, and
determine whether those are illicit transactions or whether
those are transactions that are going through one of the on-
ramps or off-ramps.
The tool that is provided to the government from a company
like Chainalysis is that we provide that map so that a law
enforcement agent can take a complaint that involves a ransom
payment or a terrorist financing payment or a campaign and move
that to the full network of transactions that resulted in those
funding transactions. So you could look at what exchanges were
used in funding and financing those and then due legal process
can be served to those exchanges to get records to identify the
individual people involved.
You can also find what common victims there may have been
to any of those crimes, and also what is the full network and
supply chain that enables those types of crimes to happen.
Mr. Timmons. Thank you for that. Can you provide some
examples of where the blockchain has helped law enforcement
combat criminal activity?
Mr. Levin. Yes, Congressman. There are a lot of different
cases that we have been involved in over the last 9 years. I
would say that we have been involved in cases that involve
child abuse material, like Welcome to Video, where 330 people
were arrested who were facilitating the distribution of child
abuse material, and the administrator was arrested in South
Korea. It was really a global effort across 30 countries to
disrupt the full network.
We have also been involved in many of the terrorist
financing seizures and disruptions that we have spoken about
today.
Mr. Timmons. Would you say Colonial Pipeline and
recuperating a substantial portion of the ransom would be one
of the bigger successes?
Mr. Levin. That would be one of the bigger successes in
ransomware, as well as the network affiliate that was actually
arrested, where $30 million was seized from that as well.
Mr. Timmons. Okay. Thank you for that.
Mr. Lisa, we have seen sanctions and enforcement actions
taken on certain mixers by the Treasury Department. To the best
of your knowledge, why did Treasury and other international law
enforcement partners seek a more targeted approach to
sanctioning mixers?
Mr. Lisa. First, thank you for the question, and just to
make sure I understand it, is it a more-targeted approach to
sanctioning specific mixers or mixers, generally?
Mr. Timmons. I would say mixers, generally.
Mr. Lisa. Yes. Treasury has, I think, so far used two tools
at its disposal regarding mixers. One is the sanctions
authority, but also Section 311 authority, at least according
to the most-recent Notice of Proposed Rulemaking (NPRM) from
FinCEN on that.
If there is a broad approach to it, as, for instance, in
the most recent Section 311 proposal, the first question is
whether or not there is actually sufficient predication for
that--in other words, is every mixer bad, or can we use just
examples of specific ones? The other question around that, I
think, is if there are good uses versus bad uses of mixers, for
instance, as my colleague, Ms. Khodarkovsky, had alluded to,
for people to use mixers in furtherance of personal privacy as
opposed to illicit activity. That is the delicate balance.
If there is a broad-based approach, then effectively there
is a risk of doing two things: first, you are actually throwing
out a lot of good activity; and second, you could be drifting
into an area of effectively regulating software, which is a
tough road to climb back from.
Mr. Timmons. Sure. Have these efforts been effective, in
your view, as far as the sanctions?
Mr. Lisa. Thank you for that question. I think there has
been limited evidence to show its efficacy. The one risk of it,
which could damage not just efficacy overall but efficacy in
terms of U.S. leadership in this space, is if we, again, do go
down a road of doing things like regulating software or not
being cognizant of actually doing what the U.S. has always been
famous for doing. It is one of the reasons why it has been a
leader in the AML space, is we, as a country, have taken a
risk-based approach. We look at harm, and we target legislation
and policy to address that harm. I do not think that has been
the case so far with mixer sanctions.
Mr. Timmons. Okay. Thank you for that. Mr. Chairman, I
yield back.
Chairman Hill. Thank you, Mr. Timmons. The gentleman yields
back. Mr. Sherman of California is recognized for 5 minutes.
Mr. Sherman. As far as I know, all of the witnesses have
businesses here that depend on the crypto ecosphere, and if
crypto were to cease to be a thing, you would all lose an awful
lot of money. Am I wrong as to any of the witnesses?
Ms. Jimenez. I do not depend on cryptocurrency. I am not
owned by a cryptocurrency company. My clients are not
cryptocurrency companies.
Mr. Sherman. Ah, the one Democratic witness. I commend the
ranking member for his selection of witnesses. Thank you.
We are told about U.S. leadership. I want to point out that
when it comes to human trafficking, China is better at that
than we are. When it comes to tax evasion, the Cayman Islands
is better. We do not need to be a leader in everything.
I do not know which witness can answer this, but how many
Bitcoin transactions are there in the average day?
Mr. Levin. Thank you for the question, Congressman. I am
not totally sure, but I would say between 10,000 and 100,000.
Mr. Sherman. Between 10,000 and 100,000. You illustrate the
point I am making, and that is as long as crypto is not a
currency, as long as we are talking 10,000 transactions, even
100,000 transactions, then we are going to be able to police it
a lot more easily than if it ever became a currency. Does
anybody have an estimate--credit cards, debit cards, checks--of
how many U.S. dollar transactions there are on an average day?
At least 1 billion. I see--I cannot see your name.
Mr. Lisa. My last name is Lisa, sir.
Mr. Sherman. Your last name is Lisa, and you are nodding.
It must be a billion. Heck, maybe a billion just at McDonald's.
Mr. Lisa. I think a billion is conservative.
Mr. Sherman. Right. So obviously, it is a lot harder to
find a tree in a forest of a billion trees than of 10,000 to
100,000 trees.
I have talked to the Israelis about this. When somebody
tells you they are going to try to kill you, you should believe
them. When an industry says they are going to try to displace
the U.S. dollar as a reserve currency and a medium for
international exchange, you should believe them. If they were
ever successful, the power of the U.S. dollar in international
exchanges is to the point where we tell other countries how
much Iranian oil will let them buy, and that they do not dare
to buy any more. Clearly, if the U.S. dollar was not as
important--let us put it like this, the Uruguayan peso is not
that important. If Uruguay started telling China how much oil
they could buy from Iran, they would be laughed at.
We are told that there are good uses for mixers, Ms.
Jimenez. We are told it is about personal privacy. Is that
really just a code word for tax evasion?
Ms. Jimenez. Yes, sir. Thank you for the question. Mixers
can be used for whatever purpose the end user wants it to be,
whether that is tax evasion, terror finance, or to hide illicit
proceeds. When the Treasury released their proposed rulemaking
on considering mixers to be a primary money laundering concern,
they do actually have studies and analysis, using blockchain
analytics, that cited the very large percentage of funds that
were flowing in and out related to illicit activities. There
are some lovely stats that I do not have----
Mr. Sherman. Most people looking at illicit activities do
not even think of tax evasion as an illicit activity. Some
people are thrilled whenever a billionaire is able to cheat on
their taxes.
What would be the legitimate use of a mixer? Can you think
of one?
Ms. Jimenez. My specialty is financial crime, so I would
defer to the other panelists. If you want to know more about
how it can be used badly, I can provide that but aside from
what other folks on the panel have already said, I do not have
anything to add to that.
Mr. Sherman. I think most of the folks in the crypto world
think tax evasion is a meritorious use of a mixer. I yield
back.
Chairman Hill. The gentleman yields back, and as I noted,
we will have a second round of questions now for the Members
who want to participate. I am going to hold the clock at 2
minutes for that second round, and I will start out initially.
In its 2022 National Money Laundering Risk Assessment, the
Treasury Department explained that the greatest source of
noncompliance as it pertains to anti-money laundering currency
compliance is with digital asset exchanges that are offshore
and outside of the U.S. jurisdiction.
Mr. Lisa, can you talk about the importance of MLAT
treaties with jurisdictions, and what other tools we should use
in combating crime in that manner? Then, I am going to ask
people just generally to comment on, is it not better if we
have a functioning regulatory framework here in the United
States that sets out all these rules and expectations in and
around digital assets that we can hold out to our partners? Mr.
Lisa?
Mr. Lisa. Yes. Thank you for this question, Chairman Hill.
In terms of existing tools that we have for international
cooperation, I think FinCEN and Treasury and DOJ already have
many of them. They may need to be better-resourced, but they do
have expertise. They have public-private partnerships. They
have use of sanctions and Section 311 authority, and they have
legal attaches in every country where we have an embassy. So,
they can definitely use that to build better capacity-building
that simply is not as effective if we are only talking about
traditional financial investigations, where we are only using
cumbersome MLAT processes, and effectively wind up not being
able to catch any ransomware actors.
Chairman Hill. Okay, and does everybody agree that we need
a regulatory framework that clearly outlines regulatory
oversight, AML/BSA compliance for digital assets? Mr. Hughes?
Mr. Hughes. Absolutely, yes.
Chairman Hill. Mr. Levin?
Mr. Levin. Yes.
Chairman Hill. Mr. Lisa?
Mr. Lisa. Yes, I do.
Chairman Hill. Ms. Khodarkovsky?
Ms. Khodarkovsky. Yes.
Chairman Hill. Ms. Jimenez?
Ms. Jimenez. Yes.
Chairman Hill. Thank you so much. I yield back, and I now
turn to the ranking member for 2 minutes of additional
questions.
Mr. Lynch. Thank you, Mr. Chairman. According to CoinDesk,
off-chain transactions, which refers to transactions occurring
on a cryptocurrency network that moves outside of the
blockchain, are gaining--actually, the word they used was,
``exploding,'' in popularity, especially among large
participants.
So, Mr. Levin, if we have a couple of actors like Iran and
Hamas, and they trust each other, and they move value outside
the blockchain, is that something you are going to pick up?
Mr. Levin. Thank you for the question, Congressman. When
you talk about off-chain transactions through trusted networks,
that is like using any other of their money laundering----
Mr. Lynch. Right. So, is that a yes or a no?
Mr. Levin. We do not detect anything that is off-chain,
but----
Mr. Lynch. I only have a minute. I 'm sorry. I just need a
quick answer.
Mr. Hughes, anything on your end in terms of analytics? Are
you going to pick up things if they are moving outside the
blockchain?
Mr. Hughes. If they are moving outside the blockchain they
need a third-party intermediary, and that is where----
Mr. Lynch. That often happens.
Mr. Hughes. ----and I think there needs to be a global
regulatory framework.
Mr. Lynch. Or they can exchange private keys, right? They
could do that?
Mr. Hughes. You could exchange private keys----
Mr. Lynch. Or they could have coupons where somebody can
cash in later, right? That is another----
Mr. Hughes. I am unaware of coupons.
Mr. Lynch. Okay. That is a new one.
Mr. Hughes. That is a new one.
Mr. Lynch. Ms. Jimenez, is that a problem, moving this
value where they are saying there are more and more large
participants that are using off-chain transactions?
Ms. Jimenez. Yes.
Mr. Lynch. Okay. Is that a trend we are seeing?
Ms. Jimenez. I like to give credit where it is due. When
the bad actors are seeing that their activity is being traced
on the blockchain, they have two options. They can try to
obfuscate it on the blockchain or they can move it off and some
are choosing to move it off, and our regulatory framework is
still----
Mr. Lynch. So, law enforcement would not get that rich data
that Mr. Timmons talked about if it is off the blockchain.
Ms. Jimenez. If it is off the blockchain and outside of the
United States.
Mr. Lynch. Okay. Very good. Thank you. I yield back.
Chairman Hill. The gentleman yields back. The Chair
recognizes the Vice Chair of the subcommittee, Mr. Davidson,
for 2 minutes.
Mr. Davidson. Yes, thanks. I appreciate the kind of bonus
round here. Mr. Lynch earlier said that it is beyond arguing
that cryptocurrency is the preferred payment system for
criminals. That is a nice statement, but is it objectively
true, Mr. Levin?
Mr. Levin. Thank you for the question, Congressman. When it
comes to the Iranian economy, the Iranian economy does not run
on the blockchain, so that is not the preferred----
Mr. Davidson. For Iranian criminals or any other criminals,
the U.S. dollar is the reserve currency for a reason. Cash is
king when it comes to illicit finance, not cryptocurrency. Is
that beyond dispute? I think Chainalysis put out a report that
said about 0.12 percent of all of the crypto transactions were
illicit, and that all crypto transactions combined are a tiny
fraction of U.S. dollar transactions.
So, could it possibly be objectively true that the
preferred currency for illicit activity is crypto?
Mr. Levin. Thanks for the question, Congressman. When it
comes to the set of transactions, we said it was 0.24 percent
of the transactions in cryptocurrency can be linked
specifically to illicit activity. Yes, that is a very, very
small subset of the overall transaction volume in the
traditional financial system.
Mr. Davidson. Yes. I just think there are so many fallacies
like that, and we cannot just accept them at face value.
Ms. Jimenez, in your testimony, you used the presence of
digital asset-related Suspicious Activity Reports (SARs) as an
indication of an overwhelming amount of crime in the digital
asset ecosystem. In my view, that kind of prejudges it as
guilty until proven innocent. I think the Biden family would
want the innocent until proven guilty, given their number of
SARs but according to the Department of the Treasury, ``SARs
are preliminary, an unverified tip and lead information.''
Given this important context, would it be fair to say that
digital asset-related SARs actually demonstrate that U.S-based
exchanges are trying to comply with the BSA framework?
Ms. Jimenez. Yes. However, there are also enforcement
actions against numerous U.S.-based [unclear] for failing to
file SARs.
Mr. Davidson. Thank you.
Chairman Hill. I thank the gentleman. Mr. Sherman is
recognized for 2 minutes.
Mr. Sherman. Mr. Levin, you say 0.24 percent of the crypto
transactions are illicit. Does that include tax evasion, when
you say illicit?
Mr. Levin. Congressman, thank you for the question. No, it
does not include tax evasion in that number.
Mr. Sherman. That is the big market. Cryptocurrency cannot
possibly be worth a trillion dollars if it only becomes the
currency of drug dealers and human traffickers. It can only
compete with the dollar if it gets that tax evasion market. The
IRS has testified that there is roughly $1 trillion of taxes
not paid each year, which means you have to hide $3 trillion of
income each year, and you have to hide $30 trillion of assets
from the IRS for over a decade. That is the big market.
Does anybody have an estimate of what percentage of the
U.S. dollar transactions are illicit?
Mr. Levin. Sorry, Congressman. The estimate for global
transactions is that somewhere between 3 and 5 percent of
global transactions are actually part of money laundering.
Mr. Sherman. Wait a minute. Just the number of burgers
purchased with a debit card or a credit card is--I do not know
how many burgers we eat in this country, but it is a lot. When
you say 3 to 5 percent, is that 3 to 5 percent of the
international transactions are illicit, or are you counting in
your denominator every time we buy a burger?
Mr. Levin. I think it is on the sort of gross flows of
international commerce. The U.N. has published these numbers.
Ms. Jimenez. May I add something, sir?
Mr. Sherman. Yes. Go ahead.
Ms. Jimenez. The U.N. number that is frequently cited is an
apple-and-zebra comparison, it is not even apples and oranges,
that compares a best guess by the U.N. of the value of all
illicit activities by the global GDP. Neither are comparative
to the known tag attributed cryptocurrency transactions purely
on the blockchain versus all transactions. ``All transactions''
is wildly inflated by wash trading, trading between related
parties, and the vast value of transactions that are not
attributed, for which they have not made a decision either way.
Chairman Hill. Thank you. The gentleman's time has expired.
Mr. Rose is recognized for 2 minutes.
Mr. Rose. Thank you, Mr. Chairman. Ms. Khodarkovsky, when
the war between Russia and Ukraine broke out in 2022, the
former Director for Cybersecurity and Secure Digital Innovation
for the National Security Council at the White House explained
that the scale that the Russian state would need to
successfully circumvent all U.S. and partners' financial
sanctions would almost certainly render cryptocurrency an
ineffective primary tool for the state. Treasury Secretary
Yellen reiterated this sentiment when she testified before the
committee last year, explaining that, ``any large-scale
transaction would become apparent.'' Since it would not make
sense to use crypto for large-scale transactions, it appears
that the bulk of Russia's illicit financing occurred through
other channels. Do you agree with Secretary Yellen, and could
you explain what those other channels are that Russia used and
is using for large-scale transactions?
Ms. Khodarkovsky. Thank you for this important question. I
agree that the Russian Federation could not move their entire
GDP after sanctions were issued by the U.S., the U.K., and the
EU, which is another component of how important it is for us to
collaborate with our foreign partners for a global approach on
illicit activity and autocratic regimes. They could not move
just to use cryptocurrency because Bitcoin and other digital
assets are transparent on the blockchain.
They are using, and have used, other ways. They have
laundered money through shell companies, they have used art,
they have purchased companies that are based in the U.S. and
the West, and they have legitimized those businesses to
obfuscate different laws, including tax here in the United
States. They have engaged in human trafficking with the use of
cash and shell companies and exploitation of other
jurisdictions, including Africa, and Latin and South America,
in a way that surpasses all of the criminal activity that they
are engaging in using digital assets----
Chairman Hill. The gentleman's time has expired.
Mr. Rose. Thank you. My time has expired, but if you would
like to expand on that in writing for the record, we would
appreciate it. Thank you, and I yield back.
Chairman Hill. I thank the gentleman from Tennessee. I want
to take a moment to submit a few things for the record. First,
a bipartisan letter sent to President Biden and Secretary
Yellen today by Whip Emmer, Chairman McHenry, Congressman
Torres, and myself, along with 50 other Members, to better
understand Hamas's fundraising through digital assets; a letter
sent by Senator Lummis and me to the Department of Justice
about the need to go after specific bad actors within the
industry; information from several blockchain analytics firms
on the estimates being reported on Hamas's fundraising through
digital assets; letters from digital asset firms and 40
individuals within the U.S. military intelligence and national
security backgrounds, on the importance of Congress working
together on solutions; and finally, a waiver determination
related to a report to Congress on the renewal of Iraq's
sanctions waiver for electricity payments. Without objection,
those items are added to the record.
I want to thank our witnesses today for a great panel.
The Chair notes that some Members may have additional
questions for this panel, 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.
I ask our witnesses to please be as prompt in your
responses as you can and I wish everybody here on the committee
and our witnesses a very Happy Thanksgiving.
This hearing is adjourned.
[Whereupon, at 3:35 p.m., the hearing was adjourned.]
A P P E N D I X
November 15, 2023
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