On Tuesday, a bipartisan group of over 100 U.S. senators and representatives issued a letter to National Security Advisor Jake Sullivan and Treasury Department Under Secretary for Terrorism and Financial Intelligence Brian Nelson. The letter cites “the clear and present danger posed” by terror groups like Hamas and seeks “additional details on [the federal government’s] plan to prevent the use of crypto for the financing of terrorism.”
The letter notes media reports on Israeli authorities’ ongoing seizures of terror-linked digital assets while quoting experts’ opinions that only “a small percentage of the overall amount of funds that flowed through” terror-linked wallets has been seized. The letter specifically mentions that many of these assets were found on the Binance exchange and that the terror groups’ token of choice is the USDT (Tether) stablecoin.
The pols want information (by October 31) on multiple aspects of this situation, including “which actors are facilitating the sending and exchange of digital assets to and between terrorist organizations like Hamas, [Palestinian Islamic Jihad], and Hezbollah.” The letter also wants to know where these bad actors are based and what actions the administration is taking to disrupt their funding. The letter concludes by asking what “additional statutory tools” and other resources the administration might require to address these national security threats.
Politico quoted Senate Banking Committee chair Sherrod Brown (D-OH) saying he was considering bundling recent legislative efforts by Elizabeth Warren and others into a single bill that would impose additional anti-money laundering (AML) and sanctions compliance rules on digital asset operators. Sen. Jack Reed (D-RI) said Brown was “spending a lot of time” figuring out how to combine the best of these existing bills into one measure that would presumably have broad bipartisan support.
However, Republican members of the House of Representatives were absent from Warren’s letter (too busy herding the cats on their farcical speaker votes, no doubt). But Rep. French Hill (R-AR) said members of the House Financial Services Committee were “very interested in hearing the facts” and would seek a briefing on the situation from the House Intelligence Committee.
The feds haven’t entirely been standing still on this front. On Wednesday, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it had imposed sanctions on “ten key Hamas terrorist group members, operatives, and financial facilitators” based in Gaza and at least four other countries.
The financial facilitators include Buy Cash Money and Money Transfer Company, “a Gaza-based business that provides money transfer and virtual currency exchange services.” OFAC said Buy Cash was linked to Hamas fundraising efforts while also assisting the transfer of funds via affiliates linked to Al Qaeda and the Islamic State (ISIS). The actions cited in the announcement date back as far as 2017.
While Buy Cash’s digital wallet was previously flagged by Israeli authorities in 2021 and appears to have been a relatively inconsequential player by the time the OFAC whip came down, the pressure is clearly on the feds to at least be seen doing something. More significant actions will most assuredly follow. And that spells problems for a whole lot of players in this arena.
Digital asset stakeholders are trying to push back against this growing ‘crypto = terrorism’ mantra. Chainalysis issued a report on Wednesday claiming “inaccurate methodologies” were being used to estimate how much digital tokens are playing in fueling terrorist activities. But in the current climate, claims like these will likely get drowned out by the howls of outrage.
Coinbase: Don’t look at us
Washington’s new tough talk could throw a wrench into Coinbase’s efforts to convince D.C. politicians that not all ‘crypto’ operators are as dismissive of their regulatory responsibilities as Binance or Tether.
This week, Berenberg Capital Markets analyst Mark Palmer maintained his group’s price target for Coinbase at $39—which suggests that its current price of around $75 is overly inflated—based partly on “the threats to its business from the various regulatory actions and litigation that it faces in the U.S.” Palmer added that headlines linking Hamas with digital assets “are likely to make clarity around the question of crypto’s legal status even more elusive.”
Intent on undermining this narrative, Coinbase issued a blog post on October 17 emphasizing its commitment to “rooting out bad actors seeking to use crypto for illicit purposes.” This involves “a robust compliance program, which includes [know your customer] checks, sanctions screening, suspicious activity reporting, and strong law enforcement partnerships, to prevent and detect illicit activity on our platform.”
Great, but it’s worth remembering that Coinbase wasn’t always so diligent. In January, Coinbase paid a $100 million penalty following a New York State Department of Financial Services investigation that found “wide-ranging and long-standing failures” in Coinbase’s anti-money laundering and KYC programs. These shortcomings led to a backlog of over 100,000 unreviewed transaction monitoring alerts and 14,000 Coinbase customers warranting enhanced due diligence.
Still, Coinbase wants people to know that it’s learned its lessons. Coinbase says it has “400 compliance, legal and investigative staff” who work with regulators and government to root out “bad actors who seek to abuse crypto for illicit purposes.”
In promoting the blog post, Coinbase’s chief legal officer Paul Grewal tweeted that it was “disappointing that some would capitalize on a tragedy to scapegoat crypto while ignoring significant terror finance elsewhere.” Others might say it’s equally disappointing that Coinbase would rely on ‘whataboutism’ to atone for bad actors misbehaving on cryptocurrency exchanges.
Coinbase will release its Q3 earnings report on November 2, and early indications are the numbers will be fugly. Earlier this month, Bloomberg quoted CCData estimates indicating that Coinbase’s Q3 spot trading volume fell 52% year-on-year to its lowest level since 2020. Coinbase’s site traffic was around 24.3 million in September, down 15.5% from just the month before, reflecting growing disinterest in all things ‘crypto’ from retail traders.
There are signs that Coinbase is becoming increasingly desperate to spark customers into doing anything to boost transaction fee revenue. For instance, the exchange is currently running a promo in which customers who “trade any amount” qualify for the chance to win a single BTC token.
Coinbase raised eyebrows earlier this month by listing the gaming token BIGTIME on its exchange under the ‘Experimental asset’ label. This label refers to tokens that “come with certain risks, including price swings.” That said, the label is cosmetic, as Coinbase imposes no limits on customers’ ability to transact with said experiments to whatever degree they desire.
To virtually no one’s surprise, after launching on October 11 at 7¢ per token, BIGTIME soared above 37¢ the following day, despite some skeptics noting that “the tokenomics are quite dubious. No one is sure about the exact market cap.” And to virtually no one’s surprise, BIGTIME has since surrendered most of its early gains.
Given the scrutiny on Coinbase due to its ongoing dustup with the U.S. Securities and Exchange Commission (SEC) over the issue of offering unregistered securities to the public, one has to wonder why Coinbase would risk listing new tokens that could dig this hole deeper. That is unless there’s some more direct benefit to Coinbase than simply generating transaction fees from BIGTIME trades.
Coinbase has previously come under fire for listing tokens in which its Coinbase Ventures investment arm has a financial stake. Coinbase Ventures’ portfolio page doesn’t list Big Time Studios among its investments, but some media outlets covering Coinbase’s BIGTIME launch included Coinbase Ventures in Big Time Studios’ list of investors.
Whatever Coinbase’s direct involvement, Big Time Studio’s identifiable investors include Digital Currency Group (DCG), which also holds stakes in both Coinbase and Circle, Coinbase’s former partner in the USDC stablecoin. DCG is a notorious dumper of the large numbers of tokens it receives via its many blockchain project investments and happens to be in serious need of cash right now. Just sayin’.
Will ye no come back again, Brian?
Coinbase’s uncomfortable reliance on the U.S. market—responsible for 84% of Coinbase’s annual revenue last year—and regulatory pressures from Washington have led the company to look overseas for greener (read: less strict) pastures. This “Go Broad, Go Deep, Go Nuts” strategy led to this spring’s launch of the Coinbase International Exchange, a Bermuda-based trading platform with products the company cannot offer at home.
Derivatives account for the vast bulk of overall ‘crypto’ trading volume, and late last month, the Bermuda Monetary Authority cleared Coinbase to offer perpetual futures trading to “eligible non-US retail customers.” Coinbase said Wednesday that qualified customers will have access to BTC, ETH, LTC, and XRP contracts at up to 5x leverage (3x for XRP), with more options to follow.
Coinbase aims to attract some of the derivatives whales who formerly traded long or short on FTX, which collapsed in disgrace last November. Coinbase appears to believe that, having been burned once by Sam Bankman-Fried, many futures traders aren’t in any hurry to get burned again by Changpeng ‘CZ’ Zhao, Binance’s ethically challenged founder.
While Coinbase’s international push has also included recently receiving a bank license in Spain and a payment institution license in Singapore, Coinbase’s biggest international market remains the U.K. That probably explains the late-September outburst by CEO Brian Armstrong when he learned the Chase UK bank was changing its “policy around crypto.”
As of Monday, October 16, if Chase thinks its customers are “making a payment related to crypto assets, we’ll decline it.” Customers remain free to transfer funds from their Chase accounts to another bank to fund such activities, but Chase believes “fraudsters are increasingly using crypto assets to steal large sums of money from people,” and so declining such payments is “helping keep you and your money safe.”
Armstrong called the move “totally inappropriate behavior” and suggested, “UK crypto holders should close their Chase accounts if this is how they’re going to be treated.” Armstrong even tagged U.K. Prime Minister Rishi Sunak to suggest that Chase “does not respect your policy goals – thoughts?” (Sunak appears to have ignored Armstrong’s appeal.)
It’s as if Armstrong was unaware that other U.K. banks have imposed outright bans or transaction limits on payments associated with digital assets. But it’s possible Brian has been so focused on fighting with U.S. regulators that he’s only now just waking up to the world beyond America’s borders.
Regardless, that level of wilful blindness doesn’t bode well for convincing American politicians that you’re fully aware of all the transactions taking place on your exchange, does it?
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of group—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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