Bitcoin and ammunition

Terror ties lead Congress to demand ‘swift action’ against Binance, Tether

A growing number of U.S. politicians want to pursue criminal charges against Binance and
Tether, using ‘crypto’ terror financing as their casus belli.

Last Thursday (26), the U.S. Senate Committee on Banking, Housing and Urban Affairs held a public hearing on Combating the Networks of Illicit Finance and Terrorism. We’ll get to the hearing details in a minute, but first a sense of how significantly the vibe around ‘crypto’ has shifted in Congress following the devastating attacks on Israel earlier this month by the Islamic militant group Hamas.

The hearing came the same day that Committee member Sen. Cynthia Lummis (R-WY) and Rep. French Hill (R-AZ) issued a joint letter urging Attorney General Merrick Garland to “reach a charging decision on Binance that reflects their level of culpability and expeditiously conclude your investigations into the ongoing illicit activities involving Tether.”

The letter recalls that Binance “has historically been linked to illicit activity and is purportedly the subject of a current Department of Justice (DOJ) investigation.” Meanwhile, Tether “is knowingly facilitating violations of applicable sanctions laws and the Bank Secrecy Act by failing to conduct adequate customer due diligence and screenings despite being aware that its product is used to facilitate terrorism and other illicit activities.”

With recent media reports linking both Binance and Tether to Hamas-related transactions, the letter urges the DOJ to “carefully evaluate the extent to which Binance and Tether are providing material support and resources to support terrorism.” Lummis and Hill “strongly support swift action by the Department of Justice against Binance and Tether to choke off sources of funding to the terrorists currently targeting Israel.”

Lummis is a recognized advocate for more compliant digital asset operatorsas is Hill, who chairs the House Financial Services Committee’s Subcommittee on Digital Assets. As such, their willingness to call out Binance and Tether isn’t sitting well with some.

Max Keiser, a longstanding hype man for Tether and its sister company, Bitfinex, issued a tweet noting Tether’s allegedly sizable purchases of U.S. Treasury bills, then equated Lummis’s letter with “an attack on the $, and by extension, the United States.” Keiser went on to “question Cynthia’s patriotism at this point. We got a rat in the house.”

While Keiser deleted this tweet not long after posting, others were quick to point out that Keiser has historically trashed the U.S. dollar, calling it “garbage” that is “going to zero.”
Keiser has also claimed that “with the Bitcoin I have, I can buy any freaking senator or congressman I want. I make the laws!” Except Keiser now sounds like he’s making #2 in his pants at the thought of Tether finally facing criminal charges. Cope harder, stableboy.

Hear ye, hear ye

Getting back to the hearing, while most participants acknowledged that ‘crypto’ remains a relatively small part of terror groups’ overall financing, Committee chair Sherrod Brown (D-OH) noted in his opening remarks that “terrorists know they can use crypto in ways they could never use dollars.”

This is in large part because “too often, crypto platforms don’t use the same common sense protections that help keep illicit money out of the traditional banking system—safeguards like knowing their customers, or suspicious transaction reporting. And when law enforcement attempts to trace or block crypto funds, it becomes a game of whack-a-mole.”

The hearing featured three witnesses:

  1. Dr. Matthew Levitt, Director, Reinhard Program on Counterterrorism & Intelligence, Fromer-Wexler Senior Fellow at the Washington Institute for Near East Policy (prepared remarks here)
  2. Dr. Shlomit Wagman, Affiliated Scholar and Former Chair of the Harvard Kennedy School’s Israel Money Laundering and Terror Financing Prohibition Authority (prepared remarks here)
  3. Danielle Pletka, Distinguished Senior Fellow at the American Enterprise Institute (prepared remarks here)

Levitt observed that, while Hamas predominantly relies on “more traditional means of raising and moving money,” including money sent from Iran and local taxation of Gazan residents, digital asset funding “rightly deserves attention.”

Wagman noted the increasing popularity of ‘coin mixers’ that obfuscate digital assets’ provenance, a ruse that “continues to make the use of [digital assets] attractive to terrorists.” Wagman called for more cooperation between digital asset operators and law enforcement agencies.

Noting how few jurisdictions had implemented the Financial Action Task Force’s (FATF)
Travel Rule, Wagman urged the FATF to “take an aggressive approach to enforcing its [anti-money laundering/counter-terrorism financing] framework” and recommended, “additional measures to regulate Peer-to-Peer, DeFi and smart contracts.”

Pletka’s opening remarks made no reference whatsoever to digital assets.

When the senators in attendance had the opportunity to question the witnesses, it tended to devolve into the kind of hyper-partisanship that has kept Congress from achieving much in recent years. Many Republican members spent their allotted five minutes heaping blame on the Biden administration for the current situation, while Democrats pointed out mistakes made during the Trump years.

Sen. John Kennedy (R-LA) spent so much time trying to get Pletka to agree that Biden policies were to blame for everything under the sun that she finally stated in an exasperated tone: “I’m not a spokesman for the Biden administration.” At one point, an audible “what the hell” emerged from one of the senators who was attending remotely, prompting chuckles in the hearing room.

Then, there were ‘crypto’ supporters like Bill Hagerty (R-TN) who took issue with the veracity of recent media reports regarding terror financing. On the other side, Raphael Warnock (D-GA) noted that “executives at Binance, the largest crypto exchange, are accused by the [Commodity Futures Trading Commission] of being seemingly dismissive of the risk that Hamas is utilizing their platform to fund terrorism.”

When Lummis had the opportunity to question the witnesses, she opted instead to use her full five minutes expressing her concerns regarding rogue digital asset intermediaries. “Let’s get after Binance and Tether … offshore companies that are financing illicit activities and terrorism.”

“Binance is knowingly facilitating violations of sanctions laws and the Bank Secrecy Act by failing to carry out adequate customer screening. And it is aware the exchange is being used to finance terrorism. It is also well known that Tether is a favored on- and off-ramp for illicit activities that interact with crypto asset markets and is knowingly facilitating violations of the law … Tether is failing to conduct adequate consumer and customer due diligence and screening despite being aware that its product is used to facilitate terrorism and other illicit activities.”

Lummis acknowledged Hagerty’s earlier comments about crypto financing of terror being “overstated” but added that “even $1 going to support the recent heinous attacks is too much.” Referencing Binance and Tether, Lummis said, “it’s time they’re brought to justice.”

Lummis said it was unfortunate that no one from the Financial Crimes Enforcement Network (FinCEN) or other law enforcement agencies was there to offer their perspective, but these agencies have previously told her that “we don’t need more laws, we need more resources.” Lummis has
proposed legislation that would, among other things, give FinCEN an additional $150 million specifically to combat illicit use of digital assets.

Typically, Lummis got in a plug for more ‘compliant’ digital asset operators, presumably a nod to entities such as the Coinbase (NASDAQ: COIN) exchange and Circle, the issuer of the USDC stablecoin (on which it previously partnered with Coinbase). Lummis has a “very supportive of crypto” designation on Coinbase’s running tally of which politicians are being mean to it at any given moment.

Tether responds, CZ can’t be bothered

On the day of the hearing, Tether issued a self-serving blog post that attempted to address the “misinformation” in the media regarding its disdain for regulatory compliance. The post didn’t contain anything new, just repeated fact-free clichés like “Tether’s ethos revolves around transparency, compliance, and proactive collaboration with relevant authorities worldwide.”

Binance founder Changpeng ‘CZ’ Zhao has so far offered no response whatsoever to the events of last week, not even the dismissive ‘4’ he trots out whenever reports cut a little too close to Binance’s criminal bone. Binance’s official communication channels have also been mute on this issue.

However, CZ did find time to complain about how he was portrayed in Bloomberg’s new long-form documentary on Sam Bankman-Fried and the downfall of the FTX
exchange. CZ whined that the writer who interviewed him had promised “positive coverage, no FUD, etc.” but ended up telling Bloomberg about the oddly reclining seats in CZ’s van. So, call CZ a criminal terrorist supporter: crickets. Mock his ride: oh, it’s on, bitches.

US exchanges play Tether keepaway

Washington’s new antagonism towards Tether could lead to significant changes in how U.S. digital asset operators judge the costs v. benefits of handling Tether’s USDT stablecoin. For clues as to how that may play out, we can look north of the border.

For over two years now, Canada has barred its licensed digital asset exchanges from facilitating customer trades involving USDT. The San Francisco-based Kraken exchange operates in Canada via a Money Services Business license, but while it has applied for a Restricted Dealer license, the said license has yet to be granted.

Perhaps with this in mind, Kraken informed its Canadian customers last week that they will no longer be able to make trades involving USDT as of November 30. Other Canadian-facing exchanges (including Coinbase) imposed similar USDT restrictions earlier this year, but Kraken’s traditional anarcho-libertarian stance appears to have delayed it taking this step until it became clear it might personally cost them.

With Coinbase’s biggest Congressional cheerleaders now coming out strongly against Tether, it seems likely that both Coinbase and Kraken will be forced to delist the stablecoin rather than be tarred with the same non-compliant brush.

Kraken paid a $30 million penalty last year for dealing in unregistered securities, while Coinbase continues to fight similar charges. Kraken also reached a settlement over its failure to adequately police Iran-based customers, while Coinbase paid a $100 million penalty for shoddy AML/KYC compliance.

Neither of these exchanges needs the added headache of being linked with terror groups. Not in this political climate. The question is: how much of a financial hit are they willing to take to buy political cover?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of group—from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX 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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