US Treasury admits terrorists love cash even more than ‘crypto’

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‘Crypto Bros‘ are rejoicing after the U.S. Treasury Department’s terror chief said jihadis aren’t immune from the allure of cold hard cash.

On Wednesday, the House of Representatives Financial Services Committee held its annual oversight hearing of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI).

Most of the nearly four-hour hearing focused on efforts by Russia and Iran to evade economic sanctions, the uptick in terrorism-related financing, and fentanyl trafficking by Mexican drug cartels. But there was also some discussion of digital assets, with many of the usual committee suspects appearing.

Brian Nelson, the Treasury’s Undersecretary for TFI, said in his prepared remarks that his office remains “deeply concerned about the use of virtual assets for all illicit financial activity.” Nelson noted the prominence of virtual assets enjoyed in Treasury’s recent risk assessments of global money laundering, proliferation, and terror financing.

Nelson said the Treasury was using its existing tools “sometimes in novel ways, to disrupt illicit actors’ ability to use virtual assets,” including targeting coin mixers like Tornado Cash. But Nelson emphasized the need for “additional tools and resources” as well as Treasury’s willingness to work with Congress “to adopt common-sense reforms that update our tools and authorities to match the evolving challenges we face today.”

The other invited guest, FinCEN director Andrea Gacki, used her opening remarks to highlight her office’s notice of proposed rulemaking (NPRM) to classify coin mixing as a class of transactions of primary money laundering concern. The proposals include a requirement that covered financial institutions report information about a transaction they know, suspect or have reason to suspect involves ‘convertible virtual currency’ (CVC) mixing.

Gacki also referenced her office’s publication this week of a new financial trend analysis
regarding the use of CVC for online child sexual exploitation and human trafficking. The analysis, which covered the two-year period from January 2020 to December 2021, found that Bank Secrecy Act (BSA) reports related to these issues increased from 336 in 2020 to 1,975 in 2021. CVC-linked reports accounted for 6% of overall human trafficking-related BSA reports in 2020, but this shot up to 29% in 2021.

Of the 2,311 BSA reports in the review period, 95% showed BTC was the primary CVC cited. (If the review period was more current, it would almost certainly show the Tether (USDT)
stablecoin supplanting BTC as criminals’ token of choice.)

Q&A

Committee chair Patrick McHenry (R-NC) got the proceedings underway with complaints about Treasury going after ‘innocent Americans’ aka Republicans who pronounce ‘Biden’ as ‘Brandon.’ (We’re paraphrasing.) McHenry left not long after making his opening remarks, possibly because there was an important Ukraine military assistance bill that required ignoring.

Ranking member Rep. Maxine Waters (D-CA) was the first one on the dais to mention digital assets, noting the November 2023 legal settlement between U.S. federal agencies and the Binance exchange. A key aspect of the government’s pursuit of Binance was based on the exchange’s willingness to look the other way while terrorists and other criminals used the platform.

Waters congratulated Nelson for the Treasury’s impressive 2023 enforcement record, citing the Binance settlement as an example of “crypto criminals committing old school crimes.” Waters went on to chastise her Republican counterparts for reducing FinCEN’s funding in their appropriations bill.

Rep. Brad Sherman (D-CA) remarked that America’s ability to leverage the U.S. dollar through the imposition of economic sanctions is “the most critical element of American national power; certainly more usable than military power.” Sherman said this is why he’s such a vocal ‘crypto’ critic, because so many of its proponents view the U.S. as an “illegitimate player on the world stage,” and therefore are doing everything they can to “defang” the government.

Sherman noted the exponential difference in the number of overall BTC transactions versus those done with fiat, then offered the following warning to the invited guests: “If [BTC] ever becomes a currency, you’re going to have a tough time.” (Good thing BTC is utterly incapable of serving as anything other than a digital Beanie Baby.)

Rep. Sean Casten (D-IL) brought up a recent report by blockchain analysts Chainalysis that claimed less than 1% of on-chain transactions were illicit. These reports have been widely cited by ‘crypto’ proponents as proof that claims of rampant criminality are overblown. However, critics have noted that the Chainalysis figure excludes things like “non-crypto native crime (e.g., conventional drug trafficking involving cryptocurrency as a mode of payment.”

Casten asked Gacki if it was true that the volume of transactions conducted on exchanges (like Binance) is 10x that of on-chain transactions, which would mean Chainalysis was “undercounting by a factor of 10?” Gacki agreed that this was a pretty good estimate.

Casten praised the committee’s two guests for their enforcement efforts but wondered, given the increasing popularity of obfuscation techniques such as chain-hopping, if these efforts were effectively a game of “whack-a-mole.” Nelson said technology is always evolving, but the Treasury was working with the Financial Action Task Force (FATF) and counterparts in other countries to develop a” consistent approach to avoid jurisdictional arbitrage” by wrongdoers.

You’ve got filthy fiat money in your wallet right now, don’t you? DON’T YOU?

The most sustained digital asset commentary came from Rep. Tom Emmer (R-MN), the ‘cryptocrite’ who in 2021 verbally fellated Sam Bankman-Fried at one of these hearings, then demanded that Gary Gensler’s Securities and Exchange Commission (SEC) stop investigating his good buddy Sam’s FTX exchange, then later demanded to know why Gary’s SEC didn’t do more to stop SBF.

Emmer, who staunchly opposes the Treasury’s desire to exert more influence over digital assets, started by referencing last October’s report by the Wall Street Journal regarding the extent to which groups like Hamas were using digital assets to help fund their activities. Emmer got Nelson to agree that terrorists still prefer to conduct the bulk of their financial affairs using ‘traditional methods.”

Without mentioning Sen. Elizabeth Warren (D-MA) by name, Emmer slammed “certain senators” for using this crypto-terror “misinformation” to support legislation that would “literally destroy innovation” by U.S. companies.

Emmer pressed Nelson on specific figures regarding terror-crypto funding, a subject Nelson offered to discuss in more detail in a classified session with Emmer. Undeterred, Emmer asked Nelson whether Treasury has “a responsibility to correct the record here,” suggesting that Treasury “must do a better job with all the data it has to paint an accurate narrative of digital assets and not perpetuate a false one.”

Mixed results

Another pro-crypto legislator on the other side of the aisle, Rep. Ritchie Torres (D-NY), brought up FinCEN’s proposed rules on coin mixers. Noting that financial institutions were already required to file suspicious activity reports (SARs) regarding specific transactions, Torres asked Gacki whether the new rules would simply add another layer of regulatory burden.

Noting that the NPRM comment period had just closed, Gacki said she expected this view to be voiced by many financial institutions. She said FinCEN would “look to minimize burden,” but their experience in reviewing SARs showed that FinCEN wasn’t “getting all the reporting that we thought we’d expect through mixing.”

In January, Chainalysis filed its own NPRM comments, arguing that FinCEN’s proposed special measures are “too broad to effectively mitigate the illicit finance risks of CVC mixers.” Specifically, Chainalysis believes the measures will be difficult to implement at scale, won’t be effective in deterring bad actors from using mixers, and—surprise!—require a “deeper investment in blockchain analysis solutions.”

Chainalysis also claimed that, while it reported in July 2022 that known illicit blockchain wallets accounted for 23% of all funds sent to mixers, it also claimed that “non-illicit address types” send “less than 0.3% of outgoing funds to mixers.”

Rep. Warren Davidson (R-OH) asked Gacki how FinCEN works with analytics firms to track on-chain activity. Gacki replied that FinCEN was at the forefront of this fight, seeking and using whatever tools were available to evaluate and detect illicit finance.

Flipside

On Thursday, the Committee will hold a more digital asset-focused hearing titled Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Activity. The hearing, a follow-up to the Part I held last November, will feature witness testimony from representatives of Coinbase (NASDAQ: COIN), Circle, TRM Labs, and others.

Given how hard Coinbase and Circle are making it rain for Committee members such as McHenry, this hearing will likely be a love-in (and McHenry might even stick around this time so as not to annoy his benefactors). Expect concerns to be dismissed, compliance to be overstated, and piped-in harp music as Coinbase describes its noble efforts to help starving third world residents achieve financial freedom. Or something.

Watch: Digital currency regulation and the role of BSV blockchain