Understanding the Role of Digital Assets in Illicit Finance (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing	Understanding the Role of Digital Assets in Illicit Finance
Committee	U.S. Senate Committee on Banking, Housing, and Urban Affairs
Date	March 17, 2022

 

Hearing Takeaways:

• Use of Digital Assets and Cryptocurrencies in Illicit Finance: The hearing focused on the role of digital assets and cryptocurrencies in illicit finance, including in the facilitation of ransomware payments, terrorist financing, and money laundering. Committee Democrats and Mr. Stansbury raised concerns that digital assets and cryptocurrencies presented new and distinct challenges for law enforcement bodies given their decentralized nature, ease-of-use, and perceived anonymity. Committee Republicans, Mr. Levin, and Mr. Mosier highlighted however that the public nature of blockchain ledgers enabled enhanced monitoring and quicker identification of illicit cryptocurrencies transactions from law enforcement bodies and third parties. Mr. Mosier noted how companies could quickly employ mathematical heuristics to help identify networks associated with U.S. Office of Foreign Assets Control (OFAC) designated addresses. He indicated that it took significantly longer to identify OFAC-designated addresses in fiat currency cases because these investigations required more manual work.
  • Propensity of Digital Assets and Cryptocurrencies vs. Traditional Finance System for Illicit Activity: Mr. Levin testified that his company, Chainalysis, had found that illicit transactions only represented 0.15 percent of total cryptocurrency transaction volume. He noted how global organizations had estimated that between 2 percent and 5 percent of world financial flows were related to money laundering and illicit finance. He commented that this amount was significantly more than the 0.15 percent of total digital asset transactions that were illicit in nature. Sen. Warner and Mr. Stansbury stated however that the volume of ransomware payments made in cryptocurrencies was likely greater than the Chainalysis estimate and noted how not all ransomware attacks were publicly reported. Mr. Levin asserted however Chainalysis tended to have higher estimates of the total amount of ransomware revenue because the company was able to take a solo incident of ransomware reporting and determine all of the activity associated with the incident.
  • Ransomware Attacks: Ransomware attacks involve a hacker threatening to block access to or publicly release the contents of a computer system unless they receive payments. Committee Democrats and Mr. Stansbury stated that digital assets and cryptocurrencies were contributing to the recent uptick in ransomware attacks because they enabled instant and anonymous transfers of money (often through non-regulated entities). Mr. Mosier asserted that the increase of ransomware attacks was more attributable to other factors, such as the increased availability of ransomware kits that reduced technical barriers to engaging in ransomware attacks. Sen. Robert Menendez (D-NJ) had expressed concerns that an estimated 15 percent of ransomware payments made in 2020 had carried risks of sanctions violations. Mr. Levin remarked that U.S. sanctions against specific parties perpetrating cybercrimes had reduced the likelihood of firms being willing to make ransomware payments. He stated that this in turn reduced the incentives for parties to engage in cybercrimes.
  • Chain Hopping: Chain hopping refers to a money laundering technique in which the launderer changes money across various cryptocurrencies in order to evade detection. Mr. Levin asserted that chain hopping did not provide the level of anonymity that was commonly believed and stated that the public nature of blockchains allowed for third parties to track cryptocurrency movements.
  • Use of Mixers and Tumblers: Mixing and tumbling involve taking illicitly obtained cryptocurrencies and moving them with legitimately obtained cryptocurrencies in order to obscure the original source of the cryptocurrencies. Mr. Levin stated however that low amounts of market liquidity limited the opportunities for mixing and tumbling. He also asserted that his company was able to identify when this activity was occurring.
  • Rug Pulls: Chairman Brown also mentioned the practice of “rug pulls,” which refers to when a bad actor sets up a sham digital asset project, raises as much money as possible, and then steals the money that was raised.
  • Digital Wallet and Cryptocurrency Exchange Hacks: Sen. Chris Van Hollen (D-MD) and Mr. Stansbury discussed how the emergence of cryptocurrencies presented opportunities for new types of crimes and specifically highlighted the potential for hacks of cryptocurrency exchanges and digital wallets. Mr. Levin noted that cryptocurrency exchanges were financial intermediaries in which an entity was holding funds on behalf of someone else. He stated that regulation could be helpful in terms of establishing best practices and standards by which cryptocurrency exchanges and financial intermediaries should hold their funds.
  • Limits on the Ability to Track Cryptocurrencies on Public Ledgers: Mr. Stansbury noted that while law enforcement bodies possessed several tools to connect people with cryptocurrency transactions, he stated that there existed an element of luck in being able to connect the two. He explained that law enforcement bodies and prosecutors needed to prove that a given person or entity was the party that actually engaged in the illicit activities.
  • Ability to Recover Ransomware Payments and Stolen Cryptocurrency: Committee Members and the hearing’s witnesses highlighted how the traceability of cryptocurrencies had previously enabled law enforcement bodies to partially or fully recover cryptocurrency ransomware payments and stolen cryptocurrencies.
  • Use of Cryptocurrencies by Rogue Nation States: Committee Democrats and Mr. Stansbury expressed concerns over how rogue nation states, such as Russia, Venezuela, Iran, and North Korea, were increasingly employing cryptocurrencies to engage in theft and other crimes in order to finance their regimes. Sen. Menendez raised particular concerns regarding Iran’s practice of mining cryptocurrencies in order to launder its sanctioned oil and natural gas reserves into cash. Of note, Mr. Chobanian remarked that there likely did not exist relationships between Russian cryptocurrency miners and the Russian government.
• Regulation of Digital Assets and Cryptocurrencies: The hearing also focused on the current regulatory oversight of digital assets and cryptocurrencies. Full Committee Chairman Sherrod Brown (D-OH) asserted that the U.S. currently maintained lax rules and little oversight for cryptocurrencies. He noted how companies that dealt with U.S. dollars were subject to know your customer (KYC) rules and suspicious activity report (SAR) requirements. He expressed concerns that many cryptocurrency companies were subject to different sets of rules and mentioned how offshore cryptocurrency operators were not subject to U.S. laws.
  • Lack of Regulatory Clarity: Committee Members and the hearing’s witnesses expressed concerns that the U.S.’s current lack of regulatory clarity for digital assets was undermining domestic innovation and driving it abroad. Sen. Tina Smith (D-MN) stated that the U.S.’s establishment of a regulatory framework for cryptocurrencies that became a standard would provide the U.S. with a national security advantage in terms of being able to better understand how cryptocurrency networks would work.
  • Ability of Cryptocurrencies to Reduce Regulatory Burdens and Boost Privacy: Full Committee Ranking Member Patrick Toomey (R-PA), Mr. Levin, and Mr. Mosier noted how the U.S. maintained broad reporting requirements for bank transactions that resulted in the collection of massive amounts of data, which in turn imposes compliance burdens on banks and raised privacy concerns. They stated that the public nature of blockchains would enable law enforcement bodies and third parties to engage in real-time financial transaction monitoring without making unnecessary data collections.
• The Role of Digital Assets and Cryptocurrencies in the Current Russian Invasion of Ukraine: Several Committee Members expressed interest in how digital assets and cryptocurrencies were being used inside of both Ukraine and Russia in light of Russian’s recent invasion of Ukraine. 
  • Ukraine’s Use of Cryptocurrency Donations to Support their Defense: Mr. Chobanian discussed his effort to establish a government fund to support Ukraine’s defense efforts and citizens following the recent Russian invasion of Ukraine. He testified that the fund had already raised $50 million. He highlighted how cryptocurrencies could be transferred instantaneously and commented that this feature was critical in light of the current threats that Ukraine faced from Russia. He also mentioned how cryptocurrencies enabled Ukraine to collect donations from any place in the world (including countries that lacked formal banking systems).
  • Concerns that Russia and Russian Oligarchs Would Use Cryptocurrencies to Evade Sanctions: Full Committee Chairman Sherrod Brown (R-OH) highlighted how the U.S. Financial Crimes Enforcement Network (FinCEN) had recently warned that Russian actors could leverage cryptocurrencies in order to engage in sanctions evasion. However, Mr. Levin, Mr. Mosier, and Mr. Chobanian all expressed skepticism that there were current Russian efforts underway to use cryptocurrencies to evade sanctions. Mr. Mosier highlighted that the current demand for Russian rubles was very low, which made it difficult for Russians to convert their money into cryptocurrencies. He further mentioned how a party seeking to convert fiat currencies into digital assets would need to find a counterparty that believed that such a trade would not violate any laws or sanctions. He commented that this dynamic would likely discourage non-Russian financial institutions from accepting trade requests from Russian parties for cryptocurrencies.
  • Response of Cryptocurrency Exchanges to the Russian Invasion of Ukraine: Mr. Chobanian discussed how Ukraine’s cryptocurrency community had shut down Russian ruble operations in response to the recent Russian invasion of Ukraine and stated that this action had helped to address the problem of sanctions evasion. He noted however that certain cryptocurrency exchanges, including Binance, were continuing to accept Russian rubles and called on the Committee to investigate Binance’s response to the Russian invasion of Ukraine.
  • The Digital Asset Sanctions Compliance Enhancement Act: Sen. Elizabeth Warren (D-MA) mentioned how she was introducing the Digital Asset Sanctions Compliance Enhancement Act, which would authorize the President to sanction foreign cryptocurrency firms that were doing business with sanctioned Russian entities. Full Committee Ranking Member Patrick Toomey (R-PA) and Mr. Chobanian expressed concerns with how this legislative proposal would impose the equivalent of secondary sanctions on cryptocurrency parties doing business with anyone from Russia. They commented that while the legislation’s intent was to go after Russian oligarchs, they expressed concerns that the legislation would negatively impact anyone in Russia engaged in cryptocurrency transactions. They called it important for the U.S. to not harm ordinary Russians that were opposed to Russian President Vladimir Putin.

Hearing Witnesses:

1. Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis, Inc.
2. Mr. Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network
3. Mr. Michael Chobanian, Founder of KUNA Exchange, President of Blockchain Association of Ukraine
4. Mr. Shane Stansbury, Robinson Everett Distinguished Fellow in the Center for Law, Ethics, and National Security, Senior Lecturing Fellow, Duke University School of Law

Member Opening Statements:

Full Committee Chairman Sherrod Brown (D-OH):

• He remarked that the hearing would focus on how cryptocurrencies could facilitate crimes and intimidation and threaten the U.S.’s national security.
  • He mentioned how the U.S. Department of Justice (DoJ) had concluded in October 2020 that cryptocurrency technology played a role in many of the U.S.’s most significant criminal and national security threats.
• He discussed how the U.S. dollar possessed safeguards to protect against crime and illicit activity and highlighted how companies that dealt with U.S. dollars were subject to KYC rules and SAR requirements.
• He expressed concerns however that many cryptocurrency companies were subject to different sets of rules and noted how offshore cryptocurrency operators were not subject to U.S. laws.
• He remarked that digital assets made it easier for bad actors to move money under pseudonyms and engage in global money laundering schemes.
  • He highlighted how FinCEN had recently warned that Russian actors could leverage cryptocurrencies in order to engage in sanctions evasion.
• He mentioned how FinCEN had fined a cryptocurrency exchange $100 million in 2021 for failing to collect adequate customer information and commented that this exchange’s lax information collection procedures had enabled more than $200 million in suspicious transactions to occur.
• He then remarked that cryptocurrencies enabled money launderers and terrorists to engage in new forms of illicit activity that were not feasible with U.S. dollars.
  • He highlighted the practice of chain hopping, which refers to a money laundering technique in which the launderer changes money across various cryptocurrencies in order to evade detection.
  • He also mentioned the practice of “rug pulls,” which refers to when a bad actor sets up a sham digital asset project, raises as much money as possible, and then steals the money that was raised.
• He further discussed Hydra, which he explained was an online black market for drugs, stolen credit card numbers, and cyberattack services.
  • He commented that cryptocurrencies played a key role in Hydra’s functioning.
• He remarked that U.S. laws and law enforcement bodies must work to address the aforementioned activities involving cryptocurrencies.
  • He asserted that the U.S. currently maintained lax rules and little oversight for cryptocurrencies.
• He also noted how cryptocurrencies had information embedded in them that enable law enforcement and national security officials to track and trace where the cryptocurrencies have been.
  • He stated however that this information did not provide indications regarding the previous ownership of a given cryptocurrency and commented that the recently enacted beneficial ownership law should help to provide such ownership information.
• He then mentioned how the U.S. Federal Bureau of Investigation (FBI) had recently announced the creation of a new unit that would be dedicated to tracking down illicit cryptocurrencies and noted that the DoJ was dedicating more resources and staff to addressing crimes involving digital assets.
• He contended that the U.S. would need to take a “whole-of-government” approach to address the role of digital assets in illicit finance and applauded President Biden for his recent Executive Order (EO) on Ensuring Responsible Development of Digital Assets.

Full Committee Ranking Member Patrick Toomey (R-PA):

• He first remarked that the Committee must work to ensure regulatory clarity for digital assets and commented that digital assets, including cryptocurrencies and their underlying distributed ledger technology (DLT), have “enormous” potential benefits.
• He asserted that the U.S. must maintain its leadership within the digital assets space and stated that policymakers should avoid undermining efforts to foster technological innovation.
• He expressed concerns however that the U.S.’s current lack of regulatory clarity for digital assets was undermining domestic innovation and driving it abroad.
  • He called on Congress to enact a regulatory framework specific to digital assets that would provide such clarity.
• He also raised concerns that the hearing would be used to disparage cryptocurrencies and to connect cryptocurrencies to efforts by Russia to evade international sanctions.
  • He acknowledged that while there could be a Russian oligarch making use of cryptocurrencies in order to conceal some of their assets, he stated that there did not exist any evidence of cryptocurrencies being used by Russia to significantly evade sanctions according to Biden administration officials.
• He noted however that Ukraine had been “actively” using cryptocurrencies to engage in beneficial activity.
  • He highlighted how cryptocurrencies were being used to receive donations to support Ukraine’s defense efforts.
• He stated that the “remarkable” aspect of cryptocurrencies was their ability to enable instant global transfers of value at very low costs.
• He discussed how criminals had always sought to use new technologies to nefariously obtain gains and asserted that the potential for illicit activity did not constitute a valid reason for stifling new technological developments.
• He remarked that cryptocurrencies could support illicit crime detection and prevention efforts and noted that cryptocurrency transactions involving illicit activity only accounted for 0.15 percent of all cryptocurrency transaction volume in 2021 according to Chainalysis.
  • He stated that the traceability of cryptocurrencies made them ill-suited for criminal purposes and mentioned how this traceability had enabled the DoJ to recover 85 percent of the Bitcoins used for ransomware payments in the 2021 Colonial Pipeline ransomware attack.

Witness Opening Statements:

Mr. Jonathan Levin (Chainalysis, Inc.):

• He remarked that cryptocurrencies like Bitcoin and Ethereum provide an opportunity to significantly increase transparency in financial services, promote financial inclusion, and create new methods for commerce.
• He discussed how Bitcoin had evolved over the previous decade and noted how more than 100 million people now depend on the cryptocurrency.
  • He also stated that Bitcoin had spurred the creation of other digital communities and that various forms of commerce now depend on Bitcoin’s underlying technology.
• He indicated that Chainalysis provided data products, data services, and data research to government agencies, financial institutions, and the broader digital asset industry.
• He discussed how law enforcement bodies had used Chainalysis software to take down the largest darknet markets, prevent the use of cryptocurrencies for terrorist financing, and respond to scams and ransomware campaigns.
  • He testified that “tens of thousands” of cases and investigations had taken place on Chainalysis’s platform by both public sector and private sector bodies as part of efforts to remove illicit activity from cryptocurrencies.
• He stated that Chainalysis’s compliance software enabled anti-money laundering (AML) compliance for the digital asset industry so that industry stakeholders could fulfill their obligations under the Bank Secrecy Act (BSA).
• He remarked that the transparency and permanent records of blockchains enabled Chainalysis platform users to combat illicit activity.
  • He noted how law enforcement bodies took advantage of these features of blockchains to proactively investigate crimes without the need to serve subpoenas or maintain reporting requirements.
• He then discussed how OFAC had used the fact that there was compliance among cryptocurrency exchanges in order to support Russian sanctions efforts.
  • He mentioned how OFAC had sanctioned SUEX and Chatex in September 2021 and commented that these actions had effectively removed these exchanges from the digital asset ecosystem.
• He testified that Chainalysis had recently released a free and open sanctions screening tool that enables digital asset industry members to screen against addresses that are listed in OFAC’s Specially Designated Nationals (SDN) list.
• He stated that the use of digital assets in criminal activity was similar to the use of other novel technologies in criminal activity and referenced a Chainalysis report that had found that illicit transactions only represented 0.15 percent of total cryptocurrency transactions volume.
• He remarked that the recent sanctions imposed on Russia demonstrated the importance of investing in financial technology (FinTech) and the dominance of the U.S. dollar.
  • He commented that the embrace of digital assets could help the U.S. build a global financial system that encouraged transparency and enhanced national security and public safety.

Mr. Michael Mosier (Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network):

• He remarked that cryptocurrencies could help to support people living in and fighting authoritarian regimes and stated that encryption both protects and reflects the U.S.’s democratic values.
  • He highlighted how cryptocurrencies had recently played a key role in swiftly delivering aid to Ukraine in a transparent manner.
• He noted that while Bitcoin had become a preferred payment method for ransomware given its speed and perceived anonymity, he stated that the public ledgers of the Bitcoin network provided law enforcement bodies with significant visibility and investigative benefits over the “opaque” international banking system.
  • He commented that the Bitcoin network’s public ledgers had enabled the recovery of ransomware payments for the Colonial Pipeline hack.
• He asserted that the increase of ransomware attacks was more attributable to other factors than the growth in cryptocurrencies.
  • He highlighted how ransomware kits were becoming widely available, which reduced technical barriers to engaging in ransomware attacks.
• He also discussed the practice of “double extortion,” which referred to threats to both lock information and expose information if ransomware payments were not made.
• He further stated that many parties engaged in ransomware attacks were not driven by financial factors.
• He noted how the internet during its early years had a lot of fraud and commented that policymakers had sought to combat this fraud rather than shut down the internet as a technology.
• He made three recommendations for Congress for combating illicit finance.
  • He first recommended that Congress provide additional funding for FinCEN and OFAC and highlighted how these agencies had increased obligations as a result of recent AML legislation.
  • He then recommended that Congress resource and “expansively clarify” the AML Whistleblower Program to enable crowdsourced leads related to corruption and abuse.
  • He lastly recommended that Congress press Financial Action Task Force (FATF) representatives to focus on regulatory arbitrage through baseline consistency across jurisdictions before pursuing new rules.

Mr. Michael Chobanian (KUNA Exchange, Blockchain Association of Ukraine):

• He recounted how Russia’s recent invasion of Ukraine had forced him and his family to flee their home in order to seek safety.
• He discussed his effort to establish a government fund to support Ukraine’s defense efforts and citizens following the recent Russian invasion of Ukraine and testified that the fund had already raised $50 million.
  • He indicated that the fund was seeking to raise $100 million.
• He noted that the fund was employing cryptocurrencies to distribute aid to the people residing in Ukrainian cities captured by Russia.
• He testified that the fund was run on the KUNA Exchange, which meant that it was fully compliant with Ukraine’s current laws and regulations.
  • He mentioned how Ukraine had just approved legislation to fully legalize cryptocurrencies.
• He then discussed how Ukraine’s cryptocurrency community had shut down Russian ruble operations in response to the recent Russian invasion of Ukraine and stated that this action had helped to address the problem of sanctions evasion.
  • He noted however that certain cryptocurrency exchanges, including Binance, were continuing to accept Russian rubles and called on the Committee to investigate Binance’s response to the Russian invasion of Ukraine.
• He also disputed Full Committee Chairman Brown’s (D-OH) previous assertion that Russians could employ cryptocurrencies to evade international sanctions and stated that it was physically impossible to transfer large amounts of money from fiat currency into cryptocurrency.
  • He further commented that the Russians would not be able to make use of cryptocurrency even if they were able to convert their fiat currency into cryptocurrency due to travel restrictions.
• He emphasized however that many Russian opponents of Russian President Vladimir Putin relied upon cryptocurrencies and stated that Congress must be cognizant of these opponents when developing federal cryptocurrency laws.
• He lastly thanked the U.S. and European countries for their efforts to support Ukraine in responding to the recent Russian invasion.

Mr. Shane Stansbury (Center for Law, Ethics, And National Security, Duke University School of Law):

• He remarked that the pace at which criminals had sought to take advantage of new forms of technology had increased “dramatically” over the previous two decades as a result of innovations in internet, social media, and smartphones.
• He stated that cryptocurrencies were changing how criminals financed their illicit activities and asserted that cryptocurrencies presented new and distinct challenges.
  • He commented that the decentralized nature, ease-of-use, and perceived anonymity of cryptocurrencies made them an attractive tool for engaging in illicit activity.
• He discussed how cryptocurrencies were now a multibillion dollar business for criminals and indicated that cryptocurrencies were used in connection with “virtually” every type of crime.
• He specifically highlighted how cryptocurrencies were often involved in ransomware attacks and explained that cryptocurrencies were a popular medium for ransomware payments because they could easily pass through multiple layers involving different entities, including entities outside of regulated markets.
  • He commented that criminals could employ various methods to hide the transfers of these ransomware payments made in cryptocurrencies.
• He noted that criminals could employ similar methods to use cryptocurrencies in order to launder proceeds or hide illicit assets without traditional intermediaries.
• He also discussed how cryptocurrency markets themselves were becoming targets for crime and highlighted how digital wallets and exchanges had become targets for theft and fraud.
• He further noted how rogue nation states, such as North Korea, were increasingly employing cryptocurrencies in order to engage in theft and other crimes in order to finance their regimes.
• He then remarked that law enforcement bodies were improving in their ability to trace digital assets used to commit and cover up criminal activity.
  • He commented that forensic analysis and KYC information from regulated entities was supporting these law enforcement efforts.
  • He also highlighted how the DoJ had been able to successfully recover cryptocurrency ransomware payments and cryptocurrencies stolen in hacks.
• He stated however that it was not always easy or possible to track down criminals using cryptocurrencies and emphasized that cryptocurrency investigations could be resource intensive and time consuming.
• He explained that cybercrimes were often difficult to prosecute because they required that prosecutors demonstrate beyond a reasonable doubt that an identifiable person was behind a particular act.
  • He noted that while digital clues from cryptocurrency transfers could help prosecutors in making their cases, he asserted that these clues did not provide full answers as to the identities of the parties actually behind criminal activities.
• He stated that not all cryptocurrency platforms complied with existing regulations meant to combat illicit activity and noted how many of these platforms operated in jurisdictions outside of the U.S.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown first highlighted how President Biden had recently signed a funding bill into law that provided an additional $50 million for federal efforts to combat money laundering. He then noted how the volume of illicit cryptocurrency transactions had grown by at least $14 billion in 2021. He asked Mr. Levin to identify the emerging strategies being employed by bad actors to avoid detection and obscure their identities when using digital assets.
  • Mr. Levin described efforts to learn of obfuscation techniques of criminals as a “cat and mouse” game and stated that Chainalysis worked to proactively identify such techniques as they emerged. He remarked that the largest gap in oversight within the cryptocurrency space involved the use of offshore exchanges to cash out of illicit transactions. He indicated that there was a concentration of cryptocurrency cash outs by ransomware actors at a small number of destinations and recommended that law enforcement bodies focus on these destinations.
• Chairman Brown asked Mr. Stansbury to discuss how criminals had used features of digital assets to invent new types of crime. He also asked Mr. Stansbury to discuss the types of criminal conduct that were built around cryptocurrencies.
  • Mr. Stansbury remarked that cryptocurrencies had made some existing crimes easier and changed the nature of other crimes. He noted that while the crime of ransomware had predated the advent of cryptocurrencies, he asserted that cryptocurrencies have now become the main currencies used for ransomware payments. He then discussed how the emergence of cryptocurrencies presented opportunities for new types of crimes and specifically highlighted the potential for hacks of cryptocurrency exchanges and digital wallets.
• Chairman Brown then mentioned how the Chainalysis 2022 Crypto Crime Report had identified Russia as a leader in illicit activity using digital currencies. He asked Mr. Chobanian to discuss the importance of the U.S. addressing Russia’s cybercrime and use of digital assets.
  • Mr. Chobanian remarked that cryptocurrencies could be used for both positive and negative purposes. He stated that Russian hackers were currently stuck in Russia and unable to make use of their cryptocurrencies. He commented however that this possession of cryptocurrencies by Russian hackers could become problematic if the situation in Russia were to change.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey asked Mr. Chobanian to discuss why he was soliciting donations to support Ukraine’s defense efforts against Russia in cryptocurrencies and not in traditional fiat currencies.
  • Mr. Chobanian highlighted how it took up to two days for U.S. dollars to be transferred from the U.S. to Ukraine and indicated that transfers were not made during the weekend period. He noted how cryptocurrencies by contrast could be transferred instantaneously and commented that this feature was critical in light of the current threats that Ukraine faced from Russia. He also mentioned how cryptocurrencies enabled Ukraine to collect donations from any place in the world (including countries that lacked formal banking systems).
• Ranking Member Toomey asked Mr. Chobanian to indicate whether it was inexpensive to send cryptocurrencies to Ukraine.
  • Mr. Chobanian commented that the cost of sending cryptocurrencies varied by cryptocurrency. He stated that Ukraine’s top priority was obtaining donations in a quick manner so that it could promptly purchase defense and first aid equipment.
• Ranking Member Toomey asked Mr. Chobanian to indicate whether there had occurred an increase in the use of cryptocurrencies as a medium of exchange amongst Ukrainians since the Russian invasion.
  • Mr. Chobanian noted how Ukraine had led the world in terms of cryptocurrency wallets and usage on a per capita basis prior to the Russian invasion. He stated that Ukraine’s usage of cryptocurrencies had likely doubled since the Russian invasion. He discussed how U.S. dollars were currently unavailable in Ukraine and indicated that Ukrainians needed U.S. dollars in order to purchase foreign supplies. He stated that this situation had led Ukraine to purchase tokens backed by U.S. dollars in order to make foreign purchases.
• Ranking Member Toomey then discussed how the U.S. maintained broad reporting requirements for bank transactions that resulted in the collection of massive amounts of data. He asked Mr. Mosier and Mr. Levin to address whether the features of cryptocurrency would enable the U.S. to better identify problematic transactions without needing to collect massive amounts of data.
  • Mr. Mosier remarked that FinCEN had struggled with the resource and technological issues associated with collecting and assessing large amounts of financial transaction data during his tenure at the agency. He added that this data collection and assessment raised consumer privacy concerns. He further mentioned how FinCEN had often struggled to prove that this data collection was worth the compliance burdens that it imposed upon companies and individuals. He noted how cryptocurrencies were stored on public ledgers, which meant that individuals and companies would not need to report such transactions to the U.S. government. He stated that the U.S. government would just need the tools and resources to sort through the public ledger data in an efficient manner. He commented that this public ledger data was already fairly structured, which made it easier to assess.
  • Mr. Levin remarked that reporting requirements based on fixed numbers were problematic in that they were difficult to adjust overtime and created a deluge of information around an arbitrary number. He noted how blockchain records were publicly available that were updated in real-time. He stated that it was easier to ascertain legitimate and illicit transactions within the cryptocurrency context. He remarked that policymakers ought to account for these unique attributes of digital assets technology when developing digital asset regulatory policy.

Sen. Robert Menendez (D-NJ):

• Sen. Menendez raised concerns regarding Iran’s practice of mining cryptocurrencies in order to launder its sanctioned oil and natural gas reserves into cash. He noted how the main cost associated with mining cryptocurrencies was energy and raised concerns that Russia would also pursue cryptocurrency mining as a means of evading sanctions. He mentioned how Russia accounted for 13.6 percent of all Bitcoin mining according to the Cambridge Bitcoin Electricity Consumption Index (CBECI). He asked Mr. Stansbury to indicate whether there existed tools that would enable financial institutions and regulators to prevent the use of cryptocurrency mining as a means to avoid sanctions.
  • Mr. Stansbury remarked that the tools available to regulators to address this type of sanctions evasion largely pertained to enforcement. He stated that the U.S. needed to consider how rogue nation states were able to evade sanctions and convert their mined cryptocurrencies into cash.
• Sen. Menendez asked Mr. Levin and Mr. Chobanian to discuss the relationships between Russian cryptocurrency miners and the Russian government.
  • Mr. Chobanian remarked that there likely did not exist relationships between Russian cryptocurrency miners and the Russian government. He stated that Russian cryptocurrency miners tended to be ordinary citizens and businesses. He then asserted that it was impossible to exchange large sums of cryptocurrencies for U.S. dollars on a government level. He elaborated that large transfers of cryptocurrencies would draw attention. He also stated that smaller exchanges of cryptocurrencies into U.S. dollars were unlikely to support weapons or energy purchases.
  • Mr. Levin expressed agreement with Mr. Chobanian’s comments. He also remarked that it had been possible for U.S. law enforcement and intelligence agencies to identify and attribute Russian government activity in cybercrime cases. He stated that the U.S. needed to improve the capabilities of these agencies so that they could better understand Russia’s involvement in these crimes, as well as the evolving nature of the crimes.
• Sen. Menendez then remarked that the U.S. government’s relationships with cryptocurrency exchanges (both foreign and domestic) would be an increasingly key element in enforcing sanctions moving forward. He asked Mr. Stansbury to identify the risks that U.S. persons and institutions face when trading with exchanges in Russia and other jurisdictions with poor monitoring and KYC rules.
  • Mr. Stansbury remarked that such exchanges posed risks of scam, fraud, and theft for consumers. He commented that such risks would likely grow as cryptocurrencies continued to grow in popularity and less sophisticated investors increasingly entered the cryptocurrency market.
• Sen. Menendez lastly noted how Chainalysis had estimated that 15 percent of ransomware payments made in 2020 had carried risks of sanctions violations. He asked Mr. Levin to provide recommendations for how Congress should address this problem without undermining the efficiency of the U.S.’s sanctions tools.
  • Mr. Levin remarked that U.S. sanctions against specific entities perpetrating cybercrimes had reduced the likelihood of firms being willing to make ransomware payments. He stated that this in turn reduced the incentives for parties to engage in cybercrimes.

Sen. Bill Hagerty (R-TN):

• Sen. Hagerty discussed how the public ledgers underlying cryptocurrencies had enabled law enforcement agencies to recover large amounts of stolen cryptocurrencies. He noted how cryptocurrencies were pseudonymous and noted how the owners of digital wallets could not be identified through the digital wallet addresses of said wallets. He asked Mr. Levin to discuss the available existing capabilities for tracking and identifying illicit actors in cryptocurrencies.
  • Mr. Levin discussed how Chainalysis mapped all of the transactions that occurred within the cryptocurrency space. He stated that the ability to provide this information to industry stakeholders, law enforcement bodies, and regulators enabled collaborative efforts to combat illicit activity. He highlighted how law enforcement bodies could use this information in order to seize stolen cryptocurrencies.
• Sen. Hagerty noted how cash was fully anonymous, untraceable, and lacked chain of ownership records. He commented that cash would likely be a more attractive method for engaging in illicit activity without detection than cryptocurrencies. He asked Mr. Levin to indicate whether cash was less traceable than cryptocurrency.
  • Mr. Levin answered affirmatively. He also noted how law enforcement bodies and prosecutors could access previous records of cryptocurrency transactions in order to investigate and prosecute past crimes. He commented that cash transactions by contrast were ephemeral in nature. He stated that the public nature of cryptocurrency transactions thus served as a deterrent against their use in illicit transactions.
• Sen. Hagerty asserted that there was a mischaracterization that cryptocurrencies provided a lawless environment. He expressed concerns that this mischaracterization would lead to overregulation of the cryptocurrency industry, which he commented would stifle beneficial innovation and reduce the U.S.’s international competitiveness. He asked Mr. Levin to explain how someone seeking to evade sanctions could convert their cryptocurrency holdings into fiat currencies without interfacing with the banking system.
  • Mr. Levin remarked that moving cryptocurrency holdings into the traditional finance system would require the involvement of a traditional financial institution. He noted that traditional financial institutions were subject to AML regulations.
• Sen. Hagerty then asked Mr. Mosier to provide recommendations for how Congress could help authorities and firms within the cryptocurrency space to more effectively combat illicit finance.
  • Mr. Mosier contended that the most important action that Congress could take would be to provide clarity to the cryptocurrency space. He stated that there were many firms that wanted to be certain that they were complying with the law. He commented however that there was debate across the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) about what was needed to be in compliance with the law.

Sen. Jon Tester (R-MT):

• Sen. Tester asked the witnesses to indicate whether they believed that Russian President Vladimir Putin and Russian oligarchs were using cryptocurrencies in order to evade sanctions.
  • Mr. Levin remarked that there did not currently exist evidence of Russia or Russian President Vladimir Putin systematically using cryptocurrencies in order to evade sanctions.
  • Mr. Mosier remarked that Russia was not using cryptocurrencies in order to evade sanctions. He commented that the cryptocurrency ecosystem lacked enough liquidity to run an economy as large as Russia.
  • Mr. Chobanian remarked that Russia was not currently using cryptocurrencies in order to evade sanctions. He noted how Russia had previously sought to ban cryptocurrencies and was only now reconsidering this position.
  • Mr. Stansbury remarked that there existed a difference between individuals using cryptocurrencies to evade sanctions and the widespread use of cryptocurrencies to evade sanctions. He stated that it remained possible that individuals were attempting to use cryptocurrencies to evade sanctions and mentioned how the DoJ had established a task force to look into this issue.
• Sen. Tester then noted how Mr. Levin had asserted that cryptocurrencies were safe due to their trackability. He asked Mr. Levin to explain why the U.S. was not able to fully recover the ransomware payments made in the Colonial Pipeline hack.
  • Mr. Levin remarked that there existed a difference between the ability to see cryptocurrencies and the ability to seize cryptocurrencies. He noted that while there was full transparency with regard to where the Colonial Pipeline ransomware payments went, he stated that it was not always possible to recover ransomware payments.
• Sen. Tester then asked Mr. Stansbury to clarify whether he had stated that it was difficult to connect the identities of people and cryptocurrency payments with regard to illegal activity.
  • Mr. Stansbury remarked that it could sometimes be difficult to connect cryptocurrency payments to a specific individual. He noted that while there existed firms (such as Chainalysis) that could provide law enforcement with transaction information and patterns, he stated that law enforcement bodies and prosecutors ultimately needed to connect those transactions to real people. He commented that analytics often could not provide such connections.
• Sen. Tester asked Mr. Stansbury to address how law enforcement bodies and prosecutors could hold people accountable for illegal activities involving cryptocurrencies.
  • Mr. Stansbury noted that while law enforcement bodies possessed several tools to connect people with crypto currency payments, he commented that there existed an element of luck in being able to connect the two. He mentioned how the DoJ had just announced that it had seized a large amount of illegal cryptocurrency payments. He noted that while this seizure was largely the result of transaction pattern analysis and search warrants, he also highlighted how this seizure was made possible due to the fact that the suspected criminals were living in plain view in New York City and employing cloud storage accounts within the reach of U.S. law enforcement bodies.
• Sen. Tester lastly commented that physical cash differed from cryptocurrencies in that physical cash was much more difficult to move.

Sen. Tina Smith (D-MN):

• Sen. Smith remarked that the U.S. appeared to be applying existing regulatory frameworks to novel cryptocurrency technologies. She asserted that the absence of a regulatory framework for cryptocurrencies would undermine the U.S.’s ability to combat illicit activity. She asked Mr. Levin to address how the U.S.’s lack of regulatory clarity for cryptocurrencies impacted the U.S.’s ability to combat illicit activity.
  • Mr. Levin expressed agreement with Sen. Smith’s concerns over the U.S.’s lack of regulatory clarity regarding cryptocurrencies. He stated that this lack of clarity harmed the U.S. cryptocurrency industry in that it reduced domestic funding and interest in cryptocurrency innovation, which would in turn undermine the U.S.’s ability to lead in the development of new payment rails. He commented that the U.S.’s lack of leadership in the cryptocurrency space could cause the U.S. to lose out on economic opportunities and lose visibility into what could be conducted on cryptocurrency payment rails (which could pose national security risks).
• Sen. Smith stated that the U.S.’s establishment of a regulatory framework for cryptocurrencies that became a standard would provide the U.S. with a national security advantage in terms of being able to better understand how cryptocurrency networks would work.
  • Mr. Levin expressed agreement with Sen. Smith’s statement.
• Sen. Smith stated that most good businesses generally wanted clear rules that would be evenly applied. She commented that this dynamic appeared to apply to the cryptocurrency space.
  • Mr. Levin expressed agreement with Sen. Smith’s statements. He remarked that the U.S. cryptocurrency industry had done significant work to collaborate with policymakers on developing cryptocurrency policy proposals. He stated that the unique attributes of cryptocurrencies (including their transparency and the availability of cryptocurrency transaction data) could enable novel oversight approaches. He commented that these novel oversight approaches could be cheaper for businesses and more effective.
• Sen. Smith asked Mr. Stansbury to discuss how the U.S.’s lack of a clear cryptocurrency regulatory framework impacted the ability of bad actors to operate.
  • Mr. Stansbury noted how there existed several trustworthy cryptocurrency exchanges complying with various regulations that helped to police illicit activity. He stated however that the current lack of regulatory clarity was contributing to cryptocurrency institutions seeking to evade government oversight. He remarked that regulatory clarity would help to address this evasion of government oversight. He also suggested that more aggressive BSA enforcement and more stringent rules on money transmitters could help to push people towards the legitimate cryptocurrency exchanges.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren noted how the volume of cryptocurrency transactions had reached nearly $16 trillion in 2021, which constituted a 600 percent increase from 2020. She commented that most of this growth was driven by speculation and gambling. She remarked that cryptocurrencies also provided a new payment option for bad actors and enabled these bad actors to engage in ransomware attacks with lower chances of detection. She noted how about three-quarters of the money obtained through ransomware attacks in 2021 went to Russian-linked actors. She also stated that other countries were using cryptocurrencies in order to evade sanctions. She asked Mr. Levin to identify which countries were using cryptocurrencies in order to evade sanctions.
  • Mr. Levin testified that Chainalysis had detected the use of cryptocurrencies in Venezuela, Iran, and North Korea.
• Sen. Warren mentioned how FinCEN had recently warned that sanctioned persons, illicit actors, and their related networks or facilities might attempt to use cryptocurrencies and anonymizing tools in order to evade U.S. sanctions and protect their assets around the world. She noted however that the cryptocurrency industry maintained that sanctioned Russians could not use cryptocurrencies in order to hide their wealth because the $3 trillion cryptocurrency market was too small and too transparent. She posited a hypothetical scenario in which a sanctioned Russian oligarch already possessed $1 billion in cryptocurrencies and wanted to hide this money from foreign sanctions. She asked Mr. Levin to indicate whether the oligarch in this scenario could make it more difficult for other parties to trace their cryptocurrencies through moving their cryptocurrencies across blockchains, depositing cryptocurrencies into digital wallets that lacked KYC requirements, and using a mixing service that laundered their cryptocurrencies with the cryptocurrencies of other people.
  • Mr. Levin remarked that Sen. Warren’s posited scenario would require significant amounts of liquidity in order to be able to obfuscate that amount of money through the use of cryptocurrencies. He stated that the techniques that Sen. Warren had described would not make it easier for the Russian oligarch to hide their money. He noted how chain hopping required the provision of token information and indicated that Chainalysis had software that would identify these activities. He acknowledged that while the Russian oligarch could put their cryptocurrencies in digital wallets that did not collect KYC information, he stated that this action would not remove the record of where the cryptocurrencies were located. He then noted how the daily liquidity value of mixing services globally was about $30 million. He testified that Chainalysis had done “extensive” work in tracking large sums of money through mixers that had led to the arrests of bad actors.
• Sen. Warren called Mr. Leven’s answer surprising given how Mr. Levin’s company charged a lot of money to untangle and track cryptocurrencies through consistently evolving obfuscation schemes. She asked Mr. Stansbury to indicate whether the use of cryptocurrencies would enable the oligarch in her hypothetical scenario to buy and sell items without ever having to put their money into the formal banking system (which would make it more difficult for law enforcement bodies to detect the oligarch’s actions).
  • Mr. Stansbury remarked that it was theoretically possible for the oligarch in Sen. Warren’s hypothetical scenario to avoid the traditional banking system through using cryptocurrencies. He commented however that such avoidance would be difficult to accomplish. He mentioned how there was recent reporting of certain jurisdictions being more conducive to accepting cryptocurrencies as a means of purchasing real estate and other items.
• Sen. Warren commented that it was inarguable that Russia could evade all sanctions through merely moving its assets into cryptocurrencies. She stated however that Russian oligarchs could use cryptocurrencies to evade sanctions given how they possess smaller amounts of assets. She mentioned how she was introducing the Digital Asset Sanctions Compliance Enhancement Act, which would authorize the President to sanction foreign cryptocurrency firms that were doing business with sanctioned Russian entities.

Sen. Cynthia Lummis (R-WY):

• Sen. Lummis asked Mr. Mosier to indicate whether federal law enforcement bodies would prefer to investigate illicit finance cases involving cash or illicit finance cases involving digital assets.
  • Mr. Mosier remarked that it was much easier to investigate illicit finance cases involving cryptocurrencies given the nature of public ledgers. He noted how companies could quickly employ mathematical heuristics to help identify networks associated with OFAC-designated addresses. He indicated that it took significantly longer to identify OFAC-designated addresses in fiat currency cases because these investigations required more manual work.
• Sen. Lummis then noted how Chainalysis had found that approximately 0.15 percent of all digital asset transactions were related to illicit finance in 2021. She also noted how the United Nations (UN) had recently estimated that money laundered in the traditional financial system amounted to between $800 billion and $2 trillion annually. She asked Mr. Levin to address how money laundering within the traditional financial system compared to illicit transactions within the digital assets space.
  • Mr. Levin noted how global organizations had estimated that between 2 percent and 5 percent of world financial flows were related to money laundering and illicit finance. He commented that this amount was significantly more than the 0.15 percent of total digital asset transactions that were illicit in nature.
• Sen. Lummis emphasized that cryptocurrencies were used less often in illicit finance than fiat currencies. She then asked Mr. Chobanian to indicate how much money had been donated to Ukraine via digital assets over the last few weeks. She also asked Mr. Chobanian to indicate how long it took him to set up the infrastructure to begin accepting donations for Ukraine. She further asked Mr. Chobanian to indicate how quickly it took for the Ukrainian government to make use of the received donations.
  • Mr. Chobanian testified that it only took him about ten minutes to set up the infrastructure to begin accepting donations for Ukraine. He stated that the Ukrainian government could make use of donations instantaneously upon receipt.
• Sen. Lummis asked Mr. Chobanian to address the time and burdens that would be associated with accepting donations from other countries using traditional forms of payment (including wire transfers).
  • Mr. Chobanian remarked that it took the National Bank of Ukraine ten days to post the International Bank Account Number (IBAN) and other corresponding addresses needed to wire money into Ukraine.
• Sen. Lummis asked Mr. Chobanian to answer whether digital assets had made an “important difference” to the defense of Ukraine.
  • Mr. Chobanian reiterated how Ukraine had been able to make immediate purchases following the receipt of cryptocurrency donations.
• Sen. Lummis asserted that Congress was overly focused on how Russians could use cryptocurrencies in order to evade sanctions and not focused enough on how digital assets had benefited the Ukrainians in their defense efforts.

Sen. Mark Warner (D-VA):

• Sen. Warner remarked that policymakers needed to continue to explore the potential benefits provided by digital assets and highlighted how digital assets had enabled the swift donation of aid to Ukraine. He also raised concerns that the ease of transferring digital assets had allowed and would continue to allow Russian oligarchs to evade sanctions. He then expressed skepticism with the Chainalysis finding that illicit transactions only represented 0.15 percent of total cryptocurrency transaction volume. He expressed his belief that the volume of ransomware payments made in cryptocurrencies was “exponentially higher” than the Chainalysis estimate. He asked Mr. Stansbury to indicate whether the liquidity brought about by cryptocurrencies would lead to continued growth and profitability of ransomware attacks.
  • Mr. Stansbury expressed agreement with Sen. Warner’s concerns. He mentioned how the FBI and other agencies had indicated that ransomware incidents were much more prevalent than publicly reported and noted how not all ransomware incidents were reported. He also mentioned how an October 2021 FinCEN report had indicated that the SARs filed in the first half of 2021 were projected to have a higher ransomware-related transaction value than SARs filed in the previous ten years combined. He remarked that this trend suggested that cryptocurrencies were supporting ransomware payments and stated that cryptocurrency was the exclusive tool for ransomware attack perpetrators.
• Sen. Warner discussed how recently enacted legislation would lead to increased cyber incidents and ransomware reporting, which would provide the U.S. with a better understanding of the prevalence of such crimes. He also expressed his support for the Digital Asset Sanctions Compliance Enhancement Act and asserted that the legislation would reduce the ability of Russia and Russian oligarchs to evade U.S. sanctions.

Sen. Catherine Cortez Masto (D-NV):

• Sen. Cortez Masto asked Mr. Levin to identify the illicit finance risks associated with digital assets.
  • Mr. Levin remarked that the law enforcement agencies that were responsible for investigating illicit money flows needed more resources in order to better understand novel digital assets technology. He noted how bad actors had employed cryptocurrencies in cybercrimes and stated that properly equipping law enforcement bodies would help to combat such crimes.
  • Mr. Mosier expressed agreement with Mr. Levin’s comments. He recounted how had previously advocated that the White House Office of Management and Budget (OMB) provide more resources to track cryptocurrency transactions when he had previously worked at FinCEN. He noted that the OMB was resistant to providing FinCEN with multiple cryptocurrency tracking products. He stated that FinCEN could not request data from other agencies that used other tracking products because such requests would violate the terms of the product licenses. He asserted that it was critical for law enforcement agencies to have tools that would provide real-time analysis of public ledgers so that they could take timely actions to combat crime.
• Sen. Cortez Masto then asked Mr. Levin and Mr. Mosier to indicate whether they believed that cryptocurrencies would go away.
  • Mr. Levin contended that cryptocurrencies would not go away and predicted that cryptocurrencies would become a more important financial rail for commerce. He stated that there had been growth in industry use cases for cryptocurrencies and highlighted how cryptocurrencies were employed in the art market, the music industry, and electric vehicle (EV) data management.
• Sen. Cortez Masto then asked Mr. Chobanian to indicate whether Russians were using cryptocurrencies to oppose Russian President Vladimir Putin’s regime from inside of Russia.
  • Mr. Chobanian stated that cryptocurrencies enabled people to escape from Russia with some money.
• Sen. Cortez Masto acknowledged that her question period had expired and indicated that she would submit additional questions for the hearing’s record.

Sen. Jack Reed (D-RI):

• Sen. Reed asked Mr. Levin to explain how Chainalysis connected a given digital wallet to a given bad actor.
  • Mr. Levin testified that Chainalysis tracked the entire ecosystem of cryptocurrency transactions. He stated that Chainalysis tracked ransomware perpetrators and their enablers through gathering intelligence about the ransomware campaigns. He mentioned how Chainalysis maintained a team of about 50 specialist researchers that can flag suspicious activities for the company’s law enforcement and private sector customers. He elaborated that Chainalysis’s private sector companies could use flagged activities to screen for risk and file SARs to FinCEN if necessary.
• Sen. Reed asked Mr. Levin to indicate how effective Chainalysis was in terms of identifying bad actors given the large amount of anonymity within the cryptocurrency system.
  • Mr. Levin remarked that Chainalysis was able to both collect intelligence on cryptocurrency activity and provide further analysis on the cryptocurrency activity surrounding a flagged incident as a result of the transparency of public ledgers. He stated that Chainalysis thus tended to have higher estimates of the total amount of ransomware revenue because the company was able to take a solo incident of ransomware reporting and determine all of the activity associated with the incident. He asserted that Chainalysis only needed to flag a single incident of illicit activity in order to map out the full extent of a bad actor’s criminal network.
• Sen. Reed asked Mr. Levin to indicate whether Chainalysis could find the real identities of individuals.
  • Mr. Levin indicated that Chainalysis did not collect information about individual people. He noted that regulated financial institutions collected such information and that law enforcement bodies could employ their legal authorities to obtain this information from the financial institutions. He stated that Chainalysis enabled investigations to progress much faster and more comprehensive network analysis to occur without needing identity information.
• Sen. Reed commented that he was operating on the assumption that Russian oligarchs and other global bad actors had acquired cryptocurrencies for their financial portfolios. He asked Mr. Levin to assess the veracity of this assumption.
  • Mr. Levin stated that Sen. Reed’s assumption could be possible. He remarked however that current data surrounding present digital wallets, the concentration of cryptocurrencies, and the use of cryptocurrencies suggested that the most sophisticated Russian cryptocurrency users were involved with large cybercrime operations and not large holders of cryptocurrencies.
• Sen. Reed asked Mr. Levin to address the extent to which the U.S. needed to worry about the potential for cryptocurrencies to displace fiat currencies.
  • Mr. Levin remarked that cryptocurrencies represented global communities and new ways of commerce. He stated that policymakers should view cryptocurrencies as a technology that enabled innovative business models that would improve upon current rent seeking business models. He asserted that the growth of cryptocurrencies would likely complement the issuance of the U.S. dollar.

Sen. Chris Van Hollen (D-MD):

• Sen. Van Hollen remarked that cryptocurrencies constituted the preferred method of payment for ransomware perpetrators. He asked Mr. Levin to indicate whether he believed that cryptocurrencies were perceived to be the best method of payment for ransomware attacks because cryptocurrencies enabled the perpetrators to hide their identities.
  • Mr. Levin remarked that criminals often prioritized the maximization of profits over the need for anonymity. He stated that Bitcoin was a popular currency for ransomware attacks because it was easy for victims to acquire and transfer Bitcoins. He asserted however that ransomware perpetrators had become increasingly less able to evade detection from law enforcement bodies. He noted how public blockchain ledgers enabled law enforcement bodies and third parties to fully view cryptocurrency networks, which enabled these law enforcement bodies and third parties to identify and shut down broader illicit crime networks. He commented that this ability to identify and shut down broader illicit crime networks would reduce the overall amount of ransomware attacks against the U.S.
• Sen. Van Hollen noted that blockchain technology enabled law enforcement bodies and third parties to track the activities of a given digital wallet. He commented however that law enforcement bodies and third parties must then figure out the identity of the party behind the digital wallet, which could sometimes be challenging. He then noted how the FBI had been able to obtain the key to the digital wallet involved in the Colonial Pipeline hack. He asked Mr. Levin to clarify whether the ability to obtain a key to the digital wallet was different from the ability to hack into a digital wallet.
  • Mr. Levin stated that the details surrounding the FBI’s recovery of Colonial Pipeline ransomware payments were not entirely in the public domain. He remarked that obtaining access to a digital wallet’s key was different from hacking into the digital wallet. He asserted that the Bitcoin system itself was very secure and stated that the ability to obtain digital wallet key information could be a vulnerability for users.
• Sen. Van Hollen noted how there were numerous instances in which cryptocurrency exchanges had been hacked. He expressed interest in exploring the recourse that investors would have if their cryptocurrency exchanges were hacked. He indicated that there currently did not exist protections for investors that had their cryptocurrency exchanges hacked. He asked Mr. Levin to address the extent to which cryptocurrency exchanges were vulnerable to hacks.
  • Mr. Levin noted that cryptocurrency exchanges were financial intermediaries in which an entity was holding funds on behalf of someone else. He stated that regulation could be helpful in terms of establishing best practices and standards by which cryptocurrency exchanges and financial intermediaries should hold their funds. He highlighted how many established financial institutions were entering the cryptocurrency custody space and offering robust cryptocurrency custody solutions. He predicted that this entrance would lead the cryptocurrency market to mature and cryptocurrency exchanges to reduce their vulnerabilities.
• Sen. Van Hollen commented that cryptocurrencies did not appear to be a fad and called for a more robust federal regulatory framework for cryptocurrencies.

Sen. Kyrsten Sinema (D-AZ):

• Sen. Sinema expressed her support for efforts to deliver more military equipment and humanitarian support to Ukraine. She asserted that the U.S.’s efforts to combat illicit financing were an “integral” part of the U.S.’s strategy to support Ukraine’s defense against Russia. She asked Mr. Levin to discuss how Chainalysis managed to catch illicit activity in cryptocurrency without attempting to break the blockchain or undermine the integrity of the distributed ledger.
  • Mr. Levin remarked that Chainalysis’s ability to detect illicit activity on blockchains depended on the company’s ability to view the transactions on blockchains. He noted how the public nature of blockchains enabled Chainalsyis to view all cryptocurrency transactions. He testified that Chainalysis used a combination of human intelligence and machine learning algorithms to develop a fuller picture of how cryptocurrencies were actually being used. He stated that Chainalysis provided their analysis of the cryptocurrency market for both law enforcement and private sector customers.
• Sen. Sinema then discussed how more sophisticated criminals often employed chain hopping techniques or made use of mixers and tumblers in order to hide their cryptocurrency activities. She asked Mr. Levin to indicate whether Chainalysis offered products or services that sought to address the aforementioned evasion techniques and to identify the biggest factor that limited the types of services that Chainalysis could provide.
  • Mr. Levin noted how the ability to chain hop often required transactions in which a party locked up a cryptocurrency asset on one blockchain in order to unlock a wrapped version of the asset on another blockchain. He commented that this activity could be seen on the blockchain and testified that Chainalysis provided customers with the ability to conduct cross-blockchain investigations on their platform. He asserted that chain hopping did not provide the level of anonymity that was commonly believed. He then discussed how Chainalysis had techniques to demix certain transactions. He stated that Chainalysis’s research and development (R&D) efforts kept pace with new financial transaction obfuscation methods. He indicated his willingness to elaborate further on these methods in a separate briefing.
• Sen. Sinema then mentioned how Ukrainian President Volodymyr Zelensky had just signed a law that legalized cryptocurrencies within Ukraine. She asked Mr. Chobanian to discuss the importance of this new law and to address how Web 3.0 technologies were providing new tools to Ukrainians in their efforts to weather the Russian invasion and the associated humanitarian crisis.
  • Mr. Chobanian noted how Ukraine still needed to amend its tax code for the recent law legalizing cryptocurrencies to be implemented. He explained that this recent law provides general rules for the cryptocurrency ecosystem, including AML and KYC rules for cryptocurrency financial institutions. He stated that Ukraine would have a full cryptocurrency market within the year after the war between Ukraine and Russia was finished. He noted how there remained debate in the U.S. as to how cryptocurrencies ought to be overseen and invited U.S. cryptocurrency companies to experiment with different approaches in Ukraine. He also asserted that Web 3.0 technologies would be transformational and commented that these technologies would be used to rebuild Ukraine after its war with Russia.

Sen. Steve Daines (R-MT):

• Sen. Daines first criticized President Biden for his previous allowance of the Nord Stream 2 pipeline and Congressional Democrats for previously voting against reimposing sanctions on the Nord Stream 2 pipeline. He then called it unclear whether Russia was using digital assets to evade international sanctions and highlighted how U.S. Department of Treasury officials had expressed uncertainty regarding this issue. He stated that legitimate cryptocurrency intermediaries abide by KYC and AML rules and were actively updating their standards to comply with recent U.S. sanctions. He also noted how darknet market users typically still needed to involve a financial institution (which was subject to AML and sanctions requirements) in order to convert cryptocurrency assets into fiat currencies. He then discussed how the Ukrainian government was explicitly soliciting cryptocurrency donations to support their defense efforts against Russia. He noted how this effort had thus far raised $100 million in cryptocurrency donations according to the Ukrainian government. He commented that this experience demonstrated the potential for cryptocurrencies and other digital assets to “revolutionize” finance and the speed at which donations could flow around the world. He then asked Mr. Mosier to describe the process of converting digital assets into fiat currencies. He also asked Mr. Mosier to indicate whether a person attempting to evade sanctions be able to convert digital assets into fiat currencies.
  • Mr. Mosier remarked that the process of converting digital assets into fiat currencies was complicated because there needed to exist sufficient liquidity to exchange the assets into fiat currencies. He commented that the current demand for Russian rubles was very low, which made it difficult for Russians to convert their money into cryptocurrencies. He then stated that a party seeking to convert fiat currencies into digital assets would need to find a counterparty that believed that such a trade would not violate any laws or sanctions. He commented that this dynamic would likely discourage non-Russian financial institutions from accepting trade requests from Russian parties for cryptocurrencies.
• Sen. Daines then asked Mr. Mosier to indicate whether blockchain technology provided certain benefits with regard to the ease of detecting illicit financial flows.
  • Mr. Mosier answered affirmatively. He remarked that blockchain technology provided two chief benefits: the ability to quickly identify bad actors and the ability to provide privacy for individuals. He commented that blockchain technology enabled law enforcement bodies to not rely upon widespread data collection and reporting and to instead focus their data collection efforts on select persons of interest.
• Sen. Daines lastly asked Mr. Chobanian to discuss how the Ukrainian government had made use of the cryptocurrency donations that it had received to date.
  • Mr. Chobanian testified that the Ukrainian government had used the cryptocurrency donations that it had received to purchase helmets, bulletproof vests, first aid kits, medical supplies, scopes, and soldier rations. He also testified how the Ukrainian government had distributed these donations to cities so that they could purchase food and provide humanitarian aid for their residents. He emphasized how these donations were fully transparent and asserted that such distributions of aid would be impossible to do using the traditional banking system.
• Sen. Daines indicated that his question period time had expired.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey expressed concerns with how the proposed Digital Asset Sanctions Compliance Enhancement Act would impose the equivalent of secondary sanctions on cryptocurrency parties doing business with anyone from Russia. He commented that while the legislation’s intent was to go after Russian oligarchs, he expressed concerns that the legislation would negatively impact anyone in Russia engaged in cryptocurrency transactions. He asked Mr. Chobanian to discuss the overlap between Russians that used cryptocurrencies and Russians that were opposed to Russian President Vladimir Putin.
  • Mr. Chobanian stated that Russian cryptocurrency users tended to be intelligent, wealthy, technologically literate, and well-traveled. He commented that the aforementioned attributes made Russian cryptocurrency users more predisposed to opposing Russian President Vladimir Putin. He lamented how these Russian cryptocurrency users felt that they were limited in their ability to fight President Putin’s regime. He called it important for the U.S. to not harm ordinary Russians that were opposed to President Putin. He asserted that the U.S. should instead focus its efforts on going after sanctioned individuals and highlighted how the sanctioned individuals tended to have significantly more cryptocurrencies than ordinary Russians. He noted how MasterCard and Visa had shut down their payment networks within Russia, which meant that ordinary Russians could currently only use cash or cryptocurrencies to make payments. He also mentioned how current AML and KYC requirements heavily limited the abilities of all Russians to exchange their cryptocurrencies into fiat currencies. He stated that the U.S. must ensure that it did not make it impossible for ordinary Russians to survive during the current period.