Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	November 15, 2023

 

Hearing Takeaways:

• Use of Digital Assets in Illicit Activity: Subcommittee Democrats and Ms. Jimenez raised concerns over how cryptocurrencies are often used in illicit activities and highlighted how the number of cryptocurrency-related suspicious activity reports (SARs) has spiked in recent years. They stated that the decentralized, borderless, and pseudonymous features of digital assets (as well as their convenient access, store, and transfer features) are very attractive to bad actors. Subcommittee Republicans, Rep. Wiley Nickel (D-NC), Mr. Hughes, Mr. Levin, and Ms. Khodarkovsky remarked however that most cryptocurrency activity involves licit activities and noted how other financial tools (such as cash, bank accounts, shell companies, and other commodities) are often used to perpetrate illicit activities. Subcommittee Republicans and Ms. Khodarkovsky also stated that that SAR filings do not necessarily mean that a crime has taken place. They suggested that the recent spike in cryptocurrency-related SARs could be attributable to a lack of familiarity with cryptocurrencies among banks.
  • Terrorism Financing: Several Subcommittee Democrats and Ms. Jimenez raised concerns over how cryptocurrencies are being used to finance terrorist groups and governments, including Hamas, Hezbollah, Iran, and North Korea. Subcommittee Republicans and Mr. Levin stated however that media reports of Hamas’s use of cryptocurrencies are overstated and that these overstatements are based on misinterpreted data.
  • Money Laundering, Sanctions Evasion, Ransomware, Organized Crime, and Drug Trafficking: Subcommittee Democrats raised concerns over how rouge states and non-state actors employ cryptocurrencies for money laundering, sanctions evasion, and ransomware. Rep. Sean Casten (D-IL) and Ms. Jimenez also highlighted how organized crime and drug trafficking groups make use of cryptocurrencies for their illicit activities.
  • Scams: Ms. Jimenez discussed the prevalence of cryptocurrency-related scams. She mentioned how the U.S. Federal Bureau of Investigation (FBI) had received over 30,000 complaints regarding cryptocurrency investment scams in 2022 and indicated that victims had reported over $2.6 billion in losses. She also noted how many of these scammers are victims of human trafficking that are forced to meet quotas under the threat of violence from transnational organized crime groups.
  • Tax Evasion: Rep. Brad Sherman (D-CA) and Ms. Jimenez further raised concerns over how cryptocurrencies can facilitate tax evasion. Rep. Sherman asserted that cryptocurrencies can only compete with U.S. dollars if they are able to be used for tax evasion purposes.
• Use of Blockchains and Digital Assets to Combat Illicit Activity and for Beneficial Purposes: Subcommittee Republicans, Mr. Hughes, Mr. Levin, Mr. Lisa, and Ms. Khodarkovsky contended that the transparency, accessibility, immutability, and reliability of blockchains provide governments and law enforcement agencies with unique opportunities to identify and combat illicit activities, as well as pursue national objectives. Subcommittee Democrats and Ms. Jimenez expressed concerns however that cryptocurrency transactions can be concealed through various technologies and that governments and law enforcement agencies cannot track off-chain cryptocurrency transactions. 
  • Blockchain Analytic Capabilities: Subcommittee Chairman French Hill (R-AR), Mr. Hughes, Mr. Levin, and Ms. Khodarkovsky contended blockchain analytics tools can be used to trace the flow of cryptocurrency transactions and to identify potential illicit activity. They remarked that these tools enable governments and law enforcement agencies to track cryptocurrency activity, even if bad actors use technologies (such as mixing services) to obscure the activity. They noted how bad actors seeking to make use of ill-gotten cryptocurrencies must interact with traditional financial system to retrieve the cryptocurrencies. They stated that governments can link identities to cryptocurrency-related activities through their reporting requirements for onramps and offramps to the cryptocurrency ecosystem. They indicated that banks are subject to these reporting requirements. They highlighted how blockchain analytics have enabled governments and law enforcement agencies to identify and shutdown criminal operations and recover ransomware payments (including ransomware payments made in the Colonial Pipeline ransomware attack). Subcommittee Democrats and Ms. Jimenez argued however that bad actors can still evade detection from blockchain analytics firms through the uses of various methods, including mixers, chain hopping, and side chains. They also stated that bad actors can engage in off-chain transactions to evade detection.
  • Public-Private Partnerships to Combat Illicit Activity Involving Digital Assets: Mr. Hughes, Mr. Levin, and Mr. Lisa stated that the U.S. must promote -public-private partnerships for blockchain intelligence sharing to better position law enforcement and intelligence agencies to trace, stop, and recover laundered funds. They highlighted how these partnerships have already proven successful in combating cryptocurrency-related terrorist financing campaigns and shutting down illicit websites that have relied upon cryptocurrencies, including Silk Road, Bitfinex, Welcome to Video, and BTC-e. Ms. Jimenez suggested however that the private sector may be limited in its ability to stop cryptocurrency-related crime. She commented that the private sector may not have the same access to data and information as law enforcement and intelligence agencies.
  • Implementation of Sanctions: Ms. Khodarkovsky also mentioned how U.S.-based stablecoin issuers can blacklist interactions with an application and freeze assets in digital wallets in response to U.S. Office of Foreign Assets Control (OFAC) sanctions. She highlighted how the ability to freeze digital wallet addresses on the secondary market to comply with sanctions is unique to blockchains. 
  • Resources for the Federal Law Enforcement Agencies: Subcommittee Chairman Hill and Mr. Levin expressed interest in providing sufficient resources to intelligence agencies and the U.S. Department of the Treasury so that they can uncover the identities of the parties involved in illicit cryptocurrency transactions. Mr. Levin elaborated that the Executive Branch requires better access to data and expertise to pursue criminal operations involving cryptocurrencies.
  • Uses of Digital Assets for Humanitarian and Assistance Purposes: Ms. Khodarkovsky further discussed how vulnerable populations have turned to the digital asset ecosystem in response to autocratic regimes and terrorist organizations. She mentioned how Ukraine has raised $100 billion in cryptocurrencies following Russia’s invasion of the country and noted how Ukrainians are using Bitcoin and Ether to support themselves. She also mentioned how Israel had received humanitarian aid in the form of cryptocurrencies following Hamas’s recent attack against the country.
• Digital Assets Regulation and Oversight: Subcommittee Republicans, Rep. Wiley Nickel (D-NC) and the hearing’s witnesses expressed interest in having the U.S. adopt legislative, regulatory, and legal frameworks for digital assets to ensure that digital assets have proper oversight and are in compliance with the Bank Secrecy Act (BSA) and anti-money laundering (AML) rules. They also stated that these frameworks will be key to ensure that the U.S. remains a global leader in financial regulation (especially considering how other jurisdictions are implementing their own digital asset regulations) and that digital assets activity does not occur in less regulated offshore jurisdictions. Ms. Jimenez cautioned however that federal digital assets legislation should not be viewed as a panacea and commented that such legislation would not address the underlying features of cryptocurrencies. Rep. Brad Sherman (D-CA) argued that the U.S. should not take steps to promote cryptocurrencies and warned that cryptocurrencies are seeking to displace the U.S. dollar’s role within the international financial system.
  • Agency Jurisdiction for Digital Assets Regulation and Oversight: Subcommittee Ranking Member Stephen Lynch (D-MA) and Ms. Jimenez expressed concerns over legislative proposals that would shift jurisdiction over digital assets away from the U.S. Securities and Exchange Commission (SEC) and toward the U.S. Commodity Futures Trading Commission (CFTC). Ms. Jimenez highlighted how the SEC has more experience than the CFTC in investigating financial crimes and suggested that the SEC would be better suited to oversee the digital assets space.
  • Regulatory Sandboxes: Mr. Hughes and Ms. Lisa suggested that policymakers establish regulatory sandboxes that would better enable the private sector to experiment with blockchain analytics and digital identity technologies on public ledgers.
  • Allowance of Anonymity: Subcommittee Republicans, Mr. Lisa, and Ms. Khodarkovsky stated that the U.S. must preserve the ability of Americans to hold cryptocurrencies anonymously through mixing services and self-custody. Ms. Khodarkovsky stated that there exist ways for law enforcement agencies to investigate and trace assets on blockchains, even if individuals are using self-hosted wallets. She noted how self-hosted wallet users will interact with centralized exchanges, onramps, and offramps, which will subject these users to AML reporting requirements. Rep. Sherman and Ms. Jimenez expressed skepticism regarding the desire of some people to anonymize their ownership of cryptocurrencies (including through the use of mixing services). They cautioned that anonymizing cryptocurrency ownerships and transactions can enable various illicit activities. Mr. Lisa raised concerns however that efforts to sanction mixing services could result in software regulation. He warned that such regulation would undermine U.S. leadership within the AML space.
  • International Coordination: Subcommittee Republicans, Mr. Levin, Mr. Lisa, and Ms. Khodarkovsky called on the U.S. to increase its coordination efforts with other countries so that it can better combat international cryptocurrency-related crimes. They stated that the U.S. Financial Crimes Enforcement Network (FinCEN), the U.S. Department of the Treasury, and the U.S. Department of Justice (DoJ) can leverage their existing partnerships, authorities, and resources to support their capacity building efforts for addressing global illicit activity. Mr. Lisa warned that an exclusive reliance on the mutual legal assistance treaty (MLAT) process would reduce the effectiveness of the U.S.’s efforts to combat this illicit activity.
  • Overregulation Concerns: Mr. Lisa also cautioned that overregulating cryptocurrencies could drive cryptocurrency outside of the traditional financial system and offshore (which will make cryptocurrencies difficult to track). He also warned that such overregulation could make compliance impossible, divert resources away from addressing actual risks, and result in unregulated environments and jurisdictions being the only places where cryptocurrency companies succeed and survive. He further stated that such overregulation could jeopardize the U.S.’s national security and exacerbate the U.S.’s current illicit finance challenges.
  • Cantor Fitzgerald’s Involvement with Tether: Rep. Nickel and Ms. Khodarkovsky raised concerns over how Cantor Fitzgerald (which is a U.S. financial services company) reportedly manages the stablecoin Tether’s $72 billion portfolio of U.S. Treasury bonds. They noted how these U.S. Treasury bonds effectively provide Tether with access to U.S. dollars. They raised concerns over Cantor Fitzgerald’s involvement with Tether because Tether lacks compliance controls and may be facilitating illicit activities.

Hearing Witnesses:

1. Mr. Bill Hughes, Senior Counsel & Director of Global Regulatory Matters at Consensys and previously Associate Deputy Attorney, General at the U.S. Department of Justice
2. Ms. Jane Khodarkovsky, Partner at Arktouros, previously Trial Attorney and Human Trafficking Finance Specialist with the U.S. Department of Justice’s Money Laundering and Asset Recovery Section
3. Mr. Jonathan Levin, Co-Founder & Chief Strategy Officer, Chainalysis
4. Mr. Gregory Lisa, Chief Legal Officer, DELV (f/k/a Element Finance, Inc.) and Senior Counsel, Hogan Lovells US LLP, Previously Interim Director, Office of Compliance and Enforcement at U.S. Financial Crimes Enforcement Network
5. Ms. Alison Jimenez, President, Dynamic Securities Analytics, Inc.

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He first discussed how there have been reports indicating that digital assets were used to help Hamas fundraise for its attacks against Israel.
• He mentioned how a Congressional letter had stated that Hamas and Palestinian Islamic Jihad (PIJ) had raised over $130 million through cryptocurrencies.
  • He indicated however that a blockchain analytics firm has disputed this claim and has argued that this letter had misinterpreted certain data.
• He then remarked that the Subcommittee supports all available means for shutting down illegal, illicit, and terrorism finance that occurs through cryptocurrencies, cash, or hawalas.
  • He mentioned how he had sent a letter to the DoJ with Sen. Cynthia Lummis (R-WY) regarding the need to pursue specific bad actors within the cryptocurrency industry.
  • He also mentioned how over 50 Members of Congress had joined a letter led by U.S. House Majority Whip Tom Emmer (R-MN), Full Committee Chairman Patrick McHenry (R-NC), Rep. Ritchie Torres (D-NY) and himself to better understand the size, scope, and duration of Hamas’s fundraising through digital assets.
• He stated that bad actors will ultimately use any means possible to conduct their illicit activities and asserted that phones, the internet, and cryptocurrencies should not be blamed for terrorism financing.
• He remarked that the Subcommittee must better understand the degree of illicit activity, consider how blockchain technology can be leveraged to combat illicit activity, examine the analytic tools that currently exist to combat illicit activity, and explore gaps that may undermine the prevention and detection of illicit activity.
  • He noted how the U.S. Department of the Treasury has acknowledged that most virtual currency activity is licit in nature.
• He discussed how blockchains provide law enforcement agencies with unique and novel insights into criminal organizations and their funding networks and stated that law enforcement agencies have proven “very adept” at leveraging this information to stop criminals.
  • He highlighted how these efforts often involve blocking access to the onramps and offramps for the formal financial system.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He noted how the U.S. Department of the Treasury is continuing to evaluate the role of digital assets (including cryptocurrencies) in financing terrorism and other criminal activities in the wake of Hamas’s recent terrorist attacks against Israel.
  • He indicated that the Biden administration is working with Congress and cryptocurrency stakeholders to identify actions that might further prevent illicit activities within the digital assets space.
• He discussed how the Committee has received “multiple” classified briefings from the U.S. Department of the Treasury and U.S. intelligence officials regarding the extent to which the Iranian regime and its proxies (including Hamas and Hezbollah) have used digital assets in financing regional and global terrorism.
  • He commented that public reports indicate that there exists “some cause for concern” regarding this use of digital assets.
  • He mentioned how the Wall Street Journal had estimated that digital currency wallets linked to the PIJ had received as much as $93 million with Hamas receiving about $42 million between August 2022 and June 2023.
• He also mentioned how FinCEN had recently identified the illicit use of international convertible virtual currency mixing by North Korea, Hamas, and other malicious state and non-state actors as an acute money laundering concern and a serious national security risk.
• He noted how the cryptocurrency industry and its advocates have argued that the amount of funding that has flowed through cryptocurrency channels is overestimated and is small compared to the amount of terrorism financing that flows through traditional finance.
  • He called this argument unconvincing and commented that it does not take a significant amount of money to finance terrorism.
• He remarked however that cryptocurrency remains the preferred currency of organized crime and various cyberattacks.
  • He also commented that the criminal use of cryptocurrencies has “dramatically” escalated as high corruption governments that operate as safe havens for money laundering have continued to court unvetted cryptocurrency investors through purposeful deregulation.
• He stated that there are key features of crypto assets, such as inherent pseudonymity and their decentralized nature, which make these assets vulnerable to and highly useful for illicit activities, including ransomware attacks.
  • He noted how the U.S. Department of the Treasury’s Action Plan to Address Illicit Financing Risks of Digital Assets recognizes that cybercriminals often require ransomware payments in the form of digital assets (frequently via Bitcoin).
• He mentioned how an industry report had found that cryptocurrency payments to ransomware attacks reached $449 million in the first half of 2023.
  • He indicated that this figure is up 40 percent from the same period in 2022.
• He noted how victims of the largest ransomware attacks include hospitals, government offices, energy centers, and other critical entities that cyber criminal gangs identify to generate the largest ransoms.
• He also mentioned how the U.S. financial services division of the Industrial and Commercial Bank of China (ICBC) had recently experienced a “massive” ransomware attack that had disrupted trades in the U.S. Treasury market.
  • He commented that the hacking group Lockbit (which he alleged was the likely perpetrator of the attack) has received tens of millions of dollars of Bitcoin as ransomware payments in relation to over 1,400 attacks.
• He expressed interest in exploring how cryptocurrency vulnerabilities are being used for illicit purposes, including money laundering, financial sanctions evasion, tax evasion, and other corruption-related crimes (such as bribery and embezzlement).

Full Committee Chairman Patrick McHenry (R-NC):

• He expressed interest in determining the extent to which digital assets are being used for illicit purposes and identifying ways to combat this problem.
• He also highlighted how there have been conflicting reports regarding Hamas’s use of digital assets to raise money for their activities.
  • He noted how Hamas has used the traditional banking system and has misused cash and other forms of currency.
• He remarked that bad actors tend to exploit vulnerabilities wherever possible and that the U.S. must hold bad actors accountable (specifically with regard to their use of digital assets).
• He noted how digital assets are built on transparent and open distributed ledger technology (DLT) and commented that this makes it much easier to track and detect illicit activity involving digital assets.
  • He called these features beneficial and useful.

Witness Opening Statements:

Mr. Bill Hughes (Consensys; former Associate Deputy Attorney General at the U.S. Department of Justice):

• He discussed how his company, Consensys, is a blockchain software developer that offers the most popular unhosted wallet software in digital assets: the MetaMask wallet.
• He explained that a wallet is an interface that enables a user to read and write to a blockchain without the help of any intermediaries.
  • He also noted how a wallet safeguards a user’s private key, which is the cryptographic password that a user must have to control a particular blockchain account (also known as a public address).
• He discussed how users (both domestically and internationally) can use a long list of wallets to read and write to the blockchain and to securely store their private keys.
  • He stated that technology providers are expected to follow the law and commented that U.S.-based blockchain projects generally follow the law.
• He remarked that permissionless blockchain networks are new technologies that have real value and that present exciting opportunities.
  • He asserted that the U.S. must not accept or equivocate about bad actors using these technologies to commit crimes.
• He acknowledged that combating money laundering is always difficult and stated that digital assets provide money laundering tracking and disruption capabilities that law enforcement and the public at large have never had before.
• He highlighted how open and permissionless blockchain ledgers are reviewable by anyone anywhere, which means that transactions can be traced using blockchain analytics technology.
  • He indicated that this tracing capability extends to blockchain transactions that are purposefully complicated to obfuscate the flow of funds.
• He remarked that any policy response to the threat of money laundering should embrace the transparency of blockchains and bolster the power of transaction analytics if the policy repsonse hopes to be successful.
  • He commented that while analytics technology is currently helpful, he asserted that this technology must continue to improve if illicit finance in digital assets is going to be sufficiently addressed.
• He stated that on-chain user security is also essential and testified that this security is a “core focus” that Consensys considers for its MetaMask users.
• He also remarked that digital assets present new challenges and stated that critical weaknesses remain in centralized entities that provide central order book exchange services.
  • He commented that traditional finance remains the “overwhelmingly popular space” for money launderers to operate.
  • He also commented that the estimated volume of illicit on-chain activity when compared with licit activity is “remarkably low.”
• He acknowledged however that illicit finance is a serious concern that deserves policymaker attention.
  • He asserted that the U.S. must remain vigilant to ensure that the illicit use of digital assets does not become more prevalent.
• He remarked that this objective can be accomplished through obtaining more global uniformity in regulating exchanges and stablecoins.
  • He suggested that policymakers consider establishing regulatory sandboxes to improve blockchain analytics and digital identity technologies.
• He stated that blockchain technology provides an opportunity to improve privacy protections and data security while also achieving compliance.
• He also remarked that the U.S. must improve public-private collaboration on the policy issues presented by decentralized finance (DeFi) and bolster intelligence sharing to better position law enforcement agencies to trace, stop, and recover laundered funds.
  • He stated that combating money laundering involving digital assets constitutes a “net good” for the blockchain technology ecosystem and commended the Subcommittee for its attention regarding the issue.

Mr. Jonathan Levin (Chainalysis):

• He remarked that the core focus of his company, Chainalysis, is detecting and disrupting bad actors that use cryptocurrencies for terrorist financing and other illicit purposes.
  • He mentioned how Chainalysis has spent almost a decade working with law enforcement agencies and intelligence services in the U.S., Israel, and other allied countries to disrupt these illicit networks.
• He discussed how financial intelligence has historically been composed of government information collections and reporting from financial institutions.
  • He indicated that these information collections and reportings are typically not real time and are highly dependent on domestic services and institutions to report on suspicious activities.
  • He also stated that insights into international transactions are often mired in complex international collaborations and information sharing arrangements.
• He remarked that cryptocurrencies can address these historical challenges through enabling governments around the world to have access to every single transaction that has ever occurred involving cryptocurrencies.
  • He commented that this transaction information sharing allows for full networks to be uncovered.
• He noted how cryptocurrency transactions are inherently public and how the data from these transactions are preserved on a transparent and immutable ledger.
• He discussed how Chainalysis analyzes these blockchain transactions and uses open source information and proprietary data collection to map the ecosystem of the participants in these networks.
  • He also mentioned how Chainalysis provides software solutions, data, and investigative support to enable investigators to trace the flow of cryptocurrency transactions and to identify potential illicit activity.
• He then remarked that there exists evidence of terrorist organizations operating in Gaza attempting to raise funds using cryptocurrencies as early as 2016.
• He noted that these terrorist financing efforts involve both the direct use of cryptocurrencies and the use of networks of enablers and facilitators that leverage otherwise legitimate services to finance terrorist activities.
  • He indicated that these otherwise legitimate services can be hawala services and over-the-counter (OTC) exchanges.
• He discussed how the broader network of terrorist financing enablers has historically been very difficult to detect and disrupt when moving fiat currencies.
• He stated that the use of cryptocurrencies by these networks had made it possible for law enforcement agencies to detect and disrupt these terror financial donation campaigns.
  • He mentioned how the DoJ had announced that it had dismantled the terrorist financing campaigns of Hamas and ISIS’s military wings with the aid of Chainalysis in August 2020.
  • He also mentioned how the Israeli government has undertaken multiple successful seizures of cryptocurrencies intended for groups supporting Hamas with the help of Chainalyiss.
• He remarked that efforts to combat the illicit use of cryptocurrencies have invovled international collaboration, trusted public-private partnerships, and work with the private sector to freeze both the accounts at cryptocurrency exchanges and other wallet addresses associated with this financing.
• He mentioned how Hamas had publicly announced that it was shutting down its campaign to accept cryptocurrencies as donations.
  • He noted how Hamas had cited the success of government efforts to prosecute donors as a factor for its decision.
• He indicated that while Hamas has stated that it is ceasing to accept cryptocurrencies, he testified that Chainalysis continues to work with law enforcement agencies around the world to detect and disrupt Hamas’s use of cryptocurrencies and the different entities that are supporting their actions.
• He then remarked that the federal government should provide a path to compliance for the digital asset industry to increase the number of domestic touchpoints for the federal regulation of stablecoin issuers and cryptocurrency exchanges.
  • He also called on the U.S. to address regulatory gaps among international partners that allow for unlicensed exchanges to continue operating.
• He further stated that the U.S. should prioritize arming the federal government with real-time data, sophisticated technology, and “cutting edge” expertise so that it can disrupt illicit activity.

Mr. Gregory Lisa (DELV; Hogan Lovells US LLP; Former Interim Director, Office of Compliance and Enforcement at U.S. Financial Crimes Enforcement Network):

• He remarked that most criminal activities are connected to a profit motive and that many criminal networks cannot succeed without equipment, logistics, and funding.
  • He commented that investigators and prosecutors will often trace the flow of funds when pursuing a case because this flow tends to reveal the identities of criminal leaders and where criminal organizations are most vulnerable.
• He discussed how traditional financial investigations are difficult and cumbersome, which can make them ineffective in some instances.
  • He commented that “smoking guns” are incredibly rare in financial investigations and noted how these investigations often involve tedious analyses of bank records, MLAT requests, and business documents.
• He stated however that the characteristics and nature of most blockchains provide “significant” advantages in helping to detect and prevent illicit finance.
  • He indicated that these characteristics include transparency, accessibility, immutability, and reliability.
• He remarked that public-private partnerships on blockchain-related investigations have yielded some “amazing” successes, including Silk Road, Bitfinex, Welcome to Video, and BTC-e.
• He then discussed how estimates of cryptocurrency use being illicit range from over 50 percent to less than a fraction of 1 percent.
  • He commented that both estimates are likely wrong.
• He asserted that the U.S. cannot underestimate the risks associated with cryptocurrencies and stated that this underestimation could result in cryptocurrencies being the source of the next financial crisis or terrorist attack.
  • He commented that criminals and terrorism financiers are adaptive, innovative, technology-savvy, and resourceful.
• He cautioned however that overregulating cryptocurrencies could drive cryptocurrencies outside of the traditional financial system and offshore (which will make cryptocurrencies difficult to track).
  • He also warned that such overregulation could make compliance impossible, divert resources away from addressing actual risks, and result in unregulated environments and jurisdictions being the only places where cryptocurrency companies succeed and survive.
  • He further stated that such overregulation could jeopardize the U.S.’s national security and exacerbate the U.S.’s current illicit finance challenges.
• He discussed how the U.S. financial system has a reputation for its strength, stability, resilience, and safety and highlighted how the U.S. is home to much of the world’s financial innovation and entrepreneurship.
  • He also stated that the U.S. is a global leader in AML oversight and commented that other countries look to the U.S. for responsible, bold, and thoughtful leadership.
• He warned that the U.S.’s failure to provide global leadership for financial regulation will lead other countries to look for such leadership elsewhere (including from countries that do not share the U.S.’s national interests).
  • He commented that the national security implications of this would be far-reaching and potentially irreversible.
• He remarked that the U.S. must adopt sufficient regulations for the cryptocurrencies for the sake of the U.S. financial industry.
  • He elaborated that consumers will not put funds into the U.S. financial industry if they perceive that these funds will interact with illicit actors.

Ms. Jane Khodarkovsky (Arktouros, former Trial Attorney and Human Trafficking Finance Specialist with the U.S. Department of Justice’s Money Laundering and Asset Recovery Section):

• She called blockchain technology “critical to the future” and stated that the risk-based analyses of the technology’s regulatory, legislative, and legal frameworks should adapt to the technology’s evolving uses.
• She remarked that the U.S. possesses robust AML and counterterrorism laws and regulations that apply to the digital assets ecosystem.
  • She commented that this framework has helped to stop illicit activity while leveraging the attributes of blockchains (including their traceability, transparency, and immutability).
• She discussed how U.S. centralized cryptocurrency exchanges and fiat currency on-off ramps conduct transaction monitoring using blockchain forensics to identify suspicious activity (regardless of whether the activity occurred on their platform) and to cut off bad actors.
  • She commented that this is different from traditional financial institutions that only have visibility into their own customers or transactions that occur within their bank.
• She also mentioned how U.S.-based stablecoin issuers can blacklist interactions with an application and freeze assets in digital wallets in response to OFAC sanctions.
  • She highlighted how the ability to freeze digital wallet addresses on the secondary market to comply with sanctions is unique to blockchains.
• She noted how Chainalysis’s 2020 data suggests that the percentage of all cryptocurrency activity associated with illicit activity was 0.24 percent and she stated that bad actors are continuing to exploit traditional finance.
• She recounted how the DoJ had seized Russian yachts worth just under $1 billion and Russian real estate holdings estimated to be worth $75 million.
  • She emphasized that these assets had not been purchased via cryptocurrency.
• She indicated that Russia is continuing to evade sanctions using gold, oil, and other strategic sectors. 
  • She further mentioned how human traffickers from China, Mexico, and other countries use cash, funnel accounts, and shell companies to profit from the exploitation of others.
• She also discussed how terrorist organizations will diversify their funding streams and noted how terrorist organizations will use means beyond cryptocurrencies to fund their operations, including global investment portfolios, charities, foreign aid, hawalas, and cash.
  • She emphasized that cash and hawalas do not have public ledgers.
• She stated that vulnerable populations have turned to the digital asset ecosystem in response to autocratic regimes and terrorist organizations.
  • She mentioned how Ukraine has raised $100 billion in cryptocurrencies following Russia’s invasion of the country and noted how Ukrainians are using Bitcoin and Ether to support themselves.
  • She also mentioned how Israel had received humanitarian aid in the form of cryptocurrencies following Hamas’s recent attack against the country.
• She remarked that the U.S. must lead globally on cryptocurrency regulation to stop the “jurisdictional arbitrage” that foreign actors are exploiting.
  • She mentioned how the Financial Action Task Force (FATF) had urged countries to implement Travel Rule requirements in July 2023 and noted how just 29 of 98 jurisdictions had implemented these requirements.
• She remarked that the U.S. must work to ensure that compliant U.S.-based companies in the digital asset ecosystem remain in the U.S. to avoid increased criminal activity offshore, technological decline, and a subversion of U.S. interests.
• She also called on the U.S. to use tools to isolate autocratic regimes that use technology to surveille their civilian communities, undermine basic liberties, and fund terrorism.
• She further stated that the U.S. should pursue “genuine” regulatory sandboxes that enable the private sector to showcase tools that leverage activity-based risk management on public ledgers.

Ms. Alison Jimenez (Dynamic Securities Analytics, Inc.):

• She discussed how bad actors will assess whether a given financial product can move funds fast, far, in large amounts, irreversibly, anonymously, and to a third party.
  • She asserted that there does not exist one sole feature that drives a bad actor to a particular financial product.
• She remarked that cryptocurrencies are attractive to bad actors because cryptocurrencies contain many of the aforementioned features.
• She argued that it would be misguided to dismiss cryptocurrencies as a useful tool for illicit finance just because some cryptocurrency transactions are recorded on blockchains.
  • She further stated that this dismissal would deny the existence of cryptocurrency SARs, FBI advisories, and victim complaints.
• She testified that her research has found that the number of SARs related to cryptocurrencies is growing “exponentially.”
  • She noted how the number of cryptocurrency-related SARs filed in 2021 was greater than the total number of such SARs filed between 2013 and 2020.
  • She also stated that some bad actors prefer to use cryptocurrencies over other financial products and highlighted how there had been more cryptocurrency-related SARs filed in 2021 than the total number of security and all investment-type SARs filed between 2014 and 2020.
• She discussed how the dollar value of each cryptocurrency SAR hovers around $1 million and indicated that there had been more than $96 billion in suspicious cryptocurrency transactions reported in 2021.
• She also stated that the number of ransomware SARs is increasing “dramatically” and that bad actors are exclusively demanding ransomware payments in cryptocurrencies.
  • She noted how the average Bitcoin ransomware payment made was over $900,000.
• She contended that these cryptocurrency-related SAR filings “overwhelmingly” contradict the thesis that bad actors are not using cryptocurrencies.
• She then discussed how the FBI has issued “numerous” advisories based on victim complaints about cryptocurrency scams and specifically warned about the prevalence of pig butchering scams.
  • She explained that pig butchering involves a scammer faking an online relationship with a target before pitching a fraudulent cryptocurrency financial opportunity.
• She mentioned how the FBI had received over 30,000 complaints regarding cryptocurrency investment scams in 2022 and indicated that victims had reported over $2.6 billion in losses.
  • She also noted how many of these scammers are victims of human trafficking that are forced to meet quotas of stolen funds under the threat of violence from transnational organized crime groups.
• She then remarked that blockchain analytics can only provide insights into a fraction of all cryptocurrency transactions.
  • She noted how most cryptocurrency transactions occur off blockchains within exchanges and therefore evade detection from blockchain analytics tools.
• She also discussed how bad actors can employ multiple methods to obfuscate their cryptocurrency transactions that occur on blockchains. 
  • She indicated that these methods include mixing, chain hopping, and the use of side chains.
• She further stated that attribution for cryptocurrency transactions remains an ongoing challenge, especially for the private sector.
  • She elaborated that the private sector may not have the same access to data and information as law enforcement and intelligence agencies.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill first remarked that the filing of a SAR does not necessarily mean that a crime has taken place. He stated that the recent increase in the number of cryptocurrency-related SARs could be attributable to a lack of familiarity with cryptocurrencies among banks. He commented that banks should err on the side of filing SARs when they observe something unfamiliar and that this increased filing of SARs can improve the U.S.’s supervisory process for cryptocurrencies. He then mentioned how Mr. Levin had testified that the DoJ and Israel have used blockchain analytics and other tools to shut down the use of cryptocurrencies by Hamas, ISIS, and Iran. He asked Mr. Levin to explain how the Wall Street Journal’s recent story reporting that terrorist groups are receiving large amounts of cryptocurrency donations is not entirely accurate.
  • Mr. Levin indicated that the Wall Street Journal’s recent story had quoted information and figures that encompass both cryptocurrency transactions that can be linked to actual terrorism financing and the broader network of facilitators and intermediaries that interact with financing terrorism. He noted how facilitators and intermediaries may be involved in legitimate activities and stated that government agencies must investigate the extent to which these facilitators and intermediaries have interacted with terrorist organizations.
• Chairman Hill then mentioned how the FBI had employed blockchain analytics tools to recover the cryptocurrency ransomware payments made during the Colonial Pipeline ransomware attack. He noted how Ms. Jimenez had stated that bad actors will use side chain transactions, off-chain transactions, and mixers to obfuscate their identities. He asked Mr. Levin to opine on this statement and to indicate how the Subcommittee could address these practices.
  • Mr. Levin remarked that the Executive Branch needs sufficient tools and capabilities to pursue practices meant to conceal cryptocurrency transactions and the identities behind said transactions. He elaborated that the Executive Branch requires better access to data and expertise to combat those types of operations.
• Chairman Hill interjected to ask Mr. Levin to indicate whether these tools and capabilities that Congress would enable the Executive Branch to uncover the identities behind cryptocurrency transactions.
  • Mr. Levin answered affirmatively.
• Chairman Hill expressed interest in providing sufficient resources to intelligence agencies and the U.S. Department of the Treasury so that they can uncover the identities behind illicit cryptocurrency transactions. He requested that Mr. Levin to provide the Committee with more specific recommendations on this issue in writing.
  • Mr. Levin expressed his willingness to provide the Committee with more specific recommendations in writing on ways to uncover the identities behind illicit cryptocurrency transactions. He remarked that the U.S. government has made progress in its ability to leverage blockchain analytics tools. He asserted that the U.S. can take additional actions to proactively detect illicit activities involving cryptocurrencies and to prevent terrorist financing.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch remarked that the decentralized, borderless, and pseudonymous features of digital assets (as well as their convenient access, store, and transfer features) are “highly attractive” to bad actors. He stated that these bad actors often operate globally and to the detriment of the U.S. financial system. He raised concerns that digital assets could undermine faith and trust in the U.S. financial system and the U.S. dollar’s status as the world’s reserve currency. He asked Ms. Jimenez to discuss how state-operated criminal enterprises are functioning within the digital assets space and how these state-operated criminal enterprises threaten the U.S.’s national security.
  • Ms. Jimenez remarked that North Korea is “very technically advanced” in its ability to hack cryptocurrency exchanges and other virtual asset service providers. She indicated that North Korea has used stolen funds to finance their nuclear program. She also indicated that North Korea will often cash out their stolen cryptocurrencies. She then remarked that cryptocurrencies pose other national security risks and transnational organized crime risks. She noted how drug cartels have used cryptocurrencies to remit their profits internationally. She commented that these illicit remittances often go undetected unless there exists intelligence external to blockchains regarding the remittances. She further noted how Russian oligarchs have employed cryptocurrencies to evade sanctions.
• Ranking Member Lynch then mentioned how there have been several legislative proposals introduced that would shift jurisdiction over digital assets from the SEC and to the CFTC. He asked Ms. Jimenez to provide recommendations for how the Subcommittee should respond to vulnerabilities within the digital assets space.
  • Ms. Jimenez remarked that federal legislation should designate the federal agencies that would oversee digital assets and provide increased transparency for digital assets. She stated that the SEC has more experience than the CFTC in investigating financial crimes. She noted that while the CFTC does have experience investigating financial crimes, she indicated that the CFTC receives relatively few SAR filings each year compared to the SEC. She remarked however that federal legislation would not address the underlying features of cryptocurrencies. She raised concerns that U.S. citizens and customers would remain vulnerable to criminal organizations, even if the U.S. were to possess more robust federal digital assets legislation. She stated that international criminals will continue to employ digital assets for illicit purposes.
• Ranking Member Lynch indicated that his question period time had expired.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson mentioned how Mr. Hughes had stated that policymakers should embrace the transparency of blockchains and bolster the power of transaction analytics in their fights against money laundering. He noted how cryptocurrency transactions occur on public and immutable distributed ledgers that are fully auditable. He asked Mr. Hughes to indicate whether the U.S.’s current BSA/AML framework for money service businesses (MSBs), banking institutions, and financial services providers allows for sufficient reporting requirements within the cryptocurrency space.
  • Mr. Hughes noted how most digital asset activity occurs on centralized intermediaries (such as exchanges). He indicated that the largest exchanges in the U.S. are considered MSBs, which means that they are subject to the BSA and make SAR filings. He then called blockchain analytics “crucial” for overseeing the digital assets space. He noted how both law enforcement agencies and industry participants use blockchain analytics tools to maintain the integrity of services. He stated that blockchain analytics tools can be improved to disseminate information more quickly regarding problematic digital wallets and illicit transactions. He predicted that this technology would develop as blockchain analytics continues to be used, especially as collaboration between law enforcement agencies and industry participants increases. He remarked that much of the policy debate surrounding how to stop the illicit on-chain flow of digital assets pertains to the regulation of software. He commented that consideration of software regulation remains nascent in the U.S. and overseas. He noted how there are some legislative proposals that are considering this issue.
• Vice Chairman Davidson interjected to comment that many policymakers want people to first obtain permission from either the government or a credentialed third-party agent before taking certain actions. He called this approach “dystopian.” He stated that law enforcement agencies and prosecutors want assurances that they will have a sufficient framework for pursuing bad actors. He then remarked that there exist legal and rational reasons for providing some degree of anonymity for self-custodied digital assets. He asked Ms. Khodarkovsky to discuss how there can exist legitimate uses of anonymizing transactions within the digital assets space.
  • Ms. Khodarkovsky remarked that the U.S. must balance its need to combat criminal activity with its need to preserve privacy. She stated that there exist ways for law enforcement agencies to investigate and trace assets on blockchains, even if individuals are using self-hosted wallets. She noted how self-hosted wallet users will interact with centralized exchanges, onramps, and offramps, which will subject these users to AML reporting requirements.
• Vice Chairman Davidson interjected to indicate that his question period time had expired.

Rep. Bill Foster (D-IL):

• Rep. Foster asked Ms. Jimenez to indicate whether $10,000 in stolen Bitcoin could be transferred anonymously to a bank account in a manner that would evade blockchain analytics surveillance tools.
  • Ms. Jimenez answered affirmatively. She noted that while some of the cryptocurrency ransomware payments made during the Colonial Pipeline ransomware attack have been recovered, she highlighted how many cryptocurrency ransomware payments remain unrecovered. She acknowledged that some of these ransomware payments may be recovered in the future. She remarked that most cryptocurrency ransomware payments go unrecovered. She further stated that the victims of ransomware attacks may still experience disruptions that can have long-term consequences, even if they are able to recover their cryptocurrency ransomware payments.
• Rep. Foster interjected to comment that he was more interested in the technical feasibility of obfuscating cryptocurrency transfers. He asked Ms. Khodarkovsky to indicate whether stolen Bitcoin could be transferred to a bank account in a manner that evades detection.
  • Ms. Khodarkovsky remarked that there exist tools to trace Bitcoin transfers and noted how Bitcoin transfers occur on public ledgers.
• Rep. Foster interjected to ask Ms. Khodarkovsky to indicate whether the current international oversight framework for cryptocurrencies would allow for stolen Bitcoin to be transferred to a bank account in a manner that evades detection. He posited that a bad actor could use mixers, Monero conversions, offshore transfers, self-hosted wallets and other means to obfuscate their activities.
  • Ms. Khodarkovsky remarked that the U.S. needs to help its foreign partners in overseeing the cryptocurrency space.
• Rep. Foster interjected to comment that not all foreign partners will cooperate with the U.S. He asked Mr. Lisa to indicate whether the current international oversight framework for cryptocurrencies would allow for stolen Bitcoin to be transferred to a bank account in a manner that evades detection.
  • Mr. Lisa answered affirmatively. He stated that bad actors could use non-compliant exchanges (such as the Russian-based Garantex exchange) to launder their stolen funds.
• Rep. Foster interjected to ask Mr. Lisa to confirm that he was stating that regulating the onramps and offramps for digital assets would be insufficient for preventing money laundering. He commented that bad actors can move their ill-gotten cryptocurrencies to offshore unregulated cryptocurrency exchanges to effectively launder their money and then bring back the laundered cryptocurrencies to the legitimate financial system. He asked Mr. Lisa to indicate whether there exist regulatory proposals to prevent this laundering capability.
  • Mr. Lisa remarked that the U.S. is currently attempting to use tools to address the offshore laundering of stolen cryptocurrencies. He mentioned how OFAC had sanctioned Garantex to prevent such laundering activities. He stated that the U.S. could leverage its alliances and attachés to isolate non-compliant offshore exchanges from the legitimate financial system. He acknowledged that while this system is imperfect, he commented that there are no perfect systems for addressing this problem. He asserted that the existence of offshore non-compliant exchanges is preferable to having the compliant U.S.-based exchanges move offshore. He acknowledged that there currently exists a gap in international regulation for addressing money laundering involving cryptocurrencies.
• Rep. Foster asked Mr. Levin to provide recommendations for preventing the international laundering of cryptocurrencies given the presence of non-compliant offshore exchanges.
  • Mr. Levin remarked that intelligence and law enforcement agencies must focus on how they can leverage their existing authorities to disrupt illicit activities involving cryptocurrencies. He mentioned how Chainalysis had helped the U.S. government to seize illicit foreign exchanges, including BTC-e.

Rep. John Rose (R-TN):

• Rep. Rose discussed how illicit financial activity involves cross-border transactions. He stated that the U.S.’s actions to address this activity would therefore have limited impact unless the U.S. can facilitate coordination with foreign regulators and law enforcement agencies. He asked Mr. Lisa and Ms. Khodarkovsky to address how the U.S. can build upon its current coordination efforts with foreign regulators and law enforcement agencies.
  • Mr. Lisa noted how FinCEN currently possesses the authority to charge foreign MSBs. He stated however that the U.S. is more limited in its ability to go after bad actors internationally. He suggested that the U.S. can support capacity building overseas with its attachés so that foreign allies could employ blockchain analytics tools to detect and combat bad actors. He remarked that the U.S. must maintain its international leadership in combating financial crimes.
  • Ms. Khodarkovsky remarked that the U.S. must focus on actions that it can take on its own to address illicit financial activity. She stated that the U.S. government and U.S. industry are actively working to identify bad actors that are exploiting “loopholes” and arbitraging foreign jurisdictions to pursue their illicit activities. She commented that this work is not limited to the digital assets space. She remarked that U.S. efforts to close foreign “loopholes” for illicit finance should not be narrowly focused on cryptocurrencies. She stated that these efforts should also address hawalas, banking systems, and commodity sectors being exploited by Russia and China. She cautioned that the movement of funds outside of the U.S. can still harm U.S. national security and business interests.
• Rep. Rose then discussed how many foreign countries and jurisdictions are implementing market structure rules and regulations, as well as requirements to prevent money laundering and terrorist financing. He asked Mr. Hughes to indicate whether the U.S. should copy the regulatory regimes of other foreign countries and jurisdictions to effectively combat the threat of illicit finance within the cryptocurrency space.
  • Mr. Hughes remarked that the U.S. should not necessarily copy the regulatory regimes of other foreign countries and jurisdictions to address illicit finance within the cryptocurrency space. He commented however that foreign cryptocurrency regulatory regimes can help to inform the U.S.’s development of its own cryptocurrency regulatory regime. He discussed how the European Union’s (EU) Markets in Crypto-Assets Regulation (MiCA) focuses on regulating centralized entities that perform traditional finance-like functions (such as digital asset intermediary functions) and indicated that this regulation addresses money laundering concerns. He noted how the EU is now working to develop regulations for cryptocurrency-related software and indicated that initial proposals and conclusions will not be due out of the EU until the end of 2024. He stated that the U.S. has sufficient time and opportunities to consider these types of policies and reiterated that the U.S. should consider the EU’s approach as it pursues these policies.
• Rep. Rose asked Mr. Hughes to identify other lessons that the U.S. can take from foreign efforts to establish regulatory frameworks for digital assets. He acknowledged that his question period time had expired and requested that Mr. Hughes provide his response to his previous question for the hearing’s record.

Rep. Sean Casten (D-IL):

• Rep. Casten noted how Mr. Levin’s testimony had asserted that cryptocurrencies are inherently ineffective for terrorism finance. He noted however that a 2020 DoJ report had stated that criminals use cryptocurrencies to facilitate crimes and to avoid detection and that these actions would be more difficult to perpetrate using real money. He also indicated that this 2020 DoJ report had stated that criminals have used large amounts of cryptocurrencies transferred across international borders to finance criminal conduct, including child exploitation and terrorist fundraising. He then cited ho a 2021 U.S. Government Accountability Office (GAO) report that had stated that virtual currencies have contributed to the rise of drug sales within the U.S. (especially fentanyl and synthetic opioids). He also mentioned how the U.S. Senate Committee on Homeland Security and Government Affairs had found that cryptocurrencies are almost exclusively the required method of payment for ransomware attacks. He further noted how senior U.S. intelligence officials had indicated in 2023 that almost half of North Korea’s nuclear missile program has been funded by cybercrime and cryptocurrencies. He asked Mr. Levin to indicate whether he would reaffirm his assertion that cryptocurrencies are inherently ineffective for terrorism finance.
  • Mr. Levin stated that cryptocurrency has been ineffective for Hamas’s crowdfunding operations.
• Rep. Casten then noted how Chainalysis had estimated in February 2023 that there were $21 billion of illicit transactions involving cryptocurrencies. He also noted how Chainalysis had stated that this estimate was solely based on-chain intelligence. He asked Mr. Levin to indicate whether Chainalysis possesses any tools to quantify illicit cryptocurrency activity that occurs off-chain.
  • Mr. Levin answered no and indicated that Chainalysis’s work focuses on-chain activity.
• Rep. Casten mentioned how a recent Wall Street Journal report had found that Hamas-connected digital wallets seized by the Israeli government had received around $41 million in cryptocurrencies between 2020 and 2023. He noted how more than 99 percent of these cryptocurrencies came in Tether transactions (which would entail off-chain transactions).
  • Mr. Levin stated that Tether transactions would be on-chain transactions.
• Rep. Casten provided Ms. Jimenez with an opportunity to respond to Mr. Levin’s response.
  • Ms. Jimenez remarked that she was not familiar with the exact fact pattern underlying the Wall Street Journal’s report. She stated that terrorism financing has previously occurred using both on-chain transactions and off-chain transactions.
• Rep. Casten asked the witnesses to indicate how much Tether is currently in circulation.
  • Mr. Levin indicated that the amount of Tether that is currently in circulation is approximately $86 billion.
• Rep. Casten asked Mr.  Levin to indicate how he was able to provide such an estimate. He commented that Tether does not report how much of its currency is in circulation.
  • Mr. Levin stated that Tether does report how much of its currency is in circulation through its public blockchain. He expressed his willingness to hold a briefing with Rep. Casten on this topic.
• Rep. Casten commented that he would follow up on this topic with Mr. Levin. He then reiterated how the Wall Street Journal had recently reported that Hamas had received approximately $41 billion in cryptocurrencies. He noted how a subsequent Wall Street Journal report had indicated that a “significant” portion of the funds received by Gazan digital asset exchanges were for Hamas. He also mentioned how this report had stated that cryptocurrencies have served as an “essential” part of Hamas’s operational activity since 2020. He further noted how this report had indicated that these Gazan exchanges had changed the digital wallet addresses they had used each day and had sent funds through mixers to obscure the flow of funds. He asked Ms. Jimenez to explain how terrorist organizations employ cryptocurrency mixers and other anonymizing technologies fortheir  illicit financial activities.
  • Ms. Jimenez noted how there exist blockchains that provide less transparency. She also discussed how there exist mixing services that pool many transactions from different parties and adjust the reporting of these transactions. She explained that this adjusted reporting makes it difficult for observers to identify the true senders and the true recipients of certain cryptocurrency funds. She further noted how terrorist organizations can engage in off-chain transactions to obfuscate their transactions. She then disputed the assertion that all cryptocurrency transactions are reported on blockchains and stated that only 10 percent of cryptocurrency transactions occur on blockchains. She commented that blockchain analytics can be helpful in providing surveillance of cryptocurrency transactions, she asserted that blockchain analytics ultimately has limited abilities to provide cryptocurrency transaction surveillance.
• Rep. Casten expressed agreement with Ms. Jimenez’s conclusion regarding the limited effectiveness of blockchain analytics. He stated that it remains easy for bad actors to move on and off blockchains without detection.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel remarked that the U.S. must support Israel’s right to defend itself following the recent Hamas attacks. He also stated that the U.S. must work to dismantle the financial pathways that enable and embolden terrorist organizations (like Hamas). He applauded the Committee for its recent markup of bipartisan bills to address Iran’s financing of terrorist acts against Israel. He noted how the U.S. Department of the Treasury’s National Terrorist Financing Risk Assessment has found that the “vast majority” of terrorist funds still move through banks and money transmitters or involve cash. He stated that terrorist groups that use digital assets disproportionately rely upon unregulated offshore digital assets (such as Tether and Binance) that have almost no compliance controls. He commented that these unregulated bad actors should not be permitted to provide U.S. dollars to terrorist organizations. He asked Mr. Levin to address how the U.S. can ensure that overseas actors are effectively enforcing U.S. regulations. He also asked Mr. Levin to discuss how Congress can bolster the jurisdiction of U.S. enforcement agencies so that these agencies can extend their reach internationally.
  • Mr. Levin first noted how both Binance and Tether have taken actions under the direction of the DoJ to freeze funds that are associated with Hamas terrorist financing campaigns (as well as with Hamas affiliates and facilitators). He remarked that the U.S. must continue to foster international collaboration on a tactical and operational level so that the U.S. can “freeze and seize” assets when necessary. He stated that the U.S. could strengthen its international relationships through a better domestic regulatory regime for digital assets. He specifically called for permitting U.S. stablecoin issuers to receive federal oversight from U.S. regulators. He commented that an improved domestic regulatory regime for digital assets would foster better communication between the public and private sectors. He concluded that the U.S. should work to increase its international cooperation so that it can address foreign digital assets exchanges and strengthen its domestic digital assets industry.
• Rep. Nickel then asked Mr. Levin to indicate whether the Committee’s recently approved digital assets market structure and stablecoin bills would limit the harms from companies like Tether and Binance through regulating digital assets and attracting companies back to the U.S.
  • Mr. Levin called digital assets market structure legislation “essential” for creating an environment where regulated entities can operate. He also stated that the passage of federal stablecoin legislation is important for enabling federal prudential supervision of stablecoin issuers. He commented that these bills would prevent further harm to the digital assets industry.
• Rep. Nickel then mentioned how Cantor Fitzgerald (which is a U.S. financial services company) reportedly manages Tether’s $72 billion portfolio of U.S. Treasury bonds. He noted how these U.S. Treasury bonds effectively provide Tether with access to U.S. dollars. He asked Ms. Khodarkovsky to indicate whether Cantor Fitzgerald’s management of Tether’s portfolio of U.S. Treasury bonds is appropriate. He also asked Ms. Khodarkovsky to indicate whether Congress should address this situation.
  • Ms. Khodarkovsky highlighted how the U.S.’s current regulatory framework ensures that U.S.-based stablecoin issuers conduct compliance and proactively freeze and blacklist accounts in response to OFAC sanctions. She stated that intermediaries must conduct their own due diligence and understand the risks that they are assuming when funding and supporting offshore companies that are facilitating criminal activity. She noted how the DoJ has looked into gatekeepers and third-party facilitators that have knowingly benefited from helping bad actors to commit crimes.
• Rep. Nickel indicated that his question period time had expired and expressed interest in identifying actions that Congress could take to address this situation.

Rep. William Timmons (R-SC):

• Rep. Timmons referenced a DoJ Journal of Federal Law and Practice article that states that cryptocurrencies equip law enforcement agencies with an “exceptional” tracing tool: blockchains. He asked Mr. Levin to describe the valuable data that can be derived from blockchains. He also asked Mr. Levin to discuss how law enforcement agencies can leverage blockchain data to identify and combat criminals using digital assets and halt the activities of said criminals.
  • Mr. Levin discussed how blockchains provide permanent and immutable records for all transactions recorded on a ledger. He stated that law enforcement agencies must link blockchain transactions to the entities that have placed the transactions on the blockchains and determine whether the transactions involve illicit activity. He noted how Chainalysis helps law enforcement agencies to trace suspicious transactions across blockchains. He indicated that law enforcement agencies can use this information to obtain warrants to force digital assets exchanges to identify the parties behind suspicious transactions. He also indicated that Chainalysis’s work can help to identify common victims of crimes involving digital assets and uncover the full networks and supply chains underlying certain crimes.
• Rep. Timmons asked Mr. Levin to provide examples where blockchains have helped law enforcement agencies to combat criminal activity.
  • Mr. Levin testified that Chainalysis has been involved in numerous cases over the previous nine years. He mentioned how Chianlaysis had been involved in the efforts to shut down Welcome to Video and in many terrorist financing seizures and disruptions.
• Rep. Timmons asked Mr. Levin to indicate whether the recoupment of much of the Colonial Pipeline ransomware payment would constitute one of the greatest successes in terms of law enforcement’s use of blockchains.
  • Mr. Levin answered affirmatively. He also highlighted how blockchain analytics had enabled the arrest of a network affiliate of the Colonial Pipeline ransomware attack.
• Rep. Timmons then discussed how the U.S. Department of the Treasury has issued sanctions and taken enforcement actions on several cryptocurrency mixers. He asked Mr. Lisa to address why the U.S. Department of the Treasury and other international law enforcement partners have sought out a more targeted approach to sanctioning cryptocurrency mixers.
  • Mr. Lisa noted how the U.S. Department of the Treasury has used two tools to address cryptocurrency mixers: sanctions and authority under Sec. 311 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act. He stated that the policy debate surrounds whether the U.S. Department of the Treasury can deem all cryptocurrency mixing services as bad or whether the U.S. Department of the Treasury should target specific cryptocurrency mixing services. He noted how people may use cryptocurrency mixers for privacy reasons (and not to engage in illicit activity). He cautioned that a “broad-based” approach to banning cryptocurrency mixing services could prevent positive activities and lead to the regulation of software.
• Rep. Timmons asked Mr. Lisa to indicate whether sanctions against cryptocurrency mixers have been effective.
  • Mr. Lisa stated that there has been “limited evidence” indicating the efficacy of sanctions against cryptocurrency mixers. He warned that these sanctions could result in software regulation and commented that such regulation would undermine U.S. leadership within the AML space. He stated that the U.S. has traditionally taken a risk-based approach regarding its AML efforts that involves targeting legislation and policy to address specific harms. He commented that the U.S.’s cryptocurrency mixer sanctions have departed from this approach.

Rep. Brad Sherman (D-CA):

• Rep. Sherman noted how all of the hearing’s witnesses have cryptocurrency-related businesses and commented that the witnesses would lose a lot of money if cryptocurrencies ceased to exist. He asked the witnesses to indicate whether his characterization of their companies is accurate.
  • Ms. Jimenez testified that her company does not depend on cryptocurrencies, is not owned by a cryptocurrency company, and does not have cryptocurrency-related clients.
• Rep. Sherman then remarked that the U.S. should not strive to be a leader within the cryptocurrency space. He then asked the witnesses to indicate how many Bitcoin transactions occur in an average day.
  • Mr. Levin estimated that between 10,000 and 100,000 Bitcoin transactions occur on an average day.
• Rep. Sherman commented that Mr. Levin’s response indicates that very few Bitcoin transactions occur on an average day and asserted that Bitcoin does not function as a real currency. He stated that this low amount of daily transactions enables the U.S. to better police Bitcoin transactions. He stated however that an increase in the number of daily Bitcoin transactions would make it more difficult to police Bitcoin transactions. He then asked the witnesses to estimate the number of daily transactions involving credit cards, debit cards, and checks. He commented that this number is likely at least one billion transactions.
  • Mr. Lisa stated that Rep. Sherman’s estimate that there are one billion daily transactions involving cred cards, debit cards, and checks is likely conservative.
• Rep. Sherman remarked that it is more difficult to police the transactions market involving credit cards, debit cards, and checks than the transactions market involving Bitcoin. He stated that the U.S. should take the cryptocurrency industry’s claim seriously that it is attempting to displace the U.S. dollar as the world’s reserve currency and as a medium for international exchange. He commented that this displacement would erode the U.S.’s international influence. He then discussed how cryptocurrency mixing service proponents argue that cryptocurrency mixing services have beneficial uses, such as enhancing privacy. He asked Ms. Jimenez to indicate whether these proponents desire the privacy enhancing features of cryptocurrency mixing services so that people can more easily engage in tax evasion.
  • Ms. Jimenez remarked that cryptocurrency mixing services can be used for whatever purposes the end user desires. She indicated that possible purposes could include tax evasion, terrorism finance, and the hiding of illicit proceeds. She noted how FinCEN’s recent rulemaking that considered cryptocurrency mixing services to be a money laundering concern had referenced the use of mixing services in illicit activities.
• Rep. Sherman interjected to comment that many people do not view tax evasion as an illicit activity. He asked Ms. Jimenez to indicate what would constitute a legitimate use of a cryptocurrency mixing service.
  • Ms. Jimenez commented that her specialty is financial crime and stated that she did not know of a legitimate use for a cryptocurrency mixing service.
• Rep. Sherman commented that most cryptocurrency proponents view tax evasion as a legitimate use for cryptocurrency mixing services.

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill noted how the U.S. Department of the Treasury’s 2022 National Money Laundering Risk Assessment (NMLRA) had asserted that the greatest source of non-compliance regarding AML currency compliance involves offshore digital asset exchanges that are outside of the U.S.’s jurisdiction. He asked Mr. Lisa to discuss the importance of MLAT treaties between the U.S. and foreign jurisdictions and to identify other tools that the U.S. should use to combat money laundering. He further asked the witnesses to address whether it would be preferable that the U.S. possess a functioning regulatory framework for digital assets.
  • Mr. Lisa remarked that FinCEN, the U.S. Department of the Treasury, and the DoJ already possess tools to promote international cooperation on AML issues. He commented however that these tools may need be better resourced. He discussed how federal departments and agencies have public-private partnerships, sanctions authority, authority under Sec. 311 of the USA PATRIOT Act, and legal attachés in every country where the U.S. maintains an embassy. He stated that these departments and agencies can leverage these existing partnerships, authorities, and resources to support their capacity building efforts. He cautioned that an exclusive reliance on the MLAT process would reduce the effectiveness of the U.S.’s efforts to combat ransomware.
• Chairman Hill asked the witnesses to indicate whether the U.S. ought to have a clear regulatory framework for digital assets that outlines BSA/AML compliance for digital assets.
  • Mr. Hughes answered affirmatively.
  • Mr. Levin answered affirmatively.
  • Mr. Lisa answered affirmatively.
  • Ms. Khodarkovsky answered affirmatively.
  • Ms. Jimenez answered affirmatively.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch noted how CoinDesk has reported that off-chain cryptocurrency transactions are “exploding” in popularity, especially among large participants. He asked Mr. Levin to indicate whether Chainalysis could identify instances where bad actors (such as Hamas or Iran) move value outside of blockchains.
  • Mr. Levin stated that the use of off-chain transactions through trusted networks constitutes one avenue for money laundering.
• Ranking Member Lynch interjected to ask Mr. Levin to indicate whether Chainalysis could identify instances where bad actors move value outside of blockchains.
  • Mr. Levin stated that Chainalysis does not detect off-chain transactions.
• Ranking Member Lynch interjected to ask Mr. Hughes to indicate whether Consensys could identify instances where bad actors move value outside of blockchains.
  • Mr. Hughes stated that value transfers that occur outside of blockchains require third-party intermediaries.
• Ranking Member Lynch interjected to ask Mr. Hughes to indicate whether parties could move value outside of blockchains through exchanging private keys.
  • Mr. Hughes answered affirmatively.
• Ranking Member Lynch interjected to ask Mr. Hughes to indicate whether parties could move value outside of blockchains through coupons that would allow for one party to cash in a payment at a later date.
  • Mr. Hughes commented that he was unfamiliar with Ranking Member Lynch’s suggested coupon approach.
• Ranking Member Lynch asked Ms. Jimenez to indicate whether the growing use of off-chain cryptocurrency transactions by large participants is problematic.
  • Ms. Jimenez answered affirmatively.
• Ranking Member Lynch asked Ms. Jimenez to indicate whether more large participants are engaging in off-chain cryptocurrency transactions.
  • Ms. Jimenez stated that bad actors have two possible responses to increased blockchain activity surveillance: obfuscating said activity on the blockchain or moving said activity off-chain. She noted how some bad actors are choosing to move their illicit activity off-chain.
• Ranking Member Lynch interjected to ask Ms. Jimenez to confirm that law enforcement agencies cannot obtain data on transactions that occur off-chain.
  • Ms. Jimenez answered affirmatively.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson noted how Subcommittee Ranking Member Stephen Lynch (D-MA) had previously asserted that cryptocurrency is the preferred payment system for criminals. He asked Mr. Levin to comment on the veracity of this assertion.
  • Mr. Levin stated that the Iranian economy does not run on the blockchain and commented that cryptocurrency is not the preferred payment system in the case of Iran.
• Vice Chairman Davidson interjected to remark that most criminals rely upon U.S. dollars for their illicit activities. He noted how Chainalysis had issued a report claiming that just 0.12 percent of all cryptocurrency transactions were illicit. He also commented that all cryptocurrency transactions combined are a “tiny fraction” of total U.S. dollar transactions. He asked Mr. Levin to indicate whether the preferred currency for illicit activity is cryptocurrency.
  • Mr. Levin mentioned how Chainalysis had found that 0.24 percent of cryptocurrency transactions can be linked specifically to illicit activity. He commented that this constitutes a very small subset of the overall transaction volume in the traditional financial system.
• Vice Chairman Davidson then noted how Ms. Jimenez’s testimony had claimed that presence of digital asset-related SARs suggests an “overwhelming” amount of crime within the digital assets space. He asserted that the logic underlying this claim unfairly presumes a level of guilt among parties transacting in cryptocurrencies. He noted how the U.S. Department of the Treasury has stated that SARs are preliminary in nature and can be unverified. He asked Ms. Jimenez to indicate whether the large number of digital asset-related SARs could suggest that U.S.-based exchanges are attempting to comply with the BSA’s framework.
  • Ms. Jimenez answered affirmatively. She stated however that there have been enforcement actions against numerous U.S.-based actors for failing to file SARs.

Rep. Brad Sherman (D-CA):

• Rep. Sherman noted how Mr. Levin had stated that just 0.24 percent of cryptocurrency transactions are illicit. He asked Mr. Levin to indicate whether this figure includes tax evasion.
  • Mr. Levin indicated that his 0.24 percent figure does not include tax evasion.
• Rep. Sherman remarked that tax evasion is the big market for cryptocurrency. He contended that cryptocurrency cannot achieve a $1 trillion market capitalization if it only serves as the currency for illicit actors (such as drug dealers and human traffickers). He stated that cryptocurrencies can compete with the U.S. dollar if cryptocurrencies can support tax evasion efforts. He noted how U.S. Internal Revenue Service (IRS) officials have previously testified that approximately $1 trillion of federal taxes go unpaid every year, which indicates that there exists a robust tax evasion market. He then asked the witnesses to indicate whether they have an estimate regarding the percentage of U.S. dollar transactions that are illicit.
  • Mr. Levin indicated that between 3 percent and 5 percent of all global transactions are estimated to involve money laundering.
• Rep. Sherman interjected to ask Mr. Levin to indicate whether his provided estimate is based on international transactions or total transactions.
  • Mr. Levin commented that he believed that the estimate is based on the gross flows of international commerce. He indicated that this estimate comes from United Nations (UN) figures.
  • Ms. Jimenez stated that the UN’s estimate for illicit transactions is calculated based on an estimate of the value of all illicit activities divided by global gross domestic product (GDP). She commented that these figures are not comparable to the known cryptocurrency transactions on blockchains. She further stated that wash trading, related-party transactions, and non-attributed transactions can inflate total transaction estimates.
• Note: Rep. Sherman’s question period time expired here.

Rep. John Rose (R-TN):

• Rep. Rose recounted how a former U.S. National Security Council (NSC) official had previously commented at the Russia-Ukraine war’s outset that the scale that the Russian state would need to successfully circumvent all U.S. and international financial sanctions would render cryptocurrencies an ineffective primary tool. He also noted how U.S. Secretary of the Treasury Janet Yellen had stated that Russia could not use cryptocurrencies to circumvent international financial sanctions during her 2022 testimony before the Committee. He indicated that Secretary Yellen had commented that large scale cryptocurrency transactions would become apparent (which would prevent Russia from accepting cryptocurrencies as a means of evading sanctions). He stated that the bulk of Russia’s illicit financing during its war against Ukraine appears to have occurred through other channels. He asked Ms. Khodarkovsky to indicate whether she agrees with Secretary Yellen’s assessment that Russia could not use cryptocurrencies to circumvent international financial sanctions. He also asked Ms. Khodarkovsky to explain the other channels that Russia has used for large scale transactions.
  • Ms. Khodarkovsky stated that Russia could not engage in large scale transactions using cryptocurrencies following their receipt of international financial sanctions. She commented that the fact that digital assets (including Bitcoin) are transparent on blockchains prevents Russia from engaging in large scale transactions that violate international financial sanctions. She stated however that Russia has used other methods for moving money internationally (including shell companies, art, and the acquisition of Western companies). She also asserted that Russia has engaged in human trafficking through using cash and shell companies. She further alleged that Russia has exploited other jurisdictions (including African, Latin American, and South American jurisdictions) to obfuscate their criminal activities. She stated that Russia’s use of foreign jurisdictions for criminal activity surpasses it total use of digital assets for criminal activity.
• Rep. Rose interjected to indicate that his question period time had expired. He commented that Ms. Khodarkovsky could elaborate on her answer in writing for the hearing’s record.