Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Activity (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Activity
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	February 15, 2024

 

Hearing Takeaways:

• Digital Assets and their Potential Use in Illicit Activities: Subcommittee Members and the hearing’s witnesses expressed interest in the growth in popularity of digital assets (including cryptocurrencies and stablecoins) and their potential for use in illicit activities. They noted how digital assets provide the ability to transfer value peer-to-peer, pseudonymously and irreversibly with global reach, increased speed, and cost efficiencies. They commented that these features make digital assets appealing to both licit and illicit actors. They also highlighted how these features present both opportunities and challenges for governments and law enforcement agencies.
  • Illicit Activity Involving Digital Assets: Many Subcommittee Democrats and Ms. House raised concerns over how criminal and malicious state actors are using digital assets to finance terrorism, perpetrate ransomware attacks, engage in money laundering, evade sanctions, support human and drug trafficking, facilitate tax evasion, and pursue frauds and schemes. Subcommittee Vice Chairman Warren Davidson (R-OH) and Mr. Rabenn asserted however that digital assets are a small part of overall illicit finance and that their use in illicit finance is merely highlighted due to the transparency of blockchain networks. Mr. Redbord stated that the growing popularity of cryptocurrencies will naturally result in them being used in more crimes. Subcommittee Chairman French Hill (R-AR) further stated that Hamas’s purported use of digital assets to finance their recent attacks against Israel has been exaggerated.
  • Offshore Illicit Activity Involving Digital Assets: Subcommittee Chairman Hill, Mr. Mosier, and Mr. Redbord highlighted how much of the of the illicit financing involving digital assets does not occur within the U.S. and instead occurs offshore in non-compliant rogue jurisdictions. They stated that the U.S. maintains robust policies, including anti-money laundering (AML) and know-your-customer (KYC) requirements, to prevent illicit activity from occurring domestically. Mr. Redbord further noted how U.S. government agencies have successfully targeted offshore digital assets exchanges, including Suex, Chatex, Garantex, and Bitzlato.
  • Illicit Activity Involving Stablecoins: Subcommittee Chairman Hill and Ms. Hill highlighted how both the U.S. Department of the Treasury and the United Nations (UN) have raised concerns that bad actors are relying upon stabelcoins for their illicit activities. Stablecoins are digital currencies whose value are pegged to a reserve asset (such as the U.S. dollar).  Ms. Hill stated that bad actors are using stablecoins because they believe that these assets are above AML and countering the financing of terrorism (AML/CFT) standards.
  • Illicit Activity Involving Traditional Finance: Subcommittee Republicans, Rep. Ritchie Torres (D-NY), Ms. Hill, Mr. Mosier, and Mr. Rabenn argued that the traditional financial sector remains the primary means through which criminal and malicious state actors engage in illicit activity and that digital assets do not pose exceptional illicit activity risks. Ms. House stated however that cryptocurrencies have various features that tend not to coexist in traditional assets all at once. She indicated that these features include their peer-to-peer nature, pseudonymous nature, irreversibility, global reach, and increased speed. She commented that the cumulative impact of these features results in cryptocurrencies having an enhanced risk profile relative to traditional assets.
• Tools for Supporting and Combating Illicit Finance Involving Digital Assets: Subcommittee Members and the hearing’s witnesses expressed interest in how both law enforcement agencies and bad actors are leveraging digital asset tools to accomplish their aims.
  • Blockchains: Subcommittee Republicans, some Subcommittee Democrats, Ms. Hill, Mr. Mosier, Mr. Rabenn, and Mr. Redbord highlighted how the blockchains that support digital asset transactions are fully transparent and stated that governments and law enforcement agencies can leverage this transparency in their illicit activity investigations. They noted how blockchains are updated in real-time, which enables governments and law enforcement agencies to track (either proactively or reactively) and potentially intercept illicit cryptocurrency flows without first needing to obtain a subpoena. They further noted how this blockchain information can support the building of prosecutions against bad actors. Rep. Sean Casten (D-IL) and Ms. House stated however that public blockchains only capture on-chain activity and asserted that sophisticated bad actors will engage in off-chain transactions to obfuscate their illicit activity. Mr. Mosier and Mr. Rabenn asserted however that the phrase “off-chain” transaction is a misnomer and that these transactions are merely traditional crimes. Ms. House also stated that the current level of transparency for cryptocurrencies will not inevitably be part of future cryptocurrency systems given growing efforts to integrate privacy-enhancing technologies into these systems. 
  • Transaction Freezing Capabilities: Ms. Hill highlighted how her company, Circle, has the unique ability to freeze its stablecoins anywhere on-chain in response to U.S. Office of Foreign Assets Control (OFAC) sanctions announcements. She commented that traditional fiat currencies cannot be freezed in the traditional financial sector. She stated that Circle’s freezing capability can better mitigate illicit finance concerns and support the execution of sanctions.
  • Regulation of Onramps and Offramps to the Traditional Financial System: Subcommittee Republicans, Ms. Hill, Mr. Mosier, Mr. Rabenn, and Mr. Redbord discussed the importance of regulating the onramps and offramps that allow cryptocurrency users to convert their cryptocurrencies into traditional fiat currencies. They stated that this regulation of financial onramps and offramps (which can involve AML and KYC requirements for financial institutions) will enable governments and law enforcement agencies to capture ill-gotten cryptocurrencies and return the cryptocurrencies to victims. Full Committee Ranking Member Maxine Waters (D-CA) and Ms. House cautioned however that the regulation of onramps and offramps may be insufficient for mitigating the risks within the cryptocurrency space. Ms. House asserted that exclusively regulating cryptocurrency onramps and offramps would be incompatible with the long-term development of the cryptocurrency space, especially as the space becomes more decentralized. She also stated that the growing acceptance of cryptocurrencies as a means of payment for more goods and services renders it impossible for governments and law enforcement agencies to exclusively rely upon regulating cryptocurrency onramps and offramps.
  • Corporate Compliance Programs: Ms. Hill and Mr. Rabenn discussed how their companies (Circle and Coinbase, respectively) maintain robust compliance programs to guard against illicit activities. They noted how these programs involve adherence to AML and KYC requirements, risk analyses of customers and their activities, the filing of suspicious activity reports (SARs), sanctions screenings, and customer account closures (when necessary). They further testified that their companies employ blockchain analytics tools to proactively detect illicit activities involving their customers and to report said activities to the appropriate bodies. Subcommittee Ranking Member Stephen Lynch (D-MA) noted however that the New York State Department of Financial Services (NYDFS) had fined Coinbase $50 million fine in 2023 for not maintaining sufficiently robust AML protocols. He commented that this fine is less a reflection on Coinbase as a company and more of a reflection on systemic compliance challenges for digital assets companies.
  • Anonymity Enhancing Technologies and Techniques: Subcommittee Democrats and Ms. House raised concerns that illicit actors have embraced anonymity enhancing technologies and techniques to obscure the origins and transfers of their cryptocurrencies. These services include cryptocurrency tumblers, convertible currency mixers, and unhosted digital wallets. Subcommittee Ranking Member Lynch and Ms. House expressed support for the U.S. Financial Crimes Enforcement Network’s (FinCEN) proposed rulemaking to increase transparency in convertible virtual currency mixing and combat the use of anonymity-enhancing technologies by malicious actors. Rep. Casten and Ms. House also raised concerns that bad actors are employing cross-chain transactions and chain hopping techniques to evade detection. Mr. Redbord stated however that his company, TRM Labs, has capabilities to trace digital asset flows across different blockchains.
  • Artificial Intelligence (AI) Technologies: Subcommittee Ranking Member Lynch also discussed how the rapid evolution of AI has exacerbated the illicit financing risks related to digital assets. He noted how the Combating Terrorism Center at West Point has warned that deep learning models could enable terrorists to propagate their fundraising activities with maximum efficiency and impact.
  • International Cooperation: Subcommittee Members, Ms. Hill, Mr. Rabenn, Mr. Redbord, and Ms. House asserted that the borderless nature of blockchain technology necessitates international cooperation to address crimes involving digital assets. They called on the U.S. to promote international action on combating illicit cryptocurrency activity in priority jurisdictions through diplomacy, capacity building, and adopting robust AML/CFT frameworks. 
  • Public and Private Sector Collaboration: Mr. Mosier called for the U.S. Department of the Treasury to be more involved in the decentralized finance (DeFi) through its Office of Cybersecurity and Critical Infrastructure Protection (OCIP). He discussed how OCIP works with the Financial Services Information Sharing and Analysis Center (FS-ISAC), which he indicated is an industry cybersecurity center with 4,600 members. Ms. House also stated that Congress should enhance outcome-oriented public-private partnerships for information sharing and research and development (R&D).
  • U.S. Department of the Treasury’s Authorities and Capabilities to Combat Illicit Activity: Subcommittee Democrats, Ms. Hill, Mr. Mosier, Mr. Rabenn, and Ms. House expressed interest in expanding the U.S. Department of the Treasury’s resources and funding so that it can better pursue illicit activity. Mr. Mosier specifically called on Congress to resource FinCEN’s global Financial Intelligence Unit (FIU) liaisons, FinCEN’s Whistleblower Office, FinCEN’s domestic liaisons, and FinCEN’s Innovation Officer position. He further stated that the U.S. should fund FinCEN’s Chief Digital Currency Advisor and asserted that this position is critical for enabling FinCEN’s FIU to succeed. Ms. House suggested that Congress provide prioritized resourcing for agencies and hone disruption authorities, including FinCEN’s authority under Sec. 9714 of the Combating Russian Money Laundering Act and designations under Sec. 311 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Rep. Bill Foster (D-IL) further called on the U.S. to provide higher salaries for federal government employees to support its regulatory and enforcement workforce.
• Other Policy Issues: Subcommittee Members and the hearing’s witnesses used the hearing to discuss other policy issues related to digital assets and government efforts to combat illicit activity.
  • U.S. Regulatory Framework for Digital Assets: Subcommittee Republicans, Rep. Ritchie Torres (D-NY), Ms. Hill, and Mr. Rabenn called on the U.S. to adopt a clear regulatory framework for digital assets. They stated that this regulatory framework will be key to ensuring that digital assets activity occurs in the U.S. with robust supervision (rather than in foreign jurisdictions with inadequate oversight). Subcommittee Chairman French Hill (R-AR) highlighted how the Committee had considered digital assets legislation during the previous summer that would provide a robust regulatory framework for digital assets.
  • Financial and Technological Experimentation: Ms. House remarked that the U.S.’s failure to support responsible financial and technological experimentation domestically poses national security concerns. She highlighted how adversarial nations have long pursued alternative payment systems and developed the “building blocks” for the next phase of the internet.
  • Impact of AML and KYC Requirements on the Provision of Banking Services: Rep. Bill Foster (D-IL), Ms. Hill, and Ms. House remarked that AML and KYC requirements often serve as a barrier to facilitating banking services. Rep. Foster, Mr. Rabenn, and Ms. House suggested that digital identity infrastructure could make KYC compliance easier through preventing fraud. 
  • Impact of Bulk Data Collection Requirements: Mr. Rabenn warned that bulk data requirements for cryptocurrency firms would drain the compliance resources of these firms and force the firms to focus on inefficient measures. He asserted that compliance with these requirements will reduce the ability of his company (Coinbase) to file SARs.
  • Application of Bank Secrecy Act (BSA) Requirements to Cryptocurrency Miners and Validators: Subcommittee Chairman Hill and Mr. Mosier criticized proposals to subject cryptocurrency miners and validators to BSA requirements. Mr. Mosier stated that cryptocurrency miners and validators should not be subject to KYC requirements because they are merely processing data. He further stated that if a particular cryptocurrency miner or validator were to decide not to process a given block (which is largely not possible), then another validator would simply take over this processing function. Ms. House noted however that OFAC has stated in their compliance guidance that miners may already have sanctions screening obligations. She suggested that the U.S. focus on enforcing existing obligations for miners when they validate transfers going to sanctioned actors.
  • Regulation and Oversight of Stablecoin Issuers Referencing the U.S. Dollar: Ms. Hill remarked that all U.S. dollar-denominated stablecoins should have the same regulatory obligations under OFAC and FinCEN so that terrorist financing groups and money launderers do not use these stablecoins. She stated that regulated U.S. dollar-denominated stablecoins would import compliance and the rule of law to the digital assets space. Rep. Wiley Nickel (D-NC) and Ms. Hill further called on the U.S. Department of the Treasury to take action against Cantor Fitzgerald for the financial firm’s management of the Tether stablecoin’s U.S. Treasury bond portfolio. They raised concerns over Teher’s access to U.S. Treasury bonds given the stablecoin’s ties to terrorism finance and other malign activities.
  • Neutral Treatment of Financial and Information Activities: Ms. House cautioned Congress against adopting equivalent privacy and neutrality treatment for financial and information activities. She asserted that these activities carry different levels of risk and that neutrality is not acceptable for addressing illicit finance.
  • Cyber Security Standards: Rep. Ritchie Torres (D-NY) and Mr. Rabenn argued that Congress should legislate standards of cybersecurity and cyberhygiene if it seeks to prevent cybercrimes. Rep. Torres specifically recommended that the U.S. should mandate multi-factor authentication.

Hearing Witnesses:

1. Ms. Caroline Hill, Senior Director of Global Policy and Regulatory Strategy at Circle
2. Mr. Michael Mosier, Co-Founder, Arktouros; Partner, ex/ante
3. Mr. Grant Rabenn, Director, Financial Crimes Legal, Coinbase
4. Mr. Ari Redbord, Global Head of Policy and Government Affairs, TRM Labs
5. Ms. Carole Noelle House, Senior Fellow, Atlantic Council; Executive in Residence, Terranet Ventures

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He remarked that while Hamas’s purported reliance on cryptocurrencies has been greatly exaggerated, he asserted that the Subcommittee must still identify and close any potential legislative and regulatory gaps within the financial sector that criminals and terrorists could exploit.
• He mentioned how U.S. Under Secretary of the Treasury for Terrorism and Financial Intelligence Brain Nelson had recently testified that bad actors still prefer to use traditional finance over digital assets for their activities.
  • He also noted how Under Secretary Nelson had confirmed prior reports that successful international collaboration with Israeli law enforcement agencies had limited Hamas’s use of digital assets ahead of Hamas’s October 2023 attack against Israel.
• He expressed interest in using the hearing to explore the tools that law enforcement agencies must pursue bad actors using cryptocurrencies and to identify any potential gaps that exist within these authorities.
• He mentioned how the Financial Times had recently reported that Iran had used two of the United Kingdom’s (UK) largest banks to evade sanctions.
  • He commented that this report demonstrates that terrorists will use any means necessary (including cash and cryptocurrencies) to accomplish their means.
• He remarked that the transparency of public blockchains provide law enforcement agencies with “critical” data regarding illicit actors and their networks.
  • He commented that law enforcement agencies have experienced success pursuing crimes involving digital assets because of their partnerships with blockchain analytics firms.
• He stated that regulators and law enforcement officials must continue to increase their own blockchain analysis capabilities and expertise.
• He noted how much of the illicit financing involving digital assets does not occur within the U.S. and instead occurs offshore in non-compliant rogue jurisdictions.
  • He asserted that the borderless nature of blockchain technology necessitates international cooperation to address crimes involving digital assets.
• He remarked that the hearing would examine ways to reinforce the tools that the FinCEN, OFAC, and the U.S. Department of Justice (DoJ) already possess.
  • He also stated that the hearing would consider legislation that builds upon the Committee’s previous stablecoin and digital assets market structure policy proposals.
• He asserted that the U.S. must ensure that it possesses a functional regulatory framework for digital assets so that digital asset companies operate within the U.S. and subject themselves to U.S. laws.
  • He mentioned how the Committee had considered legislation in the summer of 2023 that would accomplish these objectives.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He mentioned how Congress had received multiple classified briefings from the Biden administration on how terrorist groups, transnational criminal organizations, and rogue regimes are using digital assets.
  • He noted that while bad actors continue to rely upon traditional financing methods to fund illicit activities, he stated that the digital assets sector remains vulnerable to terrorist financing and money laundering.
• He mentioned how the U.S. Department of the Treasury has recently reported that terrorist organizations and their material facilitators have “markedly improved” their experimentation with virtual assets.
• He also discussed how criminal and malicious state actors have expanded beyond the use of fiat currencies and are now exploiting virtual assets to facilitate ransomware attacks, human and drug trafficking, and sanctions evasion.
  • He noted how cybersecurity industry reports indicate that global ransomware payments had exceeded $1.1 billion in 2023 and that criminals had primarily demanded the delivery of extortion payments to digital wallet addresses.
• He mentioned how the Financial Action Task Force (FATF) reports that Hamas, Al-Qaeda, and ISIS have all solicited funding through Bitcoin, privacy coins, and other digital assets.
  • He added that these terrorist organizations have also learned to leverage anonymity enhancing services, such as cryptocurrency tumblers and convertible currency mixers, to obscure the origins and transfers of funds.
• He stated that terrorist organizations “ironically” do not rely upon digital assets on a greater scale due to their extreme volatility in value.
• He also discussed how the rapid evolution of AI has exacerbated the illicit financing risks related to digital assets.
  • He noted how the Combating Terrorism Center at West Point has warned that deep learning models could enable terrorists to propagate their fundraising activities with maximum efficiency and impact.
• He then mentioned how U.S. Secretary of the Treasury Janet Yellen had recently testified that the U.S. Department of the Treasury has already identified “critical gaps” in its authorities to deter illicit financial activities.
• He highlighted how the U.S. Department of the Treasury had recently issued a detailed action plan to address the specific illicit financing risks associated with digital assets.
  • He commented that several of the plan’s priority recommendations, including the regulation of payment stablecoins and enhanced agency enforcement capabilities, will require bipartisan cooperation, Congressional funding, and statutory authorization.
• He also discussed how FinCEN has taken important actions to address the illicit financing risks associated with digital assets.
  • He highlighted how FinCEN had recently proposed a rule that would increase transparency for convertible virtual currency mixing and combat the use of anonymity-enhancing technologies by malicious actors.
• He expressed interest in working on a bipartisan basis to further ensure that the U.S. is promoting the responsible innovation of digital assets while mitigating their susceptibility to illicit financing activities.

Witness Opening Statements:

Ms. Caroline Hill (Circle):

• She mentioned how she had started her career investigating illicit networks for the UN and OFAC and how she had recommended sanctions actions against individuals and companies that were assisting Iranian, North Korean, and Syrian efforts to fund malign activities and access hard currencies.
  • She testified that she had observed firsthand the challenges associated with tracking illicit finance networks within the traditional finance space (particularly when involving foreign jurisdictions).
  • She also commented that this experience had underscored the importance of having a compliant private sector be a partner in detecting, freezing, and preventing illicit flows of funding.
• She also mentioned how she had worked as a senior advisor to the U.S. President of FATF and had overseen AML/CFT policy for the U.S. Department of the Treasury with a focus on Africa and Latin America.
  • She noted how developing countries had frequently told her in this role that U.S. financial institutions would cite AML regulations as the biggest challenge to facilitating banking services.
• She remarked that the lack of banking services harmed cross-border payments, remittances, foreign direct investment (FDI), and other economic activity.
• She stated that digital assets with proper regulatory clarity could overcome many of the aforementioned challenges with the benefit of increased AML transparency.
• She discussed how digital assets provide nearly instant 24/7 settlement to the average consumer and asserted that digital assets improve upon current payment networks.
  • She commented that current payment networks are typically restrictive, antiquated, and fragmented.
• She contended that the U.S. should be at the forefront of digital assets technology so that it can provide a domestic payments system that is efficient, supports U.S. foreign economic power, and safeguards the integrity of the U.S. financial system.
• She discussed how her company, Circle, is the sole issuer of the USD Coin (USDC) payment stablecoin and stated that Circle’s track record of sanctions and BSA compliance has exported stability, rule of law, and respect for U.S. AML/CFT standards to the broader digital assets market.
  • She testified that Circle has established the same financial crimes compliance controls as other financial institutions and has leveraged novel technologies because of the transparent nature of blockchain transactions.
  • She noted how transactions at traditional financial institutions by contrast are siloed internally.
• She highlighted how blockchain transactions are fully transparent in real time (even where there does not exist a U.S. nexus).
  • She testified that Circle has worked domestically and with foreign governments to identify, trace, and deter illicit financial flows using USDC.
• She also mentioned how the UN and the U.S. have used or facilitated the use of USDC in Ukraine and Venezuela (respectively) to facilitate efficient and transparent payments across borders.
• She then discussed how the technology underlying smart contracts allows for the freezing of assets without delay on-chain.
  • She commented that this freezing capability is beyond the ability of traditional financial institutions to address transactions involving fiat currencies.
  • She noted how anyone with an internet connection can see the exact amount of USDC that has been frozen by Circle in sanctioned addresses.
• She stated that payment stablecoin issuers should be able to reference on-chain data to demonstrate their compliance with sanctions laws.
  • She noted however that some digital assets companies have publicly claimed to not be subject to AML/CFT regulations, even if issuing a U.S. dollar-backed token.
• She remarked that the power of the U.S. government’s economic tools depends on the U.S. Department of the Treasury’s jurisdiction over U.S. financial institutions (and by proxy the U.S. dollar and international payment services).
  • She noted how many of the U.S.’s strategic competitors have been motivated to find alternative payment systems so that they can avoid the reach of U.S. sanctions and law enforcement.
• She stated that the U.S. should pursue a “whole-of-government” effort to study illicit activities involving digital assets and potential challenges to U.S. dollar dominance.
  • She also called on the U.S. to strengthen the role of the U.S. dollar through supporting innovation that would make the U.S. dollar the base currency of digital assets.
• She remarked that regulated U.S. dollar-denominated stablecoins would import compliance and the rule of law to the digital assets space.
  • She commented that these stablecoins should have compliant BSA programs and adhere to OFAC sanctions.
• She also stated that U.S. touchpoints should also be responsible when they are facilitating the existence of non-compliant tokens.
• She then reiterated that domestically enforcing existing regulations for digital assets is critical.
  • She commented that recent actions from the U.S. government have demonstrated that digital asset companies are not beyond the reach of domestic enforcement.
• She further called on the U.S. to continue to lobby other countries to adopt similar AML/CFT frameworks to ensure that regulatory arbitrage is minimized.
• She lastly recommended that Congress consider increasing funding for U.S. law enforcement agencies to identify, track, and analyze financial crime networks.
  • She also stated that the U.S. should lead international efforts to deploy the technical knowhow that will enable law enforcement agencies to track and seize digital assets.

Mr. Michael Mosier (Arktouros; ex/ante):

• He recounted how he had helped to create sanctions programs, pathways for humanitarian aid, and censorship resistant technologies for human rights activists during his tenure as OFAC’s Associate Director.
  • He also recounted how he had helped launch a privacy technology program and created a senior digital identity role during his tenure as FinCEN’s Acting Director.
• He mentioned how he had recently co-authored a paper that had proposed a policy framework for DeFi to leverage the public and private sectors and build upon the U.S. government’s experience securing financial infrastructure.
• He noted how the paper had called for the U.S. Department of the Treasury to be more involved in this space through its OCIP.
  • He explained how OCIP works across law enforcement and financial infrastructure on threat detection and mitigation.
• He discussed how OCIP works with the FS-ISAC, which he indicated is an industry cybersecurity center with 4,600 members.
  • He highlighted how FS-ISAC membership is not limited to financial institutions and is instead based on an entity’s relevance to financial infrastructure and security.
• He noted how similar partnerships are developing within the cryptocurrency sector, including the Security Alliance (SEAL) initiative and a cryptocurrency-focused information sharing and analysis center (ISAC) modeled on FS-ISAC.
  • He asserted however that OCIP’s public sector intelligence coordination would “meaningfully” advance cryptocurrency information sharing.
• He then stated that treating all pieces of code in a technological network the same as financial institutions and collecting KYC information on all data packets that are mathematically-validated overestimates both the safety of financial institutions and the effectiveness of KYC requirements.
  • He noted how major banks adhering to KYC requirements have paid approximately $385 billion in penalties for illegal activities since 2000.
  • He also commented that KYC requirements have not stopped violent cartels from laundering nearly $900 million through HSBC.
• He remarked that the traditional finance system faces “serious” challenges based on his experience as a former federal prosecutor.
• He asserted that the traditional finance system’s overreliance on static and easily-duped KYC regimes has created a “voracious” market for deep fakes, stolen identities, and exploited identities.
  • He commented that this situation is failing Americans and the public servants working to address illicit finance.
• He stated that opaque international banking prevents investigators from tracing global hops, which undermines the helpfulness of KYC requirements.
  • He described cross-border fiat currency banking with nested accounts and shell companies as the “original anonymity-enhanced technology.”
• He remarked however that traceable public blockchain ledgers provide for activity-based risk monitoring and more robust identification standards.
  • He highlighted how law enforcement agencies have been able to track stolen cryptocurrencies from the Lazarus Group (which is a hacker group) to cash out points and ultimately recover over $30 million.
• He asserted that blockchain networks are fundamentally cyberinfrastructure and stated that it would be preferable to detect bad actors as cyberthreats early rather than have the bad actors be identified on an OFAC list or in a KYC report later on.
• He then recommended that Congress better resource existing U.S. Department of the Treasury authorities before it imposes more unfunded mandates on the Department.
  • He commented that providing more tools to the U.S. Department of the Treasury without additional funding would merely set up the Department for failure.
• He noted how FinCEN had not yet received full funding to implement its expanded authorities under the Anti-Money Laundering Act of 2020 (AMLA).
• He specifically called on Congress to resource FinCEN’s global FIU liaisons, FinCEN’s Whistleblower Office, FinCEN’s domestic liaisons, and FinCEN’s Innovation Officer position.
  • He commented that these programs and positions are all unfunded and unfilled.
• He further stated that the U.S. should fund FinCEN’s Chief Digital Currency Advisor and asserted that this position is critical for enabling FinCEN’s FIU to succeed.

Mr. Grant Rabenn (Coinbase):

• He noted how his company, Coinbase, is the U.S.’s largest digital asset exchange and indicated that he leads the company’s lawyers that are responsible for money laundering, sanctions, and law enforcement matters.
  • He testified that Coinbase works collaboratively with law enforcement agencies to keep the company’s platform and the broader cryptocurrency ecosystem safe.
• He mentioned how he had spent most of his professional career as a federal financial crimes prosecutor focusing on the intersection between money laundering and cybercrime.
  • He noted how he had initiated some of the federal government’s earliest criminal investigations into cryptocurrency-related money laundering, including partnering with FinCEN on one of its first cryptocurrency enforcement actions.
  • He also highlighted how he had led the U.S.’s efforts to take down the dark web marketplace AlphaBay.
• He remarked that Coinbase is “laser focused” on being the most secure, trusted, and compliant cryptocurrency platform.
  • He commented that the company’s mission is to protect its customers’ cryptocurrencies and the U.S.
• He noted how many former national security and compliance professionals (like himself) are now working to ensure the security of cryptocurrencies within the U.S.
  • He highlighted how Congress has given many tools to law enforcement agencies that can be applied to new technologies and that can make cryptocurrencies safer. 
• He remarked that there exists a national security imperative for the U.S. to develop a strong regulatory and enforcement framework for cryptocurrencies.
• He asserted that keeping cryptocurrencies within the U.S. would ensure compliance, enhance law enforcement, and secure the financial system.
  • He warned that the U.S. would not be able to shape this emerging technology if the technology’s infrastructure moves abroad.
• He testified that Coinbase has invested “heavily” in its AML program and global intelligence teams that partner with global law enforcement agencies on a daily basis.
  • He stated that the company is constantly leveraging new technologies to establish an AML program that would rival the AML programs of traditional financial institutions.
  • He also mentioned how the company has led industry-wide AML compliance initiatives.
• He then noted how sanctions evasion, terrorist financing, and criminal activity is concentrated with offshore platforms and asserted that law enforcement agencies should use all of their existing tools to police offshore actors.
  • He stated that Congress should immediately provide any needed funding to enable law enforcement agencies to prioritize cryptocurrency enforcement efforts.
• He further expressed Coinbase’s support for legislation that will provide targeted additional tools meant to make the cryptocurrency space safer.
• He then discussed how Coinbase (like other financial institutions) is subject to “robust” AML and KYC standards and stated that the public nature of blockchain ledgers support Coinbase’s efforts to detect and stop illicit activities.
  • He asserted that public blockchain ledgers allow for increased compliance through providing his company with transparency into user actions both on and off the Coinbase platform.
• He noted how public blockchain ledgers can provide law enforcement agencies with immediate information about what customers are doing across the cryptocurrency ecosystem.
  • He commented that this results in better compliance tools that law enforcement agencies and compliance departments can leverage.
  • He noted that while OFAC has sanctioned approximately 560 cryptocurrency addresses, he indicated that Coinbase has been able to identify more than 8 million suspicious addresses through its proactive investigations.
• He also stated that while onshore regulated digital asset exchanges invest heavily in compliance to stop illicit activity, he noted how criminals are seeking out offshore digital asset platforms that lack robust AML programs and controls.
  • He commented that these offshore platforms will often jump from jurisdiction to jurisdiction to evade AML requirements.
• He called on the U.S. to use all of its existing tools to go after these offshore digital asset platforms and applauded recent enforcement actions within the cryptocurrency AML space.
• He further expressed support for the Committee’s proposed digital assets market structure and stablecoin bills and commented that these bills would provide better guidance for the digital assets industry and encourage the industry’s domestic development.
  • He also asserted that additional cybersecurity standards and measures would make cryptocurrencies less vulnerable to cyberattacks.
• He expressed Coinbase’s commitment to working with Congress and law enforcement agencies on combating illicit finance and terrorism.
  • He commented that safeguarding Coinbase’s platform is central to the company’s mission of enabling economic freedom in a trusted, secure, and compliant way.

Mr. Ari Redbord (TRM Labs):

• He discussed how his company, TRM Labs, provides software and critical threat intelligence data to the public and private sectors to investigate and mitigate the risk of fraud and financial crimes involving cryptocurrencies.
  • He indicated that TRM Lab users include law enforcement agencies, regulators, national security agencies, financial institutions, and cryptocurrency businesses.
• He stated that he has spent his career working to protect the U.S. financial system from illicit actors.
  • He mentioned how he had previously worked for the U.S. Attorney’s Office for the District of Columbia and for the U.S. Department of the Treasury.
• He remarked that TRM Labs seeks to work with Congress on protecting the U.S. financial system from illicit actors while ensuring that the U.S. remains the global center of technological innovation.
• He called it paramount for U.S. policymakers to discuss and understand how the U.S. can leverage the native properties of public blockchains to disrupt illicit finance involving cryptocurrencies.
  • He commented that public blockchains involve data that is transparent, traceable, and permanent and can enable law enforcement agencies, regulators, and national security officials to detect and investigate financial crimes more effectively and efficiently.
• He indicated that his written testimony cites examples and provides case studies where law enforcement agencies have leveraged blockchain intelligence to investigate scams, hacks, and other illicit activities.
• He mentioned how the U.S. Department of the Treasury has created a “playbook” to effectively leverage blockchain intelligence to deploy sanctions against illicit actors while also using enforcement actions.
  • He highlighted how OFAC had sanctioned Sinbad, which is a Bitcoin mixing service, in November 2023 and commented that this sanctioning had caused Sinbad to shut down operations.
  • He also highlighted how the U.S. Department of the Treasury had taken actions against non-compliant digital assets exchange Bitzlato in January 2023 for facilitating ransomware and other illicit activities and noted how this action had caused Bitzlato’s incoming volume to significantly decline.
• He discussed how regulators have become increasingly interested in recent years on the use of privacy enhancing technologies, such as cryptocurrency mixers.
  • He commented that cryptocurrency mixers extend the norm of financial privacy into the realm of cryptocurrencies.
• He noted however that illicit actors (such as North Korea) have used cryptocurrency mixers to launder billions of dollars in hacked and stolen funds.
  • He asserted that the U.S. must ensure that lawful cryptocurrency users can transact in a secure and private manner while mitigating the risk from illicit actors.
• He stated that the ability to trace the flow of funds through cryptocurrency mixers constitutes the “first line of defense” from illicit actors using these services.
  • He mentioned how TRM Labs works with law enforcement agencies to enable such tracing abilities.
• He also remarked that the issues of security and privacy on blockchains are global in nature and asserted that international cooperation, information sharing, and the provision of sufficient resources to regulators, law enforcement agencies, and national security officials is thus important.
  • He stated that TRM Labs provides essential tools to law enforcement agencies and has trained thousands of agents and investigators globally.
  • He expressed the company’s continued interest in working with regulators and policymakers globally to mitigate risks within the cryptocurrency ecosystem.

Ms. Carole Noelle House (Atlantic Council; Terranet Ventures):

• She asserted that cryptocurrencies remain a “serious risk” for illicit finance.
  • She stated that the unique aggregate features of cryptocurrencies right now and the current state of cryptocurrency compliance (both domestically and abroad) have cultivated an environment that is “ripe” for exploitation by rogue governments and fraudsters.
• She stated that while there exist mitigating measures for cryptocurrencies (such as transparency) that are helping to combat illicit finance, she asserted that critical and timely steps are required to make best use of these measures.
  • She commented that the status quo has not yielded benefits for consumers, the evolving DeFi ecosystem, or U.S. leadership.
• She remarked that a key aspect of cryptocurrency’s appeal to both licit and illicit actors is its ability to transfer value peer-to-peer, pseudonymously and irreversibly with global reach, increased speed, and cost efficiencies.
  • She also commented that the absence or reduction of financial intermediaries and central points of control in more highly decentralized cryptocurrency systems challenges clear lines of responsibility and accountability that are essential for managing risks in high-value and high-risk activities (such as finance).
• She indicated that while a risk mitigating feature of cryptocurrencies is their often public and transparent nature, she stated that there are limitations to this transparency.
  • She elaborated that these limitations include off-chain data and the use of obfuscation methods, such as mixing, chain hopping, and encryption.
• She stated that the current level of transparency for cryptocurrencies will not inevitably be part of future cryptocurrency systems given growing efforts to integrate privacy-enhancing technologies into these systems.
• She remarked that cryptocurrency remains attractive to many illicit actors given the aforementioned features and the propensity for non-compliance.
  • She commented that cryptocurrencies remain the favored tool of cybercriminals and the predominant means of payment in sophisticated ransomware-as-a-service economies that target critical infrastructure (such as energy infrastructure and hospitals).
  • She also mentioned how the Biden administration has reported that North Korea has funded about half of its nuclear proliferation regime through cybercrime and cryptocurrency theft.
• She discussed how “pig butchering” and investment fraud schemes continue to harm consumers with over $9 billion reported in fraud in 2022.
  • She also stated that cryptocurrencies are one of many tools used in transnational organized crimes (including drug and human trafficking), sanctions evasion, and terrorism financing.
• She remarked that the U.S.’s failure to support responsible financial and technological experimentation domestically poses national security concerns.
  • She highlighted how adversarial nations have long pursued alternative payment systems and developed the “building blocks” for the next phase of the internet.
  • She also noted how these adversarial nations have served as homes to the administrators of leading purported U.S. dollar-denominated stablecoins.
• She mentioned how the U.S. Commodity Futures Trading Commission (CFTC) Technology Advisory Committee’s (TAC) recent report on DeFi outlines opportunities for approaching accountability and addressing novel cryptocurrency-related issues.
  • She noted how this report had recommended the adoption of dynamic compliance features at different layer of the DeFi technology stack and the consideration of ongoing infrastructure provider-related regulations under development at the U.S. Department of Homeland Security (DHS) and the U.S. Department of Commerce.
• She cautioned Congress against adopting equivalent privacy and neutrality treatment of financial and information activities.
  • She asserted that these activities carry different levels of risk and that neutrality treatment is not acceptable for addressing illicit finance.
• She recommended that Congress enhance the capabilities of regulatory and enforcement agencies to take sustained and timely actions against the most egregious violators of illicit finance policies.
  • She suggested that Congress provide prioritized resourcing for agencies and hone disruption authorities, including FinCEN’s authority under Sec. 9714 of the Combating Russian Money Laundering Act and designations under Sec. 311 of the USA PATRIOT Act of 2001.
• She also called on Congress to promote international action on combating illicit cryptocurrency activity in priority jurisdictions through diplomacy and capacity building.
• She further stated that Congress should enhance outcome-oriented public-private partnerships for information sharing and R&D.
• She lastly recommended that Congress promote the development of secure, trustworthy, and interoperable digital identity infrastructure.

Member Opening Statements (cont.):

Full Committee Ranking Member Maxine Waters (D-CA):

• She criticized Congressional Republicans for seeking to cut funding for law enforcement agencies and asserted that these funding cuts will jeopardize the U.S.’s national security.
  • She specifically criticized Republicans for not working to provide FinCEN with new resources and authorities to pursue cryptocurrency-related crimes.
• She stated however that Committee Democrats are working with the Biden administration to ensure that cryptocurrency companies fully comply with the law.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill discussed how every digital asset transaction involves multiple actors with varying degrees of participation and insight into the specific transaction on the blockchain. He asked Mr. Mosier to explain why it does not make sense to subject cryptocurrency miners and validators to BSA requirements.
  • Mr. Mosier noted how cryptocurrency miners and validators are producing and verifying blocks to be added to blockchains. He commented that cryptocurrency miners and validators operate similarly to internet service providers (ISPs). He stated that cryptocurrency miners and validators should not be subject to KYC requirements because miners and validators are merely processing data. He noted how cryptocurrency miners and validators engage in a random process of allocation and do not have customers. He further stated that if a particular cryptocurrency miner or validator were to decide not to process a given block (which is largely not possible), then another validator would simply take over this processing function. He commented that the application of KYC requirements to cryptocurrency miners and validators would not be effective.
• Chairman Hill asked Mr. Mosier to indicate whether requiring cryptocurrency miners and validators to become money services businesses (MSBs) would be effective at stopping the use of cryptocurrencies in terrorism finance.
  • Mr. Mosier stated that requiring cryptocurrency miners and validators to become MSBs would not be effective at stopping the use of cryptocurrencies in terrorism finance. He emphasized that cryptocurrency miners and validators do not have customers.
• Chairman Hill asked Mr. Mosier to identify the most effective actions for stopping the use of cryptocurrencies in terrorism finance.
  • Mr. Mosier remarked that the U.S. Department of the Treasury’s risk assessments and blockchain analytics assessments indicate that the “overwhelming majority” of cryptocurrency-related illicit finance is occurring at centralized digital assets exchanges. He stated that most of this illicit activity is occurring offshore in jurisdictions with weaker transparency requirements than the U.S.
• Chairman Hill asked Mr. Redbord to discuss the differences between the onramp and offramp requirements for U.S. digital asset exchanges and the onramp and offramp requirements for offshore digital asset exchanges. He also Mr. Redbord to address how the U.S. and its allies pursue offshore digital asset exchanges that seek to circumvent transparency requirements.
  • Mr. Redbord noted how illicit actors may move their funds using offshore digital asset exchanges. He remarked however that illicit actors (as well lawful cryptocurrency users) still require offramps to convert their cryptocurrencies into more usable fiat currencies so that they can purchase things. He stated that money laundering is mostly occurring on the onramps and offramps to the traditional financial system. He noted how the U.S. treats cryptocurrency exchanges as MSBs and how these MSBs must have robust compliance controls in place to stop money laundering. He also stated that OFAC, the U.S. Department of the Treasury, and the DoJ have successfully targeted offshore digital assets exchanges, including Suex, Chatex, Garantex, and Bitzlato. He concluded that the best way to stop money laundering in the cryptocurrency space would be to enforce compliance and FATF standards globally and target non-compliant digital asset exchanges.
• Chairman Hill then mentioned how the U.S. Department of the U.S. Department of Treasury’s 2024 National Terrorist Financing Risk Assessment (NTFRA) had indicated that terrorist groups soliciting donations of virtual assets are increasingly turning to stablecoins. He asked Ms. Hill to indicate whether she agrees with the NTFRA’s finding based on her experience.
  • Ms. Hill testified that Circle has observed illicit actors use certain offshore U.S. dollar-denominated stablecoins. She suggested that illicit actors are using these stablecoins because they believe that the stablecoins are above AML/CFT standards. She remarked that all U.S. dollar-denominated stablecoins should have the same regulatory obligations under OFAC and FinCEN so that terrorist financing groups and money launderers do not use these stablecoins. She also mentioned how the UN had recently released a report identifying stablecoins being used in illicit activities.
• Chairman Hill lastly asked Mr. Mosier to address how special measures (as opposed to sanctions) could be used to pursue illicit activities. He requested that Mr. Mosier to provide his response to the question in writing.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters noted how the U.S. Department of the Treasury’s Illicit Finance Risk Assessment of Decentralized Finance had found that certain key factors pose vulnerabilities that enable criminal use of DeFi services. She indicated that these key factors include non-compliant DeFi services, disintermediation, and a lack of implementation of international AML/CFT standards. She expressed particular concerns regarding the opportunity for terrorism financing and other criminal activity that is made possible through tools that anonymize the holders of digital assets. She noted how the cryptocurrency industry claims that cryptocurrencies make the identification of criminals easier because cryptocurrency transactions are tracked on blockchains. She asked Ms. House to opine this claim’s veracity. She also asked Ms. House to discuss how DeFi services can make the identification of criminals more complicated.
  • Ms. House remarked that the public nature of blockchain ledgers makes it easier to trace transactions. She noted how the Society for Worldwide Interbank Financial Telecommunications (SWIFT), cash transactions, the Clearing House Interbank Payments System (CHIPS), and Fedwire do not publish their transactions on public ledgers. She highlighted however that cash takes significant time and space to move globally. She also stated that cryptocurrencies have various features that tend not to coexist in traditional assets all at once. She indicated that these features include their peer-to-peer nature, pseudonymous nature, irreversibility, global reach, and increased speed. She commented that the cumulative impact of these features results in cryptocurrencies having an enhanced risk profile. She stated that while transparency is a risk mitigating feature for cryptocurrencies, she asserted that the continued transparency of cryptocurrencies is not inevitable. She further remarked that the cryptocurrency exchange compliance failures have enabled bad actors to exploit cryptocurrencies.
• Ranking Member Waters then discussed how cryptocurrency onramps allow for users to exchange their fiat currencies for cryptocurrencies while cryptocurrency offramps allow for users to exchange their cryptocurrencies for fiat currencies. She noted how cryptocurrency industry advocates will only call for the regulation of cryptocurrency onramps and offramps. She mentioned however that the CFTC TAC’s recent report on DeFi had stated that an exclusive focus on onramps and offramps may not be sufficient to mitigate the risks within the cryptocurrency space. She asked Ms. House to elaborate on this report’s findings and to discuss what regulation beyond cryptocurrency onramps and offramps would look like. She further asked Ms. House to identify potential cryptocurrency regulation policy options for federal policymakers to consider.
  • Ms. House remarked that regulation that exclusively focuses on cryptocurrency onramps and offramps would be insufficient. She noted that while FATF had evolved its regulatory approach to encompass cryptocurrency-to-cryptocurrency exchanges and decentralized exchanges. She asserted that exclusively regulating cryptocurrency onramps and offramps would be incompatible with the long-term development of the cryptocurrency space, especially as the space becomes more decentralized. She stated that the growing acceptance of cryptocurrencies as a means of payment for more goods and services renders it impossible to exclusively rely upon regulating cryptocurrency onramps and offramps. She then mentioned how CFTC TAC’s recent report on DeFi had highlighted many technical features and compliance controls that could be built in throughout the DeFi ecosystem, such as the network layer (which is where miners exist). She noted how OFAC has stated in their compliance guidance that miners may already have sanctions screening obligations. She suggested that the U.S. focus on enforcing existing obligations for miners when they validate transfers going to sanctioned actors (such as the Lazarus Group).

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson stated that illicit finance remains a problem, despite the BSA’s long existence. He also mentioned how the U.S. maintains sanctions regimes to target illicit activities (including drug trafficking and cartel activities). He highlighted how there are no financial institutions sanctioned in Sinaloa, Mexico (where many drug cartels are located). He remarked that digital assets appear to be involved in a small percentage of total global illicit finance. He commented however that the Subcommittee should consider the role that digital assets play in illicit finance given the Subcommittee’s jurisdiction. He lamented how the U.S. lacks a robust regulatory framework for digital assets. He then noted how Mr. Rabenn had worked as a federal prosecutor for over ten years. He mentioned how there had occurred a “substantial evolution” in how bad actors used digital assets and how law enforcement agencies traced, identified, and captured these digital assets during Mr. Rabenn’s tenure at the DoJ. He asked Mr. Rabenn to discuss how he had previously identified illegal activity involving digital assets and to address how law enforcement capabilities have evolved over time.
  • Mr. Rabenn stated that while law enforcement agencies had initially not known how to address cryptocurrency-related crimes, he remarked that law enforcement agencies had quickly learned to incorporate blockchain analytics into their investigations. He commented that criminals had quickly realized that their use of cryptocurrencies made them more vulnerable to capture. He noted how law enforcement agencies can potentially view a bad actor’s full history of transactions as soon as they can connect the bad actor to a single transaction on a blockchain. He stated that this attribution capability is very beneficial to prosecutors. He recounted how he had prosecuted crimes involving the use of cryptocurrencies for several years and described these cases as very easy to prosecute. He mentioned that if he could link a bad actor to a Bitcoin transaction, then he could issue a subpoena to the cryptocurrency exchanges that were connected to the transaction and quickly receive evidence from the exchanges. He noted however that bank-related financial crimes investigations had involved much longer subpoena response times and required analysts to make sense of the received data. He concluded that traditional financial crimes had been more difficult to prosecute than cryptocurrency-related crimes.
• Vice Chairman Davidson then mentioned how he plans to host an event for his local law enforcement constituents to better educate them on using blockchain tracking tools to target illicit finance. He stated that DeFi presents unique challenges that impact the ability of law enforcement agencies to trace, identify, and capture bad actors. He asked Mr. Mosier to discuss the challenges that law enforcement agencies face when tracking DeFi activities. He also asked Mr. Mosier to identify areas where DeFi is compatible with existing regulatory standards.
  • Mr. Mosier remarked that the transparency of blockchain ledgers enables federal prosecutors and law enforcement agencies to build out their cases and issue alerts “exponentially faster.” He also noted that blockchain analytics firms (such as TRM Labs) could identify additional bad actors based on the U.S. government’s alerts. He mentioned how his recent paper had called for increased information sharing between the public and private sectors so that these sectors could work together to identify and combat bad actors.
• Vice Chairman Davidson indicated that his question period time had expired.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch mentioned how the NYDFS had fined Coinbase (which is the largest cryptocurrency exchange in the U.S.) $50 million in 2023 for not maintaining sufficiently robust AML protocols. He also noted how the NYDFS had required Coinbase to spend an additional $50 million to strengthen their AML protocols. He stated Coinbase is likely among the better run digital asset platforms. He raised concerns that Coinbase’s AML issues suggest that offshore digital asset platforms may have similar or worse AML problems. He commented that these challenges are less of a reflection on Coinbase as a company and more of a reflection on underlying digital assets technology. He then mentioned how the U.S. Department of the Treasury’s 2024 National Money Laundering Risk Assessment (NMLRA) highlighted how cryptocurrencies are facilitating ransomware attacks. He discussed how ransomware attacks had doubled between 2022 and 2023 and indicated that these attacks have impacted many U.S. companies. He stated that bad actors are relying upon ill-gotten cryptocurrencies to fund their activities. He expressed concerns that North Korea, Russia, and Iran are using the cryptocurrencies they receive through ransomware attacks to finance terrorism. He commented that these vulnerabilities in the cryptocurrency ecosystem ultimately impact the U.S.’s national security. He stated that U.S. policymakers are working to address these vulnerabilities and protect the U.S. financial system from said vulnerabilities. He then mentioned how the U.S. had outlawed anonymous bank accounts and commented that unhosted digital wallets pose similar concerns. He asked Ms. House to discuss the illicit financing risks stemming from unhosted digital wallets.
  • Ms. House discussed how unhosted digital wallets are self-custodied, which means that a person (rather than a financial institution) holds the digital wallet. She acknowledged that while cash is self-custodied and therefore carries certain risks, she noted that there exist ways to detect cash flows. She also highlighted how cash is slow and heavy to move. She stated that cryptocurrencies by contrast can be moved very quickly. She remarked that the absence of intermediaries that can implement controls against illicit finance is a problem for unhosted digital wallets. She stated that while public blockchain ledgers can mitigate these risks, she noted how unhosted wallets are not subject to the same reporting requirements as other financial institutions. She mentioned how banks that receive large quantities of cash must file currency transaction reports (CTRs). She commented that similar reports are not currently occurring within the DeFi space.
• Ranking Member Lynch also mentioned how FinCEN had recently raised concerns over the availability and use of convertible virtual currency mixers. He commented that the Subcommittee is working to address this issue. He asked Ms. House to identify other actions that the U.S. can take to respond to new developments within the illicit finance space.
  • Ms. House expressed support for FinCEN’s rulemaking to address convertible virtual currency mixers. She mentioned how FinCEN had raised concerns that these mixers pose money laundering risks and stated that sufficient actions had not been taken to mitigate these risks. She expressed support for efforts to better implement KYC requirements across non-compliant mixing services and international bodies.

Rep. John Rose (R-TN):

• Rep. Rose noted how Sen. Elizabeth Warren (D-MA) had recently claimed that digital asset firms are attempting to subvert AML and CFT laws. He called Sen. Warren’s claims “blatantly false” and stated that digital asset firms engage in significant work to prevent illicit finance. He asked Mr. Rabenn to provide an overview of Coinbase’s AML compliance program and describe the additional regulatory requirements that Coinbase must comply with.
  • Mr. Rabenn testified that Coinbase employs over 400 employees who have government and traditional finance backgrounds in compliance. He stated that Coinbase is subject to the same requirements as other financial institutions located in the U.S., including maintaining a KYC program, risk analyses of their customers and their ongoing transactions, filing SARs, and closing accounts when necessary. He also testified that Coinbase (unlike traditional financial institutions) incorporates blockchain analytics directly into its compliance controls. He discussed how Coinbase had established a proprietary sanctions interdiction solution that immediately incorporates OFAC-sanctioned addresses into their compliance controls. He explained that this system prevents Coinbase customers from sending or receiving funds from a sanctioned address. He stated that traditional financial institutions cannot develop such systems because traditional financial infrastructure does not allow for them. He further mentioned how Coinbase employs blockchain analytics to determine the risks associated with all of the transactions on its platforms (and not just the transactions involving OFAC-sanctioned parties). He emphasized that Coinbase’s transaction risk analysis is in addition to Coinbase’s KYC analysis.
• Rep. Rose asked Ms. Hill to provide an overview of Circle’s AML compliance program and describe the additional regulatory requirements that Circle must comply with.
  • Ms. Hill testified that Circle engages in KYC procedures, sanctions screening, and SAR filings. She noted how traditional financial firms engage in the same practices. She also mentioned how Circle is regulated as a money transmitter in 48 states and jurisdictions and is registered with FinCEN. She noted how PayPal and Venmo comply with these same types of regulations. She further testified that Circle employs blockchain analytics to identify illicit activity that may involve its USDC stablecoin. She stated that Circle can work with law enforcement agencies when it identifies illicit activity and can take action when law enforcement agencies alert the company of illicit activity. She highlighted how Circle has the unique ability to freeze USDCs anywhere on-chain in response to OFAC sanctions announcements. She commented that traditional fiat currencies cannot be freezed in the traditional financial sector. She stated that Circle’s freezing capability can better mitigate illicit finance concerns and support sanctions efforts.
• Rep. Rose then discussed how blockchain analytics firms can search blockchain networks and reveal vital information about digital asset transactions (especially as the transactions relate to illicit activity). He asked Mr. Redbord to describe the activities that blockchain analytics firms can recover about illicit digital asset transactions.
  • Mr. Redbord discussed how TRM Labs takes raw blockchain data and layers it with threat intelligence, which enables digital asset companies (including Coinbase and Circle) to understand the parties involved in their transactions. He indicated that these digital asset companies can use this information to inform their actions. He also mentioned how TRM Labs works with law enforcement agencies to track and trace the flow of funds. He noted how this works entails tracing cryptocurrencies that have gone through mixers so that law enforcement agencies can investigate illicit finance cases. He recounted how he had worked on illicit finance cases as a prosecutor that had involved networks of shell companies, hawalas, high value art, and real estate. He noted how there did not exist analytics firms that could trace the flow of funds through these networks. He remarked that blockchain analytics provide unprecedented visibility into financial transactions, which supports law enforcement investigations and sanctions actions from regulators.
• Rep. Rose indicated that his question period time had expired.

Rep. Ritchie Torres (D-NY):

• Rep. Torres noted that while bad actors exploit the anonymity of cryptocurrencies to commit cybercrimes (including ransomware), he stated that law enforcement agencies can also exploit the transparency of blockchains to recover ransomware payments. He mentioned how law enforcement agencies had been able to successfully recover ransomware payments made during the Colonial Pipeline ransomware attack. He discussed how cryptocurrency flows are traceable on blockchains while fiat currency flows are not traceable. He noted how law enforcement agencies can monitor the flow of cryptocurrencies across digital wallets. He posited a hypothetical scenario in which the perpetrators of the Colonial Pipeline ransomware attack had demanded that their ransomware payments be made in fiat currencies. He asked Mr. Rabenn to speculate whether the ransomware payments in this hypothetical scenario would have been retrieved.
  • Mr. Rabenn answered no.
• Rep. Torres acknowledged that while blockchains are not “perfectly” transparent, he stated that blockchains are more transparent than existing channels for fiat currencies. He then mentioned how some people advocate for the banning of cryptocurrencies as a means for eradicating ransomware. He noted how the U.S. struggles to combat money laundering involving traditional money. He asked Mr. Rabenn to indicate whether the U.S. should ban money to eradicate money laundering.
  • Mr. Rabenn answered no.
• Rep. Torres asked Mr. Rabenn to indicate whether the U.S. should ban cars to eradicate car accidents.
  • Mr. Rabenn answered no.
• Rep. Torres asked Mr. Rabenn to indicate whether judging any emerging technology based on its worst possible uses will result in poorly conceived public policy.
  • Mr. Rabenn answered affirmatively.
• Rep. Torres asked Mr. Rabenn to indicate whether money laundering is getting worse or simply becoming more visible via blockchains. He also asked Mr. Rabenn to address the difference in the frequency between cryptocurrency-related money laundering and traditional money laundering.
  • Mr. Rabenn remarked that the visibility provided by blockchains has resulted in greater awareness of money laundering involving cryptocurrencies. He asserted however that this greater awareness of money laundering involving cryptocurrencies does not necessarily mean that such money laundering is more prevalent. He stated that estimates indicate that money laundering involving cryptocurrencies is significantly lower than money laundering involving traditional finance. He elaborated how the estimated percentage of global gross domestic product (GDP) associated with money laundering ranges between 2 percent and 5 percent. He noted how blockchain analytics firms typically estimate cryptocurrency-related money laundering to be 1 percent or lower.
• Rep. Torres then stated that offshore companies that are not subject to regulations carry the greatest risk of committing cybercrimes. He asserted that Congress should create a regulatory framework for cryptocurrencies if it seeks to combat cybercrimes. He asked Ms. Hill to indicate whether she agreed with his assertion.
  • Ms. Hill expressed agreement with Rep. Torres’s assertion.
• Rep. Torres also stated that Congress should legislate standards of cybersecurity and cyberhygiene if it seeks to prevent cybercrimes. He asserted that the U.S. should mandate multi-factor authentication. He then discussed how foreign adversaries can perpetrate hacks on the computer systems of the federal government and corporate America. He asked the witnesses to indicate whether the Bitcoin blockchain has ever been hacked.
  • Mr. Rabenn described Bitcoin as “the most secure piece of software that has ever been created by humans.”
• Rep. Torres asked the witnesses to indicate whether the Ethereum blockchain has ever been breached.
  • Mr. Rabenn answered no.
• Rep. Torres noted how a blockchain is not a single computer and is instead a network of computers. He stated that hacking a blockchain would entail hacking the thousands of computers that form the blockchain network. He commented that such a hacking would be very difficult to execute.
  • Mr. Rabenn expressed agreement with Rep. Torres’s assessment.

Rep. William Timmons (R-SC):

• Rep. Timmons noted that while there has been controversy surrounding the use of emerging digital asset technologies in illicit finance, he stated that these technologies also have law enforcement and national security use cases. He asked Mr. Redbord to indicate where TRM Labs is observing the most illicit activity with digital assets.
  • Mr. Redbord stated that there are several crimes that involve cryptocurrencies. He criticized the phrase “crypto crime” and commented that cryptocurrencies merely serve as the means of value in certain crimes. He remarked that cryptocurrencies are unique in their ability to be investigated and noted how there exist tools that enable law enforcement agencies to track and trace the flow of cryptocurrencies on blockchains. He commented that these tools have been very effective. He highlighted how law enforcement agencies, including the U.S. Federal Bureau of Investigation (FBI), have seized millions of dollars in cryptocurrency scam and fraud proceeds. He commented that these proceeds would go unrecovered had they been in wire transfers and other traditional transactions. He remarked that the growing popularity of cryptocurrencies will naturally result in cryptocurrencies being used in more crimes. He stated however that the ability of law enforcement agencies to investigate and seize cryptocurrencies is unique and that a similar ability does not exist for traditional financial assets.
• Rep. Timmons noted how traditional financial assets (such as bearer bonds and cash) have been used for illicit activities and highlighted how these assets cannot be traced. He highlighted how law enforcement agencies by contrast can use blockchains to trace cryptocurrency flows.
  • Mr. Redbord remarked that blockchains allow law enforcement agencies to follow flows of money in real time. He also highlighted how blockchains are immutable and forever, which enables law enforcement agencies to investigate previous activities involving cryptocurrencies. He commented that these capabilities are new within the financial investigations context.
• Rep. Timmons then recounted how the Colonial Pipeline ransomware attack had temporarily eliminated gasoline access for about 76 percent of the gas stations in his Congressional District. He noted how the Colonial Pipeline’s parent company had paid $5 million in ransomware payments in Bitcoin and how the company was subsequently able to recover most of these ransomware payments. He asked Mr. Redbord to discuss the mechanism through which the FBI had been able to recover the ransomware payments made using Bitcoin.
  • Mr. Redbord discussed how the FBI can use blockchain analytics tools (such as the tools offered by TRM Labs) to track cryptocurrency funds to digital wallet addresses. He indicated that the FBI could use their authorities to seize back a digital wallet once the wallet’s address has been identified. He stated that the FBI would not have been able to have tracked and seized the Colonial Pipeline ransomware payments had they been made in another form of currency.
• Rep. Timmons asked Mr. Redbord to indicate whether the Colonial Pipeline ransomware attack perpetrators could have taken steps to prevent the FBI from seizing the Bitcoin that they had stolen.
  • Mr. Redbord described the dynamic between law enforcement agencies and illicit actors as a “cat and mouse game.” He stated that while the Colonial Pipeline ransomware perpetrators could have employed different obfuscation techniques, he noted how blockchain tracking tools are also improving to overcome new obfuscation techniques. He contended that the Colonial Pipeline ransomware perpetrators could therefore not have taken steps to prevent the FBI from seizing the Bitcoin that they had stolen. He commented that the transparency of blockchains had ultimately allowed for the recovery of Colonial Pipeline ransomware payments.
• Rep. Timmons posited a hypothetical scenario in which the Colonial Pipeline ransomware attack perpetrators had immediately sold the Bitcoin that they had stolen to a third party with no knowledge of the Bitcoin’s stolen nature. He asked Mr. Redbord to indicate whether the FBI could have recovered the stolen Bitcoins under this hypothetical scenario.
  • Mr. Redbord noted that law enforcement agencies can track the flow of all cryptocurrency transactions that occur on blockchains across digital wallet addresses.
• Rep. Timmons interjected to comment that the FBI could not have recovered the stolen Bitcoins under his hypothetical scenario from an innocent third party that had no knowledge of the Bitcoin’s stolen nature.
  • Mr. Redbord reiterated that law enforcement agencies could track the flow of cryptocurrencies anywhere on a blockchain. He stated that the key national security objective in Rep. Timmons’s hypothetical scenario would be to ensure that these stolen cryptocurrencies did not go to the ransomware group.

Rep. Sean Casten (D-IL):

• Rep. Casten applauded blockchain analytics firms for improving their capabilities to track illicit activities involving cryptocurrencies. He stated however that the absence of illicit activity detection does not necessarily mean that the illicit activity is not occurring. He noted how much of the illicit activity involving cryptocurrencies is not occurring on-chain. He highlighted how the National Bureau of Economic Research (NBER) had found that the trading volume of Bitcoin within cryptocurrency exchanges is more than ten times the volume of Bitcoin transactions on the blockchain. He asked Ms. House to indicate whether the previous statements made at the hearing could be “vastly” understating the amount of illicit activity involving cryptocurrencies.
  • Ms. House called it “extremely probable and very likely” that many of the statements being made at the hearing are significantly underestimating the amount of illicit activity involving cryptocurrencies. She stated that while blockchain analytics firms have played an important role in assisting law enforcement and regulatory efforts, she noted how these firms are only assessing on-chain information. She indicated that blockchain analytic firms do not have access to off-chain activity or law enforcement agency data. She mentioned how a 2020 FinCEN proposed rulemaking had indicated that suspicious activity reporting had amounted to 12 percent of the market capitalization for cryptocurrencies. She acknowledged that while the filing of a SAR does not necessarily mean that illicit activity has occurred, she noted how SARs only come from compliant U.S.-reporting financial institutions. She stated that FinCEN’s identified suspicious activity involving cryptocurrencies would likely have been greater if it had included global information.
• Rep. Casten remarked that smart criminals are likely to employ methods that will minimize their risk of detection. He stated that while blockchain analytics firms have developed better methods for tracking cryptocurrencies as they move through mixers, he noted how bad actors are now pursuing cross-chain transactions and chain hopping techniques to evade detection. He asked Ms. House to address why bad actors are now using cross-chain bridges and decentralized cryptocurrency exchanges.
  • Ms. House remarked that criminals are looking to jurisdictions where they can perpetrate their illicit activities. She stated that while the U.S. has the most compliant cryptocurrency industry in the world, she commented that the U.S. cryptocurrency industry is not always sufficiently compliant. She remarked that criminals are ultimately looking for methods to further obfuscate their cryptocurrency activities and indicated that these methods can involve either on-chain or off-chain mechanisms. She predicted that privacy-enhancing technologies will become an increasingly popular way to obfuscate cryptocurrency activities. She stated that developments in AI technology could lead public attribution to become open source. She commented that most people would not want to publish their activities on a public ledger. She asserted that the U.S. must take actions to address these risks.
• Rep. Casten then mentioned how blockchain analytics firm Elliptic had recently stated that blockchain analytics can only trace the flow of funds through a single blockchain without manual intervention. He asked Mr. Redbord to discuss the challenges associated with tracking funds that move between blockchains at “meaningful scale.”
  • Mr. Redbord testified that TRM Labs currently traces the flow of funds across 29 different blockchains in about 70 million different assets.
• Rep. Casten interjected to note how North Korea has successfully employed chain hopping as a way of evading detection.
  • Mr. Redbord acknowledged that the speed and scale of North Korea’s attacks on the blockchain ecosystem is a problem. He stated however that TRM Labs is tracking the flow of funds across blockchains and making it more difficult for North Korea to find offramps.
• Rep. Casten interjected to reiterate his assertion that much of the illicit activity within the cryptocurrency space is going undetected.

Rep. Bryan Steil (R-WI):

• Rep. Steil discussed how the international community has long used FATF to improve the AML standards of foreign jurisdictions. He asked Ms. Hill to discuss how the U.S. should be playing a more active role in improving the AML standards of non-compliant foreign jurisdictions.
  • Ms. Hill remarked that FATF has been a leader in establishing AML/CFT standards in virtual assets. She asserted that FATF must ensure that countries are implementing these standards. She discussed how the U.S. has influence within FATF and stated that the U.S. should work through FATF to ensure that countries at a high risk for money laundering are targeted. She also stated that the U.S. should work on a bilateral and multilateral basis to address these high-risk countries.
• Rep. Steil then asked Mr. Rabenn to discuss how law enforcement agencies are adapting to the speed and technological issues associated with cryptocurrency-related crimes. He also asked Mr. Rabenn to comment on how law enforcement agencies are ensuring international cooperation in their efforts to address these crimes.
  • Mr. Rabenn remarked that law enforcement agencies have adapted well in responding to transnational crime. He asserted that the issues associated with cryptocurrency-facilitated transnational crime are no different from the issues associated with traditional transnational crime. He stated however that the transparency of blockchains support law enforcement agencies in pursuing cryptocurrency-facilitated transnational crime.
• Rep. Steil interjected to ask Mr. Rabenn to address how policymakers should view the international coordination needed to address cryptocurrency-related crimes. He asked Mr. Rabenn to indicate whether the speed of cryptocurrencies impacts the international coordination needed to address these crimes.
  • Mr. Rabenn remarked that the international coordination needed to address cryptocurrency-related crimes is not different from the international coordination needed to address traditional crimes. He noted how illicit cryptocurrency flows must still go through offramps and highlighted how these offramps are centralized institutions that are no different than foreign banks.
• Rep. Steil asked Mr. Rabenn to address how the U.S. should approach the recovery of stolen cryptocurrencies. He asked Mr. Rabenn to indicate whether the U.S.’s ability to recover stolen cryptocurrencies differs from its ability to recover stolen traditional assets.
  • Mr. Rabenn remarked that the U.S.’s ability to recover stolen cryptocurrencies is better than its ability to recover stolen traditional assets. He noted how law enforcement agencies can use blockchain analytics to immediately determine the financial institutions that bad actors are attempting to move the cryptocurrencies to. He mentioned how he had previously investigated fraud schemes involving traditional finance and noted how the perpetrators of these schemes could move their money into banks before subpoenas could be issued.
• Rep. Steil interjected to ask Ms. Hill to indicate whether she agreed with Mr. Rabenn’s analysis.
  • Ms. Hill expressed agreement with Mr. Rabenn’s analysis. She stated that it could be difficult for the U.S. to recover stolen traditional assets that entered foreign jurisdictions, even if jurisdictions are allies. She explained that the U.S. law enforcement agencies would need to work through mutual legal assistance treaties (MLATs), data sharing restrictions, and data limitations from the foreign financial institutions when seeking to recover these stolen traditional assets.
• Rep. Steil noted how cryptocurrencies will need to go through financial institutions to be converted into fiat currencies and how the U.S. can capture stolen cryptocurrencies once they enter a financial institution. He asked Ms. Hill, Mr. Rabenn, and Mr. Mosier to address how the U.S. should be approaching the attempts of bad actors to evade AML obligations using digital assets. He also asked Ms. Hill, Mr. Rabenn, and Mr. Mosier to address how the U.S. should be approaching the touchpoints between cryptocurrencies and the U.S. dollar.
  • Ms. Hill called it important for the U.S. to regulate the onramps and offramps to the cryptocurrency ecosystem. She noted how bad actors use offramps to convert their stolen cryptocurrencies into fiat currencies. She also stated that the U.S. should ensure that offshore actors that are using the U.S. dollar as a reference point or using the U.S. financial system are being captured by U.S. AML/CFT standards.
  • Mr. Rabenn expressed agreement with Ms. Hill’s response and stated that the illicit finance risks involving cryptocurrencies are located at the touchpoints between cryptocurrencies and the U.S. dollar.
  • Mr. Mosier remarked that offshore jurisdictions that do not implement money laundering controls pose the greatest illicit finance risks. He stated that policymakers should focus on ensuring that banks implement AML policies rather than narrowly focusing on cryptocurrencies.
• Rep. Steil expressed agreement with the previous comments. He stated that the U.S. needs to address jurisdictions that do not comply with AML rules.

Rep. Brad Sherman (D-CA):

• Rep. Sherman remarked that cryptocurrencies do not currently function as currencies. He noted that while there are tens of thousands of Bitcoin transactions every day, he emphasized that there are tens of billions of transactions involving government-issued currencies every day. He stated that there would occur significant changes if cryptocurrencies were ever to function as currencies. He asserted that cryptocurrencies currently function as collectibles whose value is based on market demand. He then remarked that the main purpose of cryptocurrency mixers is to help criminals. He asked the witnesses to indicate whether they would support legislation that prohibits Americans from doing business with any cryptocurrency exchange or other cryptocurrency service provider that uses a mixer. (Note: None of the witnesses responded affirmatively). He stated that while the witnesses represent companies that claim to want to stop crime, he remarked that the witnesses want to preserve the right of people to do business with companies that use cryptocurrency mixers. He reiterated his assertion that the main purpose of cryptocurrency mixers is to confound law enforcement. He then mentioned how the witnesses have indicated that there have been instances where cybercrime and ransomware involving cryptocurrencies have been detected. He commented however that cybercrime and ransomware are not the big market for cryptocurrencies. He asserted that the big market for cryptocurrencies is tax evasion and warned that this facilitation of tax evasion will undermine the U.S.’s global strength. He asked the witnesses to indicate whether they could provide any examples of a U.S. tax evader being caught through a cryptocurrency law enforcement investigation.
  • Mr. Rabenn mentioned how the DoJ’s Tax Division had “numerous” investigations involving cryptocurrencies when he had worked at the DoJ.
• Rep. Sherman interjected to asked Mr. Rabenn to indicate whether he could identify a single instance where the DoJ had successfully caught a tax evader during a cryptocurrency law enforcement investigation.
  • Mr. Rabenn indicated that he could not identify a specific instance where a U.S. tax evader was caught through a cryptocurrency law enforcement investigation. He expressed his willingness to follow up with Rep. Sherman on his question.
• Rep. Sherman interjected to note how the U.S. Internal Revenue Service (IRS) has told Congress that $1 trillion is not paid in federal taxes each year. He commented that this indicates that $3 trillion in income is concealed every year from the IRS. He emphasized that the witnesses could not provide a single example of a U.S. tax evader being caught through a cryptocurrency law enforcement investigation. He then mentioned how Israel had found that Hamas had received $41 billion in cryptocurrencies and how other reports have found that Palestinian Islamic Jihad (PIJ) had received $93 million in cryptocurrencies. He acknowledged how there are fiat currency transactions that fund terrorists. He reiterated however that there are significantly more fiat currency transactions than cryptocurrency transactions. He stated that cryptocurrencies are disproportionately used for terrorism, human trafficking, drug trafficking, and tax evasion. He then questioned the assertions from the witnesses that successful criminals are not using cryptocurrencies. He mentioned how ransomware attacks are increasing and noted how ransomware perpetrators are increasingly using cryptocurrencies to perpetrate their crimes. He lastly lamented how none of the witnesses had indicated that their businesses would be willing to stop engaging in business with parties using mixers.

Rep. Mike Flood (R-NE):

• Rep. Flood remarked that the U.S. should be diligent regarding how digital assets can be used for illicit finance. He also stated that the U.S. should work to sanction bad actors in Russia and North Korea that may attempt to use cryptocurrency mixers to funnel funds to avoid sanctions. He then mentioned how some opponents of digital assets have claimed that intermediaries in the digital asset industry do not have BSA obligations. He asked Mr. Rabenn to indicate whether Coinbase must comply with the BSA.
  • Mr. Rabenn answered affirmatively.
• Rep. Flood highlighted how MSBs (including Coinbase) already comply with the BSA. He then asked Mr. Mosier to describe what an off-chain transaction is.
  • Mr. Mosier remarked that off-chain transactions do not exist within the blockchain space. He stated that a blockchain transaction is on-chain by nature. He remarked that transactions that do not occur on blockchains are part of the traditional finance system and noted how the BSA applies to these transactions. He described blockchains as a data transport layer and commented that illicit activities that have used blockchains to transfer value are not necessarily cryptocurrency crimes.
• Rep. Flood asked Mr. Mosier to explain how a bad actor would use off-chain transactions to obfuscate their activities.
  • Mr. Mosier asserted that bad actors do not use off-chain transactions and that these bad actors are simply committing regular crimes.
• Rep. Flood asked Mr. Mosier to indicate whether FinCEN had maintained a strategy for addressing off-chain transactions when he had worked at the Agency. He also asked Mr. Mosier to indicate whether this strategy had been successful.
  • Mr. Mosier stated that the phrase “off-chain transactions” encompasses traditional crime and commented that FinCEN’s traditional authorities apply to these transactions. He noted how many former law enforcement and national security officials are excited about blockchain technology because it provides for increased transparency.
• Rep. Flood remarked that many blockchain technology skeptics do not appreciate the technology’s capabilities and how blockchains have onramps and offramps. He then stated that digital assets are fundamentally assets. He commented that most digital assets (aside from stablecoins) are not an effective store of value and are not typically used as currencies. He noted that while digital assets can be used as a means of exchange, he stated that digital asset users will ultimately need to exchange their digital assets into hard currencies to effectively monetize their deals. He remarked that the U.S. should remain focused on regulating the onramps and offramps between digital assets and traditional fiat currencies to address illicit finance concerns.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel remarked that the digital assets industry (like all industries) has both good and bad actors. He stated that Tether and Binance are bad actors within the cryptocurrency space and that North Korea, Hamas, and other terrorist groups are relying upon these unregulated offshore firms to finance their operations. He asserted that these unregulated offshore firms have “next to no” compliance controls. He remarked that the U.S. should extend the reach and jurisdiction of its law enforcement agencies internationally to better enforce U.S. laws against these unregulated offshore firms. He asked Ms. Hill to indicate how Congress can bolster the jurisdiction of U.S. enforcement agencies so that these agencies can extend their reach internationally.
  • Ms. Hill noted how some unregulated offshore firms have U.S. touchpoints and stated that the U.S. government should use its authorities on these touchpoints. She mentioned how the U.S. Department of the Treasury in late 2023 had requested that Congress expand the Department’s authorities to address illicit activities. She remarked that companies should not be permitted to reference the U.S. dollar without possessing “democratic values” within their companies and U.S. dollar-backed stablecoins. She recommended that the Committee consider the U.S. Department of the Treasury’s requests for additional authorities to address illicit activity.
• 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 provide Tether with access to U.S. dollars. He asserted that Cantor Fitzgerald is enabling terrorism and illicit activities globally, which he called “unacceptable.” He asked Ms. Hill to indicate whether the U.S. Department of the Treasury already possesses the authority to take action against Tether given its current nexus to the U.S. financial system (via Cantor Fitzgerald). He also asked Ms. Hill to discuss how the U.S. should address U.S.-regulated companies (such as Cantor Fitzgerald) that are facilitating illicit activities.
  • Ms. Hill remarked that the U.S. Department of the Treasury would likely have the authority to take action against Tether given its U.S. touchpoint (via Cantor Fitzgerald). She expressed hope that the U.S. Department of the Treasury is seriously considering this matter given Tether’s reputation and current evidence indicating that Tether is contributing to terrorism finance and other malign activities.
• Rep. Nickel then remarked that there exists a misconception that the U.S. cannot prevent bad actors from using cryptocurrencies for their illicit activities because of the anonymity of digital assets. He disputed the claim that digital assets are anonymous and highlighted how blockchains are transparent. He asked Mr. Rabenn to explain how law enforcement agencies use blockchain intelligence.
  • Mr. Rabenn remarked that blockchain evidence is now a critical part of cyber-investigations to the extent to which criminals are using cryptocurrencies to facilitate their illicit activities. He discussed how law enforcement agencies employ various heuristics to parse out which transactions represent criminal activity and which transactions do not represent criminal activity. He also noted how law enforcement agencies now have a strategy for making use of this evidence, which entails subpoenaing onramps and offramps, carrying out traditional cyber-investigations to identify points of attribution, and working with international law enforcement agencies to obtain records on international transactions.
• Rep. Nickel then asked Mr. Redbord to discuss TRM Labs’s work in blockchain intelligence. He also Mr. Redbord to address how blockchain intelligence can help the U.S. to combat illicit finance involving digital assets.
  • Mr. Redbord remarked that blockchain intelligence enables law enforcement agencies to track the flow of funds. He stated that blockchain intelligence is one of many tools that law enforcement agencies have access to when pursuing illicit finance cases. He indicated that these other tools include subpoenas, search warrants, and MLATs. He remarked that the U.S. needs to continue surveilling onramps and offramps with all of its tools. He mentioned how he had served a subpoena under the USA PATRIOT Act on a Chinese bank during his time as a federal prosecutor. He stated that there exist ways to pursue bad actors engaged in money laundering that are currently not being leveraged.
• Rep. Nickel indicated that his question period time had expired and that he would submit additional questions for the hearing’s record.

Rep. Byron Donalds (R-FL):

• Rep. Donalds asked Mr. Rabenn to address the scale of digital asset-related crimes relative to illicit activities involving traditional financial methods.
  • Mr. Rabenn noted how the UN estimates that between 2 percent and 5 percent of global GDP is associated with money laundering. He described this figure as a “tremendously large number.” He noted that most blockchain analytics firms have found that the percentage of cryptocurrencies involved in illicit activity is around 1 percent. He then remarked that the phrase “off-chain transaction” is a misnomer and commented that off-chain transactions are merely financial transactions. He called it “analytically wrong” to attribute off-chain transactions to cryptocurrency-related crimes.
• Rep. Donalds asked Mr. Redbord to discuss the statutes and law enforcement tools that currently exist to help combat digital asset-related illicit finance. He also asked Mr. Redbord to address how the U.S. can more efficiently use these statutes and law enforcement tools.
  • Mr. Redbord remarked that law enforcement agencies are using money laundering statutes, conspiracy laws, and other laws to build their investigations into digital asset-related crimes. He stated that the U.S. Department of the Treasury is effectively pursuing bad actors within the digital assets space. He highlighted how the U.S. Department of the Treasury has issued sanctions against non-compliant digital asset exchanges in Russia and Gaza. He also mentioned how the U.S. Department of the Treasury has targeted darknet markets (such as Hydra) and mixers (such as Sinbad and Tornado Cash). He further discussed how the U.S. Department of the Treasury has taken enforcement actions through FinCEN and OFAC to send a message to the broader digital assets ecosystem regarding the importance of compliance. He applauded the U.S. Department of the Treasury’s approach of targeting bad actors rather than technologies.
• Rep. Donalds then asked Ms. Hill to indicate whether additional government mandated disclosures are necessary for companies within the digital assets space given how on-chain data is already available to everyone.
  • Ms. Hill remarked that the U.S. should enforce its current regulations and noted how the BSA contains many reporting requirements. She also stated that on-chain data serves as a “critical tool” that enables the public and private sectors to track digital asset activity simultaneously. She remarked that this simultaneous tracking capability does not exist within the traditional finance space due to information asymmetries between banks and governments. She noted how governments must rely upon banks to report activities within the traditional finance space, which results in delayed oversight. She stated that on-chain data by contrast can be communicated to both the public and private sectors in real time and that governments and businesses can coordinate their efforts to combat illicit activities based on this information.
• Rep. Donalds then asked Mr. Mosier to identify any additional regulations that may be necessary for combating crimes involving digital assets.
  • Mr. Mosier remarked that the U.S. should leverage its existing authorities to address illicit activities involving digital assets. He stated that the U.S.’s existing authorities are sufficient and that the problem is that federal agencies are not sufficiently resourced to fully exercise the authorities. He remarked that the U.S. must first resource its existing authorities before creating new authorities.
• Rep. Donalds stated that his concern regarding digital assets is not that digital assets will be used to facilitate illicit activities. He commented that the potential for illicit activities exists in every part of the financial system. He then raised concerns that the U.S. may overregulate digital assets technology and stifle the industry in its infancy.

Rep. Bill Foster (D-IL):

• Rep. Foster noted how Mr. Mosier had repeatedly told the Subcommittee that U.S. regulators tend to be under-resourced. He asked Mr. Mosier to indicate the typical salary multiplier for when an employee leaves the federal enforcement workforce and moves to working in the private sector.
  • Mr. Mosier noted how he knew of instances where federal employees have experienced an eightfold increase in their salary when they leave the public sector to work at law firms.
  • Ms. Hill stated that public servants are not motivated to serve based on money.
• Rep. Foster interjected to comment that while he appreciates the work of public servants, he stated that public servants often face financial pressures that force them to pursue careers in the private sector. He mentioned how he has advocated for higher salaries for federal government employees throughout his time in Congress. He then discussed how the cost of AML and KYC compliance often discourages this compliance. He mentioned how the cost for banks to onboard a new customer had reached $400 during the COVID-19 pandemic. He asked the witnesses to provide recommendations for streamlining the customer onboarding process for banks.
  • Ms. House noted how most of the AML requirements for cryptocurrency and financial technology (FinTech) companies serving as MSBs are risk-based. She stated that these companies do not face the same onerous and rules-based AML requirements as banks if they perform a risk assessment. She commented however that these requirements can still be costly for the companies. She then recommended that the U.S. invest in secure and interoperable digital identity infrastructure. She remarked that this infrastructure can help to prevent the fraud that is impacting cryptocurrency and FinTech businesses. She stated that investments in providing digital verifiable credentials could combat this fraud and improve the upfront KYC processes for banks.
• Rep. Foster asked Mr. Rabenn to indicate whether better digital identity infrastructure would improve Coinbase’s KYC and AML operations.
  • Mr. Rabenn answered affirmatively. He called it very costly for firms to operate robust compliance programs. He stated however that Ms. House’s recommended regulations would impose bulk data collection requirements on cryptocurrency firms (including Coinbase). He remarked that these proposed bulk data collection requirements would drain Coinbase’s effective compliance resources and force Coinbase to focus on ineffective measures. He stated that these proposed requirements are based on inappropriate risk assessments, such as claims that unhosted digital wallets pose money laundering risks. He remarked that cryptocurrency firms will ultimately bear the compliance burdens associated with these proposed bulk data collection requirements. He asserted that compliance with these requirements will reduce Coinbase’s ability to file SARs.
• Rep. Foster interjected to comment that Ms. House’s response had focused on digital identity infrastructure. He raised concerns over the potential for deep fakes to undermine identity protections and commented that secure digital identifications (IDs) can address these threats. He then asked the witnesses to identify where the problem point is within the digital assets ecosystem that allows for ransomware perpetrators to obtain their stolen cryptocurrencies.
  • Mr. Redbord remarked that the cybersecurity layer is the main weak point within the digital assets ecosystem. He asserted that the U.S. must stop hacks from occurring in the first place.
• Rep. Foster interjected to comment that ransomware will never be completely eliminated. He posited a scenario where a party makes a ransomware payment to recover access to their computer system. He asked the witnesses to explain how bad actors can obtain their stolen cryptocurrencies and use them to purchase goods and services.
  • Mr. Redbord stated that law enforcement agencies typically become involved in tracking ransomware payments after the payments have been made.
• Rep. Foster interjected to remark that the digital assets ecosystem currently has problems given how North Korean hackers can use stolen cryptocurrencies to fund their missiles program. He asked the witnesses to identify where the digital assets ecosystem is resulting in failures that allow for bad actors to obtain their stolen cryptocurrencies. He acknowledged that his question period time had expired and requested that the witnesses respond to his question in writing for the hearing’s record.
  • Mr. Redbord remarked that the U.S. must work to prevent bad actors from using offramps to convert their cryptocurrencies into fiat currencies. He stated that compliance and the implementation of FATF standards for offramps is important for addressing illicit finance. He stated that the U.S. can currently track stolen cryptocurrencies “relatively successfully” on blockchains.