Terrorism and Cryptocurrency: Industry Perspectives (U.S. House Committee on Homeland Security, Subcommittee on Intelligence and Counterterrorism)

Hearing	Terrorism and Cryptocurrency: Industry Perspectives
Committee	U.S. House Committee on Homeland Security, Subcommittee on Intelligence and Counterterrorism
Date	June 9, 2022

 

Hearing Takeaways:

• Use of Cryptocurrencies in Illicit Activities: The hearing primarily focused on combating the use of cryptocurrencies in illicit activities. Subcommittee Members and the hearing’s witnesses stated that cryptocurrencies were attractive to illicit actors because they could be transacted instantaneously, globally, securely, and anonymously. Mr. Kothanek explained that these illicit actors relied on non-complaint foreign exchanges to cash out their ill-gotten cryptocurrencies. Mr. Levin highlighted how Chainalysis had found that just 0.15 percent of cryptocurrency activity in 2021 involved illicit or illegal use. Ms. Smith predicted that there would be less illicit use of cryptocurrencies as criminal actors increasingly realize that cryptocurrency transactions are transparent in nature.
  • Use of Cryptocurrency in Ransomware Attacks: Several Subcommittee Members expressed interest in the popularity of cryptocurrencies as a means of making ransomware payments. Ms. Smith and Mr. Kothanek noted however that cybercriminals that made use of cryptocurrencies were vulnerable to being tracked and having their ransom payments reclaimed.
  • Use of Cryptocurrencies in Terrorism Financing: Several Subcommittee Members expressed particular interest in how terrorist groups (including Hamas, Al-Qaeda, and ISIS) were using cryptocurrencies to finance their operations. Mr. Levin remarked that terrorist organizations tended to use cryptocurrencies in two main ways: for global financing campaigns and for purchasing cyber and enabling infrastructure that supported recruitment efforts, radicalization efforts, and cyberoperations. He remarked that terrorist organizations tended to be less sophisticated in their uses of cryptocurrencies as compared to nation state actors and organized cybercrime groups. He commented that this lower level of sophistication had led law enforcement agencies to have high rates of success in terms of combatting global terrorism financing campaigns.
  • Use of Cryptocurrencies by Adversarial Countries: Several Subcommittee members also expressed concerns over how adversarial countries (such as China, Iran, North Korea, and Russia) were using cryptocurrencies. They also expressed concerns that these countries were establishing cryptocurrency mining operations to fund their activities and to bolster their position within the cryptocurrency space. Mr. Levin remarked however that nation states had proven unable to engage in robust cryptocurrency mining efforts thus far. He attributed this inability to the fact that there already existed a sizable private cryptocurrency mining industry that was very sophisticated.
  • Most Popular Types of Cryptocurrency for Use in Illicit Activity: Mr. Levin remarked that bad actors tended to seek out the most liquid cryptocurrencies when engaging in their illicit activities in order to maximize revenue and profit. He also suggested that ransomware victims might be less prone to make payments using cryptocurrencies with low market capitalizations because the victims would be less trusting of the legitimacy of such payments. He further commented that it was very easy to trace large transactions in low volume and low liquidity cryptocurrencies. Mr. Kothanek also remarked that cryptocurrencies listed on the Coinbase platform undergo a due diligence process. He testified that legitimate companies and people tended to propose the vast majority of the submitted altcoins to Coinbase. He commented that this dynamic reduced the likelihood that the altcoins would engage in fraudulent relationships with ransomware perpetrators or other illicit actors.
• Cryptocurrency Tracing: Subcommittee Members and the hearing’s witnesses highlighted how cryptocurrency transactions could be traced on public blockchains, which supports the efforts of law enforcement agencies to detect, attribute, and ultimately disrupt illicit activity. Mr. Levin and Ms. Smith contended that these features made it easier for law enforcement agencies to investigate cases involving cryptocurrencies as compared to cases involving cash.
  • Need for the U.S. to Partner with and Provide Support to Other Countries on Cryptocurrency Tracing Efforts: The hearing’s witnesses recommended that the U.S. develop strong international partnerships with foreign governments and law enforcement agencies to combat global organized crime activities. Mr. Levin and Ms. Smith suggested that the U.S. could support other countries in adopting anti-money laundering (AML) policies and know your customer (KYC) rules. 
  • Need to Provide Law Enforcement Agencies with Sufficient Resources and Training: The hearing’s witnesses also called on Congress to provide law enforcement agencies with sufficient resources and training to monitor and combat illicit activities involving cryptocurrencies. Mr. Kothanek testified that Coinbase offered cryptocurrency investigations training free of charge to thousands of law enforcement officers around the world. He also mentioned that Coinbase helps law enforcement agencies to interpret the blockchain information that it provides to them and directs these agencies to the necessary tools and resources for pursuing investigations.
  • Difference Between Cryptocurrency Traceability and Seizability: Mr. Levin remarked that there was a difference between traceability and seizability with respect to cryptocurrencies. He remarked that the ability for governments to see cryptocurrencies transactions did not translate into an ability for governments to seize cryptocurrencies. He explained that private keys controlled cryptocurrencies and indicated that the failure to obtain a user’s private key would prevent a party from moving the funds associated with that key. He noted that people could self-custody their cryptocurrencies and stated that the U.S. would need physical access or cyber access to a private key in order to move the funds associated with that key.
• Regulatory Framework for Cryptocurrencies: Subcommittee Members and the hearing’s witnesses expressed general interest in the regulatory framework for cryptocurrencies. Subcommittee Chairman Elissa Slotkin (D-MI) contended that Congress needed to proactively work with the cryptocurrency industry on developing a suitable regulatory framework. The hearing’s witnesses expressed support for these efforts and specifically suggested that Congress consider policies related to identity solution technologies and cross-border and domestic information sharing.
  • Current Regulatory Compliance of the Cryptocurrency Industry: Ms. Smith remarked that the cryptocurrency space was currently regulated and mentioned how the U.S. Financial Crimes Enforcement Network (FinCEN) had first issued guidance related to blockchain networks in 2013. Mr. Kothanek testified that Coinbase maintained “very substantial” AML, Bank Secrecy Act (BSA), and KYC programs.
  • Spot Exchange Regulation: Ms. Smith called on the U.S. to develop a framework for spot exchange regulation. She noted how no federal agency was currently authorized to oversee spot exchanges and stated that Congress should address this issue. She mentioned how the U.S. House Committee on Agriculture had proposed the Digital Commodity Exchange Act of 2022, which she called a comprehensive effort to provide spot exchange regulation.
  • Stablecoin Regulation: Rep. Josh Gottheimer (D-NJ) mentioned how he had introduced a draft of the Stablecoin Innovation and Protection Act of 2022 and noted how this legislation would establish definitions and requirements for bank and non-bank issuers of qualified stablecoins. He stated that the legislation would require qualified stablecoins to be fully backed by cash or cash equivalents. He also noted how this legislation would have the U.S. Office of the Comptroller of the Currency (OCC) establish AML and KYC rules for qualified stablecoins.
• Other Policy Topics: Subcommittee Members and the hearing’s witnesses further expressed interest in other cryptocurrency-related policy topics, including the use of cryptocurrencies in the current war between Russia and Ukraine and domestic cryptocurrency mining efforts.
  • Use of Cryptocurrency in the Current War Between Russia and Ukraine: Subcommittee Chairman Elissa Slotkin (D-MI) expressed interest in how both Russia and Ukraine were making use of cryptocurrencies to support their current war efforts. Mr. Levin and Ms. Smith discussed how cryptocurrencies enabled quick donations of funds to Ukraine, which was enabling the country to purchase defense supplies and other necessary items. Ms. Smith also stated that the reduced demand for the Russian Ruble since Russia’s invasion of Ukraine had limited Russia’s ability to acquire cryptocurrencies. She further highlighted how the ability of people to self-custody their cryptocurrencies had enabled Ukrainians to quickly flee dangerous areas without losing access to their money. Mr. Levin discussed how Ukraine’s infrastructure was experiencing increased cyberattacks and cyber threats and noted that some of these cyberattacks and cyberthreats did relate to cryptocurrencies. He stated that observers could use the transparent nature of cryptocurrencies to track Russian activity on cryptocurrency networks, which supported infrastructure defense efforts.
  • Domestic Cryptocurrency Mining: Subcommittee Ranking Member August Pfluger (R-TX), Mr. Levin, and Mr. Kothanek expressed interest in efforts to support domestic cryptocurrency mining operations. Mr. Levin stated that cryptocurrency mining helped to provide demand for renewable energy sources. He also remarked that having the U.S. engage in cryptocurrency mining would make the activity less profitable for adversarial countries.

Hearing Witnesses:

1. Ms. Kristin Smith, Executive Director, The Blockchain Association
2. Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis Inc.
3. Mr. John Kothanek, Vice President, Global Intelligence, Coinbase Inc.

Member Opening Statements:

Subcommittee Chairman Elissa Slotkin (D-MI):

• She expressed interest in learning about the trends that the cryptocurrency and blockchain industry had observed regarding terrorist and illicit use.
  • She expressed particular interest in how the industry worked to prevent these uses and how the industry partnered with the U.S. government on these efforts.
• She mentioned how she had recently introduced the Cryptocurrency Accountability Act, which would require members of Congress to disclose all of their cryptocurrency holdings and trades.
  • She commented that this legislation’s goal is to improve transparency and combat corruption.
• She then discussed the novel nature of cryptocurrencies and stated that this novel nature meant that there currently was a lack of understanding, oversight, and regulation of cryptocurrencies.
• She expressed interest in working to develop a framework for Congressional oversight of cryptocurrencies.
• She remarked that the Subcommittee was particularly focused on ensuring that bad actors did not use cryptocurrencies to harm the U.S. and its allies and noted how cryptocurrencies had become popular throughout the U.S.
  • She highlighted how the U.S. Federal Trade Commission (FTC) had found that consumers had reported losing more than $1 billion to fraud involving cryptocurrency between January 2021 and March 2022.
• She also noted how Chainalysis had found that just 0.15 percent of cryptocurrency activity in 2021 involved illicit or illegal use.
  • She commented however that this Chainalysis finding might differ from other federal government estimates.
• She stated that while this 0.15 percent figure was low on a percentage basis, she noted that this figure translated into $14 billion.
  • She indicated that there was just $7.8 billion in illicit and illegal activity involving cryptocurrencies in 2020.
• She also discussed how U.S. authorities had seized millions of dollars from cryptocurrency accounts connected to terrorist groups like Hamas, Al-Qaeda, and ISIS in 2020.
• She expressed her interest in partnering with the cryptocurrency and blockchain industry on working to combat the illicit use of cryptocurrencies.

Subcommittee Ranking Member August Pfluger (R-TX):

• He remarked that the creation of cryptocurrencies had introduced additional complications to the fights against terrorist financing and illicit activities.
  • He highlighted how cryptocurrencies could provide security and anonymity for financial transactions and commented that these features made cryptocurrencies alluring to illicit actors.
• He mentioned how Chainalysis had found that illicit addresses had received $14 billion through cryptocurrency in 2021, which constituted an all-time high.
• He expressed interest in developing a better understanding of the scope of the problems posed by cryptocurrencies and working to address these problems.
• He also remarked that the Subcommittee could not overlook the foreign nation states that were attempting to directly profit from cryptocurrencies and evade sanctions.
  • He specifically expressed interest in exploring Iran’s efforts to mine cryptocurrencies and determining whether Russia was pursuing similar activities.
• He contended that the U.S. should not hastily implement cryptocurrency regulations and stated that the U.S. must pursue the least burdensome regulations while also ensuring safety and security.
  • He asserted that the public and private sectors must work together on these policy issues.
• He lastly discussed the importance of U.S. leadership within the cryptocurrency and blockchain space and expressed concerns over the prospects of a hostile country (such as Russia, China, or Iran) taking a leadership role in this space.

Witness Opening Statements:

Ms. Kristin Smith (The Blockchain Association):

• She discussed how Bitcoin enabled any person located anywhere in the world to send and receive value just through using a computer with an internet connection.
• She noted how people had previously needed to rely on intermediaries to make payments online before the invention of Bitcoin.
  • She commented that intermediaries were slow and expensive under the best of circumstances.
  • She further commented that intermediaries exposed Americans to cyber attacks, discriminated against underserved communities, and exploited their own customers under the worst of circumstances.
• She remarked that Bitcoin solved the aforementioned problems associated with intermediaries through replacing intermediaries with a decentralized ledger that enabled anyone located anywhere to send payments.
  • She noted that Bitcoin payments were almost instantaneous and had very low transaction costs.
• She stated that the Bitcoin network differed from the legacy banking system (which was dominated by large private financial institutions) and described the Bitcoin network as public payments infrastructure.
• She remarked that blockchain technology was a broader topic than just cryptocurrencies and commented that digital money was merely the first use of blockchain networks.
• She stated that U.S. innovators, entrepreneurs, and developers were now using blockchain technology to build the next interaction of the internet, which was often referred to as Web 3.
  • She noted how Web 1 refers to the first iteration of the internet where most users could only read websites and send emails.
  • She noted how Web 2 refers to the current iteration of the internet where there exist interactive applications and services.
• She highlighted how a few large companies dominate the current version of the internet and commented that these large companies wield outsized power and influence.
• She asserted that Web 3 would address this imbalance of power through bringing property rights to the internet.
  • She explained that Web 3 would enable individuals to own their own data and content and to possess digital goods and property.
• She remarked that there were both opportunities and risks associated with blockchain networks and commended the U.S. government’s efforts to address these networks.
  • She mentioned how FinCEN had first issued guidance related to blockchain networks in 2013.
• She stated that the U.S. intelligence and law enforcement communities had proven “highly effective” in stopping bad actors from using blockchain networks.
• She expressed the commitment of her trade association, the Blockchain Association, and its member companies to protecting the integrity of the financial system, supporting U.S. national security, and advancing U.S. interests.

Mr. Jonathan Levin (Chainalysis Inc.):

• He remarked that the cryptocurrency industry provided a new means of supporting global commerce and supported global economic development.
  • He commented that economic development had always helped to guard against global terror.
• He stated that the transparency inherent in cryptocurrencies would enhance the ability of policymakers and government agencies to detect, attribute, and ultimately disrupt illicit activity.
  • He commented that it was often easier to investigate cases involving the illicit use of cryptocurrency relative to cases involving other forms of payment.
• He noted how law enforcement agencies could study an illicit actor’s cryptocurrency wallet to identify the illicit actor’s cash out destination, their full network of accomplices, and the tools underpinning their campaign.
  • He highlighted how many traditional terrorist financing investigations were different in that they were predicated on difficult to trace cash payment networks or prepaid cards.
• He indicated that the overall percentage of cryptocurrency transactions involving illicit activity was just 0.15 percent.
• He then discussed how government agencies were using cryptocurrency analyses to combat terrorist financing and noted how his written statement provided specific examples of such efforts.
• He called it crucial that the U.S. ensure that there was adequate funding, resources, and training for government agencies working to combat terrorist financing and illicit activity.
  • He stated that the U.S. must keep pace with terrorist organizations and illicit actors that were constantly innovating their techniques.
• He remarked that the illicit use of cryptocurrencies (including for terrorist financing) was a global issue and asserted that the U.S. must therefore improve the information sharing and coordination between U.S. government agencies and their international counterparts.
  • He commented that the transparency of cryptocurrencies and their public nature created “unprecedented” opportunities for such collaboration.
• He lastly stated that the U.S. should assist other countries in developing and implementing AML laws and regulations for cryptocurrency businesses.
  • He indicated that such laws and regulations would prevent bad actors from cashing out their ill-gotten gains in unregulated jurisdictions.

Mr. John Kothanek (Coinbase Inc.):

• He discussed how his company, Coinbase, provided a global platform that enabled people, businesses, and developers in over 100 countries to participate in the crypto economy.
  • He noted how Coinbase was federally registered as a money service business with FinCEN and how the company served on the U.S. Department of the Treasury’s BSA Advisory Group.
• He testified that Coinbase had developed “robust” AML and KYC programs and proprietary transaction monitoring systems for identifying illegal activity.
• He also mentioned how Coinbase analyzed publicly available blockchain data with the aid of sophisticated blockchain tools in order to trace criminal proceeds and attribute blockchain addresses to potential criminals.
• He then discussed how Coinbase maintained relationships with law enforcement agencies for pursuing bad actors within the cryptocurrency space and stated that these relationships were “in concert” with Coinbase’s privacy commitments to its customers.
  • He testified that Coinbase offered cryptocurrency investigations training free of charge to thousands of law enforcement officers around the world.
  • He also mentioned that Coinbase helps law enforcement agencies to interpret the blockchain information that it provides to them and directs these agencies to the necessary tools and resources for pursuing investigations.
  • He further noted how Coinbase participated in public sector working groups to share information that could support law enforcement investigations.
• He remarked that law enforcement agencies with better understandings of cryptocurrencies and public blockchains would be better equipped to protect the public (including Coinbase customers).
• He then discussed how criminal actors tended to rely on a small group of non-compliant foreign exchanges to cash out their illicit gains and highlighted how these foreign exchanges were not subject to U.S. regulations.
  • He stated that criminal actors avoided Coinbase because the Coinbase exchange maintained AML and KYC programs and investigative teams that will freeze accounts or inform law enforcement agencies of illicit activities.
• He remarked that law enforcement agencies (particularly local law enforcement agencies) often lacked the necessary tools and resources to pursue cryptocurrency-related crimes.
  • He stated that the U.S. must ensure that federal law enforcement agencies had sufficient resources to target non-compliant offshore exchanges and mixing services.
• He also remarked that the U.S. needed to develop strong international partnerships with foreign governments and law enforcement agencies to combat global organized crime activities.
• He further recommended that Congress provide resources to support the development of local, state, and federal information sharing capabilities to combat illegal activity.

Congressional Question Period:

Subcommittee Chairman Elissa Slotkin (D-MI):

• Chairman Slotkin discussed the increased frequency of ransomware attacks and noted how the ransomware attack perpetrators often demanded that ransom payments be made in cryptocurrencies. She highlighted how the Colonial Pipeline ransomware attack had resulted in gas shortages and lines in the eastern U.S. She noted how the U.S. Federal Bureau of Investigations (FBI) had been able to recover some of the ransom payments made in the Colonial Pipeline ransomware attack. She also mentioned how numerous schools in her Congressional District had experienced ransomware attacks. She asked the witnesses to explain why bad actors tended to demand that ransom payments be made in cryptocurrencies. She commented that cryptocurrencies were more transparent and traceable, which should make them an undesirable means of payments.
  • Mr. Levin remarked that ransomware perpetrators sought to maximize the returns from their criminal activities and noted how these ransomware perpetrators tended to be located far away from their targets. He stated that the global nature of cryptocurrencies coupled with the ability to transfer cryptocurrencies instantaneously made cryptocurrencies attractive for ransomware perpetrators. He remarked however that the transparent nature of cryptocurrencies enabled the mapping of payments and could uncover the criminal networks behind a given ransomware attack. He mentioned how his company, Chainalysis, provided law enforcement agencies with such mapping capabilities, which often helped in efforts to reclaim ransomware payments. He further stated that Chainalysis helped to identify the “full supply chain” underlying ransomware attacks.
• Chairman Slotkin emphasized that there existed a very large number of illicit actors that demanded ransom payments in cryptocurrencies. She asked the witnesses to provide recommendations for how the U.S. could combat the parties that enabled illicit actors to make use of ill-gotten cryptocurrencies.
  • Ms. Smith remarked that providing law enforcement agencies with more resources would help to combat ransomware attacks involving cryptocurrencies. She noted how ransomware existed long before the creation of Bitcoin. She expressed agreement with Mr. Levin’s comments regarding the attractiveness of cryptocurrencies for use in ransomware payments. She stated however that increased cryptocurrency payment tracking will reduce the use of cryptocurrencies in ransomware payments. She then discussed how most ransomware attacks currently involve parties seeking money. She raised concerns that future ransomware attacks might be pursued against critical infrastructure. She stated that the U.S. must ensure that it maintained robust systems with sufficient cybersecurity protections.
  • Mr. Kothanek remarked that cybercriminals that made use of cryptocurrencies were vulnerable to being tracked and having their ransom payments reclaimed. He stated that the ability to track cryptocurrencies across blockchains was “fairly substantial.” He indicated that Coinbase would turn over information from its exchange to law enforcement agencies to support the punishment of bad actors.

Subcommittee Ranking Member August Pfluger (R-TX):

• Ranking Member Pfluger asked Mr. Levin to discuss how foreign adversaries were using cryptocurrencies to evade sanctions. He expressed particular interest in exploring how Iran was mining cryptocurrencies and whether there were Chinese investments in cryptocurrency mining operations.
  • Mr. Levin noted how there were certain countries (such as North Korea) that had cyberoperations that have been targeting cryptocurrency exchanges. He also mentioned how these countries often sought to steal cryptocurrencies in order to fund their own operations. He then noted that while Iranian nation state-level actors were not heavily involved in cryptocurrency schemes, he indicated that ransomware attacks were emanating from Iran. He highlighted how the U.S. Office of Foreign Assets Control (OFAC) had sanctioned the main intermediaries that enabled these Iranian ransomware attacks. He then discussed how cryptocurrency mining involved global competition and stated that improved U.S. cryptocurrency mining operations would reduce the profitability of foreign cryptocurrency mining operations. He remarked that nation states had proven unable to engage in robust cryptocurrency mining efforts thus far. He attributed this inability to the fact that there already existed a sizable private cryptocurrency mining industry that was very sophisticated. He noted how cryptocurrency mining operations in hostile countries tended to involve smaller actors rather than the nation states themselves (with the exception of North Korea). He also mentioned that the U.S. had successfully disrupted North Korean cryptocurrency theft attempts and had successfully recovered some of the cryptocurrencies stolen by North Korean actors.
• Ranking Member Pfluger then asked Mr. Kothanek to discuss Coinbase’s KYC and AML programs for verifying their users and ensuring that their users were not engaged in illicit activity. He also asked Mr. Kothanek to address how Coinbase accounted for privacy protections in these programs.
  • Mr. Kothanek remarked that Coinbase maintained “very substantial” AML, BSA, and KYC programs. He noted how Coinbase required prospective customers to provide forms of identification (ID), address information, and information about how much money they planned to move through the Coinbase exchange. He also mentioned how Coinbase was constantly updating its algorithms and transaction monitoring system (TMS) to better identify suspicious activities. He noted how Coinbase was required to maintain a BSA and AML program as a registered money services business. He further stated that Coinbase used device IDs, Internet Protocol (IP) addresses, and other collected information to identify bad actors. He testified that Coinbase shared this information with law enforcement agencies when they identified bad actors. He lastly noted how Coinbase could use the aforementioned information to quickly take corrective actions against bad actors using their systems when other exchanges or law enforcement agencies identified such bad actors.

Rep. Jake LaTurner (R-KS):

• Rep. LaTurner asked Mr. Levin to address whether nefarious actors tended to favor certain types of cryptocurrencies and cryptocurrency exchanges. He also asked Mr. Levin to explain why nefarious actors might tend to favor certain cryptocurrencies and cryptocurrency exchanges.
  • Mr. Levin remarked that the adoption of cryptocurrencies within the terrorist financing space tended to be based on profit maximization and global fundraising interests. He stated that terrorist organizations tended to seek out the most liquid and accessible cryptocurrencies, which tended to be the most popular cryptocurrencies. He identified Bitcoin as one such cryptocurrency. He noted how there existed anonymizing technologies that were implemented in certain cryptocurrencies. He indicated that while some bad actors sought to use these cryptocurrencies with anonymizing technologies, he stated that these cryptocurrencies tended to have more limited usability relative to more popular cryptocurrencies. He remarked that the use of liquid and popular cryptocurrencies in illicit activity enabled the monitoring of this activity. He then stated that the U.S. could support certain international jurisdictions in their efforts to investigate and oversee their cryptocurrency markets. He commented that such support would enable these jurisdictions to become better partners in combating illicit activity involving cryptocurrencies.
• Rep. LaTurner stated that while most cryptocurrency transactions were being made for legal reasons, he noted that criminals and terrorists were still benefiting from the anonymity provided by cryptocurrencies. He asked Ms. Smith to address how the U.S. government could reconcile policies that would both support the growing use of cryptocurrencies and address bad actors that made use of cryptocurrencies.
  • Ms. Smith remarked that the cryptocurrency space was currently regulated and mentioned how FinCEN had first issued cryptocurrency regulations in 2013. She stated that the cryptocurrency industry did not want illicit actors to use cryptocurrency networks and commented that the cryptocurrency industry and the U.S. government had shared policy goals. She remarked that the U.S. had made “tremendous strides” in terms of adopting the correct regulatory framework for cryptocurrencies and building cryptocurrency network monitoring technologies. She called on the U.S. to continue putting resources into these efforts. She recommended that the U.S. provide continued cryptocurrency training for federal, state, and local law enforcement agencies, as well as for international counterparts. She then noted that while the percentage of illicit finance by volume in 2021 had increased by 79 percent, she highlighted how cryptocurrency transactions had increased overall by 567 percent during this period. She stated that the percentage of illicit use of cryptocurrency networks was thus increasing at a slower pace. She predicted that there would be less illicit use of cryptocurrencies as criminal actors increasingly realize that cryptocurrency networks are transparent in nature.

Rep. Josh Gottheimer (D-NJ):

• Rep. Gottheimer mentioned how he had introduced a draft of the Stablecoin Innovation and Protection Act of 2022 and noted how this legislation would establish definitions and requirements for bank and non-bank issuers of qualified stablecoins. He stated that the legislation would require qualified stablecoins to be fully backed by cash or cash equivalents. He also noted how this legislation would have the OCC establish AML and KYC rules for qualified stablecoins. He remarked that digital assets had the potential to “revolutionize” how business was conducted globally and asserted that the U.S. ought to be a leader in this space. He asked Ms. Smith to indicate whether the U.S. would experience further volatility within the cryptocurrency space if Congress were to fail to enact meaningful cryptocurrency reforms. He also asked Ms. Smith to indicate whether Congress’s failure to enact cryptocurrency legislation would pose threats to U.S. national security.
  • Ms. Smith first expressed her appreciation for the Stablecoin Innovation and Protection Act and called the legislation the most comprehensive cryptocurrency proposal in the U.S. House of Representatives. She then remarked that there existed some regulatory gaps within the cryptocurrency space. She stated that while federal agencies had been fairly successful in applying existing laws to cryptocurrencies, she asserted that cryptocurrency technology significantly differed from existing technologies (which led to regulatory gaps). She recommended that the U.S. provide some guardrails around U.S. dollar-backed stablecoins. She also called on the U.S. to develop a framework for spot exchange regulation. She noted how no federal agency was currently authorized to oversee spot exchanges and stated that Congress should address this issue. She mentioned how the U.S. House Committee on Agriculture had proposed the Digital Commodity Exchange Act of 2022, which she called a comprehensive effort to provide spot exchange regulation. She stated that having cryptocurrency exchanges register with the U.S. Commodity Futures Trading Commission (CFTC) and publicly disclose the assets backing a listed cryptocurrency would be beneficial.
• Rep. Gottheimer then expressed concerns over how bad actors were using cryptocurrencies. He mentioned how Hamas and its affiliates had reportedly received donations in Bitcoin following the group’s attacks on Israel and the West Bank. He noted how he had introduced the Hamas International Financing Prevention Act, which would impose sanctions on any foreign states that fund Hamas. He expressed concerns however that Hamas might operate in countries that lack the capacity or willingness to police illicit uses of digital currencies. He discussed how the blockchain technology underlying cryptocurrencies often held insights that could support law enforcement agencies and governments to track cryptocurrency flows. He also noted that this technology could provide indications of specific actors that have held the cryptocurrencies. He asked Mr. Levin to identify the biggest obstacles that were preventing foreign governments and financial bodies from implementing AML and KYC requirements.
  • Mr. Levin remarked that countries needed to acquire and adopt technology to investigate illicit activity. He stated that countries needed dedicated professionals that understood the novel nature of cryptocurrencies, which necessitated additional help and training from experts. He suggested that the U.S. could use the U.S. Department of State and other resources to support cryptocurrency education and training efforts in other countries. He remarked that such training and education would remove obstacles for these other countries in terms of their abilities to combat international terrorism.
• Rep. Gottheimer also asked Ms. Smith to identify the biggest obstacles that were preventing foreign governments and financial bodies from implementing AML and KYC requirements. He further asked Ms. Smith to identify the areas of the world that posed the most cryptocurrency-related concerns.
  • Ms. Smith first expressed agreement with Mr. Levin’s comments. She noted how the Financial Action Task Force (FATF) published an annual list that identified countries with subpar oversight standards for cryptocurrencies. She indicated that this list was known as the “Grey List” and commented that the countries on this list tended to have less developed economies and be located in regions with less rule of law. She stated that U.S. coordination with these countries could help to combat international terrorism. She then remarked the lack of resources, training, and will often prevented foreign governments from implementing AML and KYC requirements. She stated that international pressure could lead foreign governments to adopt AML and KYC requirements. She commented that legislative proposals, such as the Hamas International Financing Prevention Act, were important in terms of combating illicit activity involving cryptocurrencies. She noted how cryptocurrencies were global in nature and stated that the U.S. therefore needed to work with its global partners to ensure the maintenance of baseline cryptocurrency oversight standards.

Subcommittee Chairman Elissa Slotkin (D-MI):

• Chairman Slotkin noted how both Russia and Ukraine were making use of cryptocurrencies to support their current war efforts. She asked the witnesses to further address how cryptocurrencies were being used in the current war between Russia and Ukraine.
  • Ms. Smith noted how there had been concerns at the outset of the war between Russia and Ukraine that Russia would use cryptocurrencies to evade U.S. sanctions. She emphasized that U.S. sanctions applied to all currencies (including cryptocurrencies) and that U.S. persons and companies were obligated to not transact with sanctioned entities. She stated that the reduced demand for the Russian Ruble since Russia’s invasion of Ukraine had limited Russia’s ability to acquire cryptocurrencies. She also discussed how law enforcement agencies, cryptocurrency exchanges, and other entities were closely monitoring cryptocurrency flows to ensure that cryptocurrencies were not being used to evade U.S. sanctions. She noted however that large amounts of cryptocurrencies were being donated to the Ukrainian government to support the country’s defense efforts. She also mentioned how cryptocurrencies were being donated to non-governmental organizations (NGOs) that were helping Ukraine. She further highlighted how the ability of people to self-custody their cryptocurrencies had enabled Ukrainians to quickly flee dangerous areas without losing access to their money.
  • Mr. Levin noted how it had been faster to move money into Ukraine through cryptocurrencies than through other financial avenues. He stated that this quick transfer of funds into Ukraine had enabled the Ukrainian government to purchase bulletproof vests and emergency meals at the time when they needed these items the most. He asserted that the global and instantaneous nature of cryptocurrencies had played a key role in supporting Ukraine’s ability to defend itself from Russia. He also discussed how Ukraine’s infrastructure was experiencing increased cyberattacks and cyber threats and noted that some of these cyberattacks and cyberthreats did relate to cryptocurrencies. He stated that observers could use the transparent nature of cryptocurrencies to track Russian activity on cryptocurrency networks, which supported infrastructure defense efforts.

Subcommittee Ranking Member August Pfluger (R-TX):

• Ranking Member Pfluger asked Ms. Smith to discuss how cybersecurity vulnerabilities could impact critical infrastructure and to address how cryptocurrencies would interact with the aforementioned issues.
  • Ms. Smith called it very important for the U.S. to boost the cyberdefenses for its critical infrastructure providers. She stated that this would involve providing tools, education, and information to U.S. businesses so that these businesses could protect their own infrastructure. She remarked that the U.S. cryptocurrency industry maintained robust cyberdefenses. She noted how blockchains were immutable and were very secure. She also stated that the networks that operated blockchains were very secure and attributed the strengths of these networks to their decentralized natures. She noted how the Bitcoin blockchain itself had never been hacked and commented that this security was attractive to developers.
• Ranking Member Pfluger then asked Mr. Levin to discuss the current state of U.S.-based cryptocurrency mining.
  • Mr. Levin mentioned how the U.S. had data centers that engaged in cryptocurrency mining. He noted how these data centers often used renewable energy sources or excess energy being produced to power their mining operations. He called the U.S. cryptocurrency industry “vibrant” and indicated that this industry’s growth was accelerating.
• Ranking Member Pfluger noted how a significant amount of cryptocurrency mining activity was occurring within his Congressional District. He asked the witnesses to address whether the U.S. ought to encourage domestic cryptocurrency mining.
  • Mr. Levin stated that cryptocurrency mining was likely generating a large number of jobs within Ranking Member Pfluger’s Congressional District. He remarked that encouraging the domestic development of cryptocurrency network security would support U.S. leadership within the cryptocurrency space. He also commented that making cryptocurrencies more efficient and more developed would make cryptocurrencies less profitable for adversaries. He expressed support for efforts to bolster domestic cryptocurrency mining.
  • Mr. Kothanek remarked that the U.S. ought to be a leader in cryptocurrency mining.
• Note: Ranking Member Pfluger’s question period time expired here.

Rep. Jim Langevin (D-RI):

• Rep. Langevin noted how cryptocurrencies often served as the payment method of choice for bad actors. He asked the witnesses to clarify why cryptocurrency payments were not more traceable if blockchains were transparent in nature. He stated that the U.S.’s ability to recover some of the ransom payments from the Colonial Pipeline ransomware attack was an anomaly. He elaborated that the U.S. was only able to recover those payments due to its possession of certain information and indicated that his statement was based on a classified briefing from Commander Paul Nakasone of U.S. Cyber Command. He asked the witnesses to explain why the U.S. could not fully recover ransom payments made during ransomware attacks.
  • Mr. Levin remarked that there was a difference between traceability and seizability. He noted how blockchains contained records of all transactions that have ever occurred. He indicated that his company could trace cryptocurrency transactions on blockchains up until the point where the cryptocurrencies were converted into local currencies. He stated however that the ability for governments to see cryptocurrencies transactions did not translate into an ability for governments to seize cryptocurrencies. He explained that private keys controlled cryptocurrencies and indicated that the failure to obtain a user’s private key would prevent a party from moving the funds associated with that key. He noted that people could self-custody their cryptocurrencies and stated that the U.S. would need physical access or cyber access to a private key in order to move the funds associated with that key.
• Rep. Langevin then asked Mr. Levin to indicate whether there existed opportunities to improve law enforcement capabilities regarding cryptocurrency and blockchain analysis within the context of domestic and foreign terrorism. He also asked Mr. Levin to address how Congress could support cryptocurrency and blockchain analysis training efforts for law enforcement agencies.
  • Mr. Levin remarked that a given agency’s resources would largely dictate whether the agency could maintain a cryptocurrency and blockchain analysis training program. He asserted that cryptocurrency and blockchain analysis ought to be recognized as a basic capability for all law enforcement agencies.

Rep. Peter Meijer (R-MI):

• Rep. Meijer discussed the problem of illicit wire fraud involving compromised email accounts. He noted how the funds stolen through wire fraud were often converted into cryptocurrencies in order to evade detection. He asked Mr. Levin and Mr. Kothanek to identify any actions that could be taken to prevent stolen funds from being converted into cryptocurrencies.
  • Mr. Levin remarked that the takedown of enabling infrastructure was key to preventing the compromise of email accounts. He mentioned how the U.S. Department of Justice (DoJ) had just announced that it had taken down an online Social Security and fraud shop that sold credentials to parties seeking to unlawfully access email accounts. He stated that cryptocurrency analysis could help law enforcement agencies to determine how the proceeds of these schemes were being used. He commented that this analysis would enable law enforcement agencies to proactively pursue cyberattackers before they actually attacked businesses. He stated that law enforcement agencies needed resources in order to pursue these cyberattackers. He then called it important for OFAC to share the addresses of potential bad actors with the private sector so that the private sector could help to combat these bad actors in real time. He acknowledged that this effort would require global cooperation. He mentioned how FinCEN had worked to address compromised business emails at the international level and suggested that this work ought to be employed within the context of cryptocurrencies. He noted how Chainalysis could identify bad actors in real time, which enabled businesses to better respond to thefts and frauds.
  • Mr. Kothanek mentioned how Coinbase had worked with law enforcement agencies and financial institutions on the issue of compromised emails. He asserted that faster identification of email compromises would enable quicker responses. He noted how the FBI often informed Coinbase of compromised accounts, which enabled Coinbase to either freeze an account’s funds or quickly trace the account’s funds to other exchanges. He indicated that law enforcement agencies could pull back frozen funds through the seizure process. He concluded that increased communication between Coinbase, law enforcement agencies, and financial institutions would be beneficial for responding to cryptocurrency thefts.

Subcommittee Chairman Elissa Slotkin (D-MI):

• Chairman Slotkin discussed the historical relationship between social media companies and Congress. She stated that the social media companies had long called on Congress to not regulate them and had recently reversed this position. She remarked that Congress should not take a similar approach to the cryptocurrency sector and called on Congress to instead work with the cryptocurrency industry on developing a suitable regulatory framework. She asked the witnesses to provide their policy recommendations for preventing bad actors from using cryptocurrency platforms. She stated that some additional regulation would be required within the cryptocurrency space.
  • Ms. Smith first commended the work of FinCEN and OFAC to oversee the cryptocurrency space. She remarked that policymakers ought to closely monitor the illicit finance space. She commented that changes in token usage patterns might necessitate the adoption of enhanced KYC requirements for certain tokens. She then discussed how the cryptocurrency industry was developing identity solutions and explained that these solutions would enable digital wallets to carry user information with them. She noted that these identity solutions would enable users to only share relevant information (rather than all of their information) for instances where identity information was required. She stated that policymakers ought to follow the development of identity solution technology and commented that existing regulations could be modified in response to evolutions of this technology.
  • Mr. Levin remarked that the U.S. needed regulatory clarity for cryptocurrency and blockchain innovators and commented that the U.S. currently lacked such regulatory clarity. He then stated that Congress ought to provide adequate legal frameworks to govern both cross-border and domestic information sharing. He lastly remarked that the U.S. needed to incentivize both the public and private sectors to work together to detect and prevent illicit activity involving cryptocurrencies.

Rep. Peter Meijer (R-MI):

• Rep. Meijer expressed concerns that ransomware perpetrators might request ransom payments in cryptocurrencies with smaller market capitalizations in order to artificially boost demand for said cryptocurrencies. He commented that such a strategy would enable the ransomware perpetrator to profit from both ransomware attacks and cryptocurrency market manipulation. He asked the witnesses to comment on whether this concern was well-founded.
  • Mr. Levin remarked that policymakers and stakeholders would need to monitor the constantly evolving strategies of bad actors within the cryptocurrency space. He noted however that ransomware perpetrators and terrorist organizations tended to focus on profit and revenue maximization strategies and stated that these bad actors therefore sought out the most liquid cryptocurrencies. He indicated that these bad actors were currently not using cryptocurrencies with low market capitalizations as part of their illicit activities. He also suggested that ransomware victims might be less prone to make payments using cryptocurrencies with low market capitalizations because the victims would be less trusting of the legitimacy of such payments. He stated however that bad actors had used cryptocurrencies with low market capitalizations as part of market manipulation schemes and money laundering efforts. He noted that most of these cryptocurrencies with low market capitalizations tended to be very transparent and commented that it was very easy to trace large transactions in low volume and low liquidity cryptocurrencies. He further stated that the U.S. ought to provide regulators that oversaw market manipulation with the necessary technology to proactively monitor cryptocurrency flows.
  • Mr. Kothanek discussed how cryptocurrencies listed on the Coinbase platform undergo a due diligence process. He testified that legitimate companies and people tended to propose the vast majority of the submitted altcoins to Coinbase. He stated that this relationship between Coinbase and the altcoin issuers significantly reduced the likelihood that the altcoins would engage in fraudulent relationships with ransomware perpetrators or other illicit actors. He concluded that it was unlikely that illicit actors would demand cryptocurrencies with lower market capitalizations in order to engage in market manipulation.
  • Note: Rep. Meijer’s question period time expired here.

Rep. Jim Langevin (D-RI):

• Rep. Langevin provided Ms. Smith and Mr. Kothanek with an opportunity to address the extent to which stolen cryptocurrencies could be recovered. He also asked Mr. Kothanek to discuss how the U.S. could support law enforcement training around the issue of cryptocurrencies.
  • Mr. Kothanek remarked that federal, state, local, and international law enforcement agencies had proven well adept at keeping pace with cryptocurrency technology developments. He testified that Coinbase often provided comprehensive training on cryptocurrency policy issues to law enforcement agencies and stated that this training could vary based on the law enforcement agency’s current level of expertise. He called on the U.S. to provide law enforcement agencies with additional resources to support these training efforts.
  • Ms. Smith testified that law enforcement agencies had told her that they preferred responding to crimes involving cash over crimes involving Bitcoin. She stated that the news stories of crimes involving cryptocurrencies were often the result of crimes being foiled. She commented that crimes involving cash often did not result in news stories because they were less likely to be solved. She expressed support for efforts to train law enforcement agencies on cryptocurrency transaction monitoring.
• Rep. Langevin then asked Mr. Levin to indicate whether Chainalysis had observed state-sponsored organizations engaging with terrorist organizations on cryptocurrency laundering schemes or other blockchain-related illicit activities. He also asked Mr. Levin to indicate whether Chainalysis had observed different terrorist organizations adopting different tactics as they use cryptocurrencies and cryptocurrency exchanges.
  • Mr. Levin remarked that terrorist organizations tended to use cryptocurrencies in two main ways: for global financing campaigns and for purchasing cyber and enabling infrastructure that supported recruitment efforts, radicalization efforts, and cyberoperations. He stated that the level of sophistication of a given terrorist organization was the main determinant of the group’s techniques and strategies. He remarked that terrorist organizations tended to be less sophisticated in their uses of cryptocurrencies as compared to nation state actors and organized cybercrime groups. He commented that these lower levels of sophistication among terrorist organizations had led law enforcement agencies to have high rates of success in terms of combatting global terrorism financing campaigns. He also noted how law enforcement agencies were able to enumerate how much money was being raised in cryptocurrencies from global terrorism financing campaigns. He stated that these amounts tended to be “miniscule” relative to overall operating budgets of these organizations.

Subcommittee Chairman Elissa Slotkin (D-MI):

• Chairman Slotkin emphasized how there existed a difference between the traceability of cryptocurrencies and the retrievability of cryptocurrencies. She also reiterated her call for increased cooperation between the cryptocurrency industry and Congress in terms of developing a regulatory framework for cryptocurrencies. She expressed her receptiveness to receiving policy white papers and proposals from the cryptocurrency industry on this topic.