The House Financial Services Committee hearing on “Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Activity” doubled down on the “context” aspect, featuring nuance and understanding of both the benefits and detriments of everything from mixers to self-hosted wallets and validators.
The hearing featured speakers who were well-versed in crypto, including speakers from TRM Labs, Coinbase and Circle, among others.
After multiple testimonies highlighted the benefits of being able to track onchain transactions when it came to illicit finance uses, such as the case of tracking down the ransom from the hack of Colonial Pipeline, Rep. Ritchie Torres (D-NY.) said what many in the room seemed to be thinking.
“Scapegoating crypto offers more instant gratification than promoting cyber hygiene,” said Torres.
Even so, the back and forth with lawmakers highlighted the nuances of crypto and demonstrated that illicit finance is still more likely to occur in the context of the traditional financial system.
Michael Mosier, co-founder of Arktouros, and also a former acting head of the Financial Crimes Enforcement Network, told lawmakers it didn’t make sense to subject miners and validators to oversight requirements like those in the Bank Secrecy Act.
“Miners and validators are essentially producing blocks and verifying blocks,” said Mosier. “And they’re operating like any internet service provider on the internet today. That’s not something that we would subject to know-your-customer [requirements] in the sense that it’s just data being processed. In the same way for miners and validators, it’s essentially a random process of allocation of processing data.”
The hearing honed in on key issues around who should be responsible for illicit finance when it involves crypto. While there seemed to be agreement among lawmakers that tools like mixers should be subject to more scrutiny, overall there was recognition that crypto in and of itself didn’t drive illicit finance.
Where Crypto Is Vulnerable
“It’s clear in every Treasury risk assessment and every blockchain analytics assessment that the overwhelming majority of illicit finance to the extent that it’s even in crypto is happening at centralized exchanges, where the on ramp and off ramping is happening,” said Mosier. “And almost all of that is happening offshore.”
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The lack of a coherent AML/KYC framework for crypto contributes to this.
“What’s odd to me is that one of the more promising ways to help fill the regulatory gaps and manage the risks around decentralized infrastructure lies in the development of digital ID systems, something both the US government and private sector firms are working on. But this topic was only briefly mentioned and discussed,” said Yaya Fanusie, director of policy for AML & Cyber Risk at Crypto Council for Innovation, in an email to Unchained. He was an observer of the hearing. “But digital ID development may be the one nascent innovation which pleases AML regulators and blockchain builders alike.”
The transparency and public nature of the blockchain ledger are a mitigating factor for the illicit use of crypto, according to the testimony of Carole House, senior fellow at the Atlantic Council. “SWIFT, FedWIRE and cash movements do not publish transactions to public ledgers or records for anyone to see.”
“However, cash also takes time and significant space to move from point A to point B around the world,” House said.
House stated that the design of crypto makes it more at risk for illicit use because many attractive features from the constellation of traditional financial products exist altogether in a single asset, crypto.
“Crime involving crypto does still exist, much of it exploiting aspects of crypto that make the tech attractive overall — quick, borderless, irreversible, with the ability to transfer funds without an intermediary. These are features, not bugs,” added Fanusie.
He also brought up the essential problem of addressing the illicit use of crypto, that it has many benefits to licit users, too.
“And there’s tension between those who want to address the risks in crypto with more blunt regulations disrupting the industry’s infrastructure and those who want a finer, responsible approach that enables those features to grow and benefit consumers,” Fanusie said.
