A panel of leaders in the digital asset industry discussed helpful legal frameworks to prevent illegal crypto financing while supporting market activity.
House lawmakers held a hearing examining the risks within the flourishing cryptocurrency market and its potential to fund terrorism activities or evade U.S. legal sanctions, specifically understanding how the private sector can work in tandem with the federal government to protect the U.S.’s national security.
Witnesses working within the cryptocurrency industry testified before the House Committee on Homeland Security, discussing collaboration opportunities that can distinguish money laundering through cryptocurrency and legitimate transactions.
Each testimony broadly reiterated cryptocurrency firms’ willingness to partner with federal law enforcement to curb abuses of digital currency transactions. John Kothanek, the vice president of global intelligence at crypto trading platform Coinbase, said that his team wants to remove illegal transactions from the crypto industry.
“We have built a collaborative partnership with law enforcement agencies in concert with our strict privacy commitments to our customers to pursue bad actors in the crypto space,” he testified.
Chief among concerns discussed in the hearing was the recent trend of ransomware hackers demanding payments in cryptocurrencies, a strategy that usually helps anonymize the recipient of the ransom. Rep. Elissa Slotkin, D-Mich., asked the witnesses how the cryptocurrency private sector plans to increase transparency in digital currency transactions.
Kothanek said that blockchain technology, the bedrock to most cryptocurrency transactions, is inherently designed to register users accessing certain data.
“If you are a cyber criminal and you're using crypto, you're going to have a bad day,” he said. “We are going to track you down and we're going to find your finance and we're going to hopefully help you, the government, seize that crypto.”
Concerns over cryptocurrency being used to circumvent the law and federal sanctions on foreign countries and groups mounted when Russia invaded Ukraine in February, prompting the U.S. to impose economic sanctions on various state actors.
Lawmakers warned that oligarchs can store their wealth in independent digital currencies to avoid the financial repercussions of sanctions.
Witness Jonathan Levin, the co-founder of Chainalysis, a software company dedicated to educating firms on the digital currency marketplace, pushed back on the narrative that foreign governments orchestrate crypto-backed sanction evasion activity; rather, smaller groups are the typical culprits.
“We have not seen a large amount of cryptocurrency mining being able to be done at a nation state level, due to the fact that private industry is actually large, and these operations are fairly sophisticated,” Levin said. “When we've seen cryptocurrency used in countries, like the ones that we're concerned about, oftentimes, these are smaller actors. There are organized crime groups that we are concerned about that we track very closely, but we don't see sort of the systemic use of cryptocurrency by the nation state level.”
He conceded that North Korea may be a government spearheading state hacking operations to support government operations and targeting digital currency exchanges, but that the U.S. government has a strong handle on seizing these operations.
Levin also clarified the difference between traceability and seizability of funds sent using blockchain as cryptocurrency is a caveat of the technology’s design.
“Just being able to see the money does not mean that we can actually go and take the money from the person who's in control of that money,” he said. Analyses that track what ransomware and cyberattack proceeds are being used can help prevent attacks.
“What we want to be doing is making sure that our government agencies have the resources to be able to go after the enablers in this ecosystem that actually are at the root cause of these problems,” Levin testified. You know, once it gets into cryptocurrency, it's important that the government actually shares information with the private sector. There needs to be much greater partnership between private and public sectors in order to be able to combat these threats in real time.”
Despite the tenuous nature of cryptocurrencies’ usage, the popularity of digital assets has birthed legitimate transactions. The emerging market’s continued popularity has made the federal government keen to issue regulations to prevent illicit financial activity, while simultaneously studying how embracing digital monies can benefit the holistic U.S. economy.
Kristin Smith, executive director at a crypto advocacy group, the Blockchain Association, testified that the private sector isn’t necessarily opposed to more regulations.
“We don't want illicit actors to be using these networks either. And I think the goals there are mutual, that we want to find the policies in order to do that,” she said.
Smith recommended putting more resources into training efforts to help federal and local law enforcement take action against bad actors. She also cited statistics that say people who are engaging in legal forms of cryptocurrency trading are vastly outpacing criminal activity, both of which rose at 567% and 79% in 2021, respectively.
Smith also noted developing a framework for crypto exchange regulations should be on Congress’s radar to keep crypto transactions legal and transparent.
Responding to Rep. Josh Gottheimer, D-N.J., one of the more pro-crypto lawmakers, Levin highlighted the need for more technologists working in the federal sphere.
“The innovation behind cryptocurrencies mean that these governments need to have dedicated people that actually understand cryptocurrencies,” he said.
Editor's Note: This story was updated to more accurately reflect North Korea's use of cryptocurrency mining.