Summary

On February 15, 2024, the House Committee on Financial Services Subcommittee on Digital Assets held the second part of its Crypto Crime in Context hearings. Witnesses for the hearing included: 

• Caroline Hill, Senior Director of Global Policy and Regulatory Strategy at Circle

• Michael Mosier, Co-Founder and Partner, Arktouros

• Grant Rabenn, Director, Financial Crimes Legal, Coinbase 

• Carole Noelle House, Senior Fellow, Atlantic Council; Executive in Residence, Terranet Ventures

• Ari Redbord, Global Head of Policy and Government Affairs, TRM Labs (one of our very own National Security Task Force leaders)

These hearings are in response to the October 7th attacks on Israel by Hamas, which raised concerns over cryptocurrency’s role in illicit finance. This hearing focused on the current landscape of illicit finance in the digital asset industry, gaps in compliance, blockchain analytic tools, as well as current legislative proposals and risk assessments that may have significant effects on our industry. 

Overall Takeaway: The hearing underscored the complexity of regulating digital assets and the importance of balancing innovation with robust compliance measures. The need for continuous collaboration between the industry and regulatory bodies was emphasized to ensure a secure digital asset environment. We anticipate that increased focus on sanctions enforcement across the industry is extremely likely. The Chamber of Digital Commerce will continue to be a lynchpin to facilitate cooperation and actively foster sensible laws that enable blockchain technology to thrive in the U.S. 

Summary

In his opening statement, Subcommittee Chairman French Hill (R-AR) emphasized the critical need for a balanced regulatory approach to digital currencies, highlighting the challenges posed by the decentralized nature of the blockchain. He advocated for a combined strategy of domestic and international regulatory cooperation to address potential gaps being exploited by bad actors. This perspective aligns closely with the Chamber of Digital Commerce advocacy for proactive and collaborative regulatory measures. Alongside Ranking Member Stephen Lynch’s (D-MA) observations about the rising use of digital assets in ransomware attacks and other illicit activities, their insights reinforce the Chamber’s stance on the importance of evolving regulation and technological capabilities in the crypto sector.

Witnesses gave very strong opening statements, particularly Michael Mosier urging government to “resource existing treasury authorities before adding more unfunded mandates. Throwing more shovels at people who already have 15 in each hand is not making them more effective, it’s setting them up for failure.” This underscored the importance of government resource allocation, cautioning against the ineffectiveness of overburdening agencies with unfunded mandates. Carole House offered four areas for proposed action to reduce illicit activity that may be indicative of where future legislative and regulatory action will evolve:  

(1) Enhance regulatory and enforcement capability to take sustained, timely actions against the most egregious violators in the space through prioritized agency funding and honing of disruption authorities (e.g., FinCEN’s 311 and 9714),

(2) Promote timely international action on FATF standard adoption through diplomacy and capacity building across priority jurisdictions,

(3) Enhance outcome-oriented public-private partnerships for info sharing and R&D (examples like NCIJTF’s IVAN program, NCFTA, the FBI’s Financial Fraud Kill Chain, FinCEN’s Rapid Response Program, Crypto-ISAC, IST Ransomware Task Force, etc.) and,

(4) Promote development of secure, trustworthy, and interoperable digital identity infrastructure.

Reps. Ritchie Torres (D-NY) and Wiley Nickel (D-NC) expressed support for blockchain technology, and cited the nature of distributed ledger technology as a major benefit for combating illicit finance. Chair Hill also stated that most illicit activity using digital assets occurs offshore where U.S. regulations do not apply. Witnesses came to consensus on these ideas and reinforced the miniscule amount of illicit activity happening through digital assets in comparison to traditional finance.

Full Committee Ranking Member Maxine Water (D-CA), Subcommittee Ranking Member Lynch and Representative Sean Casten (D-IL) spoke on their primary concerns with the decentralized nature of DeFi allowing for illicit activity and the prevalence of off-chain illicit activity. Takeaway: As off-chain transactions are used more widely to improve blockchain scalability this issue of regulating off-chain transactions could become more prevelant. 
Rep. Brad Sherman (D-CA) continued his previous rhetoric against the industry, by stating that the sole purpose of CVC Mixers is for illicit activity. Takeaway: Rep. Sherman intentionally neglects to see the privacy benefits of mixing technology. See the Chamber’s response to FinCEN’s notice of proposed rulemaking on CVC mixing.