Chamber Summary: Understanding the Role of Digital Assets in Illicit Finance

March 17, 2022

U.S. Senate Hearing Summary
Committee on Banking, Housing, and Urban Affairs
“Understanding the Role of Digital Assets in Illicit Finance”
March 17, 2022

 

Member Statements

Witness List & Links to Written Testimony

  • Mr. Jonathan Levin, Co-Founder And Chief Strategy Officer, Chainalysis, Inc.
  • Mr. Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network (FinCEN)
  • Mr. Michael Chobanian, Founder Of KUNA Exchange, President of Blockchain Association of Ukraine
  • Mr. Shane Stansbury, Robinson Everett Distinguished Fellow In The Center For Law, Ethics, And National Security Senior Lecturing Fellow, Duke University School of Law

 

Summary

The Senate Banking Committee held a hybrid hearing today discussing the potential role of digital assets in illicit activity, specifically sanction evasion.

Chairman Sherrod Brown (D-OH) opened the hearing by noting the committee’s continued examination of digital assets and their impact on the domestic financial system. He explained that while the dollar has a sufficient regulatory structure to safeguard consumers while also protecting against criminal or illicit activity, the digital asset industry doesn’t “play by the same rules”. Sen. Brown outlined concerns that Russians were utilizing digital assets to circumvent international sanctions because crypto exchanges do not adequately collect consumer information to allow for sufficient sanction enforcement. He went on to outline strategies, including chain hopping, that are potentially employed by cyber criminals to evade detection on the public blockchain ledger, which serves as the backbone of digital asset technology. Given the complexity of the digital asset ecosystem, Sen. Brown concluded by applauding President Biden’s recent Executive Order to coordinate law enforcement and regulatory strategy to stave off illicit uses of digital assets. 

Ranking Member Pat Toomey’s (R-PA) remarks opened with calls for secondary sanctions to “force the international community to choose between doing work with the US or with Russia.” He outlined a need for regulatory clarity in the digital asset space to ensure that the industry is able to successfully provide consumer protection while being competitive on the global scale. Despite an acknowledgement that there is room for improvement in oversight of the industry, Sen. Toomey detailed that there is no compelling evidence of digital assets being used to effectively evade sanctions at scale. He did, however, explain that in instances of illicit uses of cryptocurrencies, the distributed ledger technology can serve as a benefit to law enforcement, often enabling the recovery of funds.

Overall, the hearing focused heavily on the potential for Russian Oligarchs to use digital assets to evade sanctions, the use of crypto for humanitarian and military donations, and the need for a more definitive digital asset regulatory structure.

 

Key Take-Aways

Crypto concerns: Russia & Ukraine

 

Sanctions evasion

Members of the Committee discussed the impact of cryptocurrencies on both humanitarian efforts and sanction evasion. Sens. Brown, Robert Menendez (D-NJ), Jon Tester (D-MT), Catherine Cortez Masto (D-NV), Tina Smith (D-MN), Elizabeth Warren (D-MA), Mark Warner (D-VA), and Jack Reed (D-RI) expressed concern that the Russian government and/or Russian oligarchs would utilize cryptocurrencies to evade domestic and international sanctions. 

These concerns were so prominent that Sen. Warren, along with Sens. Reed, Warner, Chris Van Hollen (D-MD), Raphael Warnock (D-GA), Smith, Cortez Masto, and Tester and Tammy Duckworth (D-IL), introduced the Digital Asset Sanctions Compliance Enhancement Act to ensure Russian Oligarchs are unable to utilize digital assets to evade sanctions. 

In a series of questions, Mr. Levin pushed back against Sen. Warren’s assertions that oligarchs could “chain hop” or use mixers to evade sanctions at scale. Not to be convinced, and clearly having brought strong opinions to the hearing, Sen. Warren announced the introduction of her bill. 

Overall, while witnesses agreed that there is little to no evidence of sanction evasion, Mr. Stansbury acknowledged the possibility that sanction evasion could occur. Mr. Chobanian, however, was quick to make two points: first, neither the Russian government nor its oligarchs would ever be able to transfer large amounts of crypto into fiat funds without being detected on the public blockchain and second, due to sanctions, average Russians are, and must continue to be, only able to use cryptocurrencies to provide for basic necessities of life.

 

Humanitarian Assistance

Senators on both sides of the aisle, including Sens. Toomey, Bill Hagerty (R-TN), Cynthia Lummis (R-WY), and Kristyn Sinema (D-AZ), and Warner celebrated Ukraine’s use of digital assets to quickly accept humanitarian aid and utilize those funds to purchase much needed military equipment. Mr. Chobanian detailed that digital assets have allowed the nation to access funds with much needed speed and 24/7 accessibility that the traditional banking system is not able to provide.

 

Illicit Activity & Digital Assets

Beyond concerns with sanction evasion, Senators questioned witnesses on the risk of digital assets being used in various illicit activities. Sens. Brown, Tester, Warren, Warner, and Van Hollen highlighted that crypto is often the tool preferred method of payment in ransomware attacks. Mr. Levin repeatedly underscored that the transparency of the blockchain allowed for greater fund retrieval following ransomware attacks, unlike difficult-to-trace cash. 

In response to Sen. Tester, however, Mr. Levin acknowledged that locating and seizing funds are not necessarily the same thing, which is why only roughly 85 percent of funds were retrieved following the ransomware attack of the Colonial Pipeline. Sen. Lummis amplified Mr. Levin’s argument when she highlighted that, accounting to Chainalysis, only 0.15 percent of all digital transactions were related to illicit uses, while international financing organizations anticipate that roughly 2-5 percent of cash transactions fall under the same category. 

In addition, Sen. Lummis asked Mr. Mosier, a former acting head of FinCEN, whether FinCEN would rather work a case involving crypto assets or cash – Mr. Mosier explained that cases involving digital assets were easier to resolve. Sen. Warner openly disagreed with Chainalysis’ understanding of the prevalence of ransomware attacks utilizing digital assets, calling for increased cyber incident reporting for enhanced clarity on the issue.

 

Regulatory framework needed

Overall, all members and witnesses were supportive of establishing a domestic regulatory framework for digital assets. Sens. Toomey, Hagerty, Smith, Menendez, Van Hollen, and Sinema all outlined their general support for establishing clear guidelines for cryptocurrencies that implement needed Know-Your-Customer and Anti-money Laundering practices and provide a reasonable level of consumer protection. Sens. Menedenez and Van Hollen underscored that the lack of these guidelines currently has led to a greater likelihood of fraud and illicit activity in the industry overall. Panelists agreed, noting that greater regulatory clarity would be a vital aspect of ensuring domestic leadership in the digital asset ecosystem.

 

Quotables 

Sen. Sherrod Brown: “We hear all the time about how innovative cryptocurrency is, but criminal’s innovate too. Crypto allows money launderers and terrorists to do things they’ve never could have done with dollars.”

Sen. Jon Tester: I can tell you the reason, at least from my perspective, why cash is different from cryptocurrency, is it takes a whole lot of suitcases to transfer the amount of cash you’re talking about, which I believe is a simple press of a button in crypto.”

Sen. Jack Reed (referring to crypto users): “I think one of the principles… is you can divide the world of good actors and bad actors… and we are focused on the bad actors.”

Mr. Jonathan Levin: “The reason why the criminals actually use it is they are economic actors. And so they are looking for methods that maximize profitability first, not necessarily anonymity.”

Mr. Michael Chobanian: “I see that you’re still discussing whether to ban or allow crypto in the U.S. so U.S. companies can come to Ukraine and open up there to use Ukraine as a sandbox for U.S. policy problems here.”