Cryptocurrency fraud, cybercrime, fraud management and cybercrime
Also: Elizabeth Warren and colleagues introduce sanctions evasion bill
Dan Gunderman (dangun127) •
March 17, 2022
On Thursday, US lawmakers again discussed illicit finance as it relates to cryptocurrencies – in light of recent warnings that the Russian government may increasingly rely on digital currencies to stabilize its sanctioned economy.
During a Senate Banking, Housing, and Urban Affairs Committee hearing titled “Understanding the Role of Digital Assets in Illicit Finance,” several cryptocurrency experts, including a person on the frontlines of the Russian-Ukrainian conflict , informed the commission of what they called an immense benefit of crypto adoption. Experts also discussed some of the more macro risks in crypto, including sanctioned entities obfuscating funds and ransomware gangs extorting global organizations for Bitcoin.
Witnesses included Jonathan Levin, co-founder and chief strategy officer of blockchain analytics firm Chainalysis; Michael Mosier, former acting director, deputy director/head of digital innovation for the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN; Michael Chobanian, founder of Ukraine-based KUNA Exchange and president of the Blockchain Association of Ukraine; and Shane Stansbury, Robinson Everett Fellow Emeritus at the Center for Law, Ethics, and National Security, and Senior Lecturer at Duke University School of Law.
Endangering national security?
In his opening remarks, committee chair Sherrod Brown, D-Ohio, noted that “cryptography can be used…to commit crimes, facilitate illicit financing, terrorism, and other forms of criminal activity. , and threaten our national security”.
He said that “bad actors around the world – hackers, scammers, drug dealers, terrorist groups and [authoritarian] regimes – sought digital assets to facilitate their crimes and intimidation. »
Brown acknowledged that the U.S. dollar has safeguards to protect against such activity, requiring companies to know their customers, report suspicious transactions and keep records. Conversely, when crypto companies are also “covered by law”, he said, “too many of them don’t follow the same rules, especially offshore crypto operators which are not subject to U.S. law.
Brown said that “shady crypto companies” that don’t adequately monitor their platforms “give criminals the green light” and “make it easier for money launderers to use transaction networks around the world to cover their tracks. In turn, the president continued, this makes it “more difficult for law enforcement to track down illicit funds.”
“We can’t sit on the sidelines,” Brown said. “We need to take a sober look at how these assets can put consumers and our safety at risk. … We need to take a whole-of-government approach.”
Ranking committee member Pat Toomey, R-Pa., took a different approach in his remarks — praising the visibility and transparency of the blockchain that underpins cryptos and saying the assets can fuel financial innovation American.
“The technology has huge potential benefits, some of which are already realized,” Toomey said. “The White House itself recently said that the United States must maintain its leadership in space, which is why lawmakers and regulators should do nothing to harm America’s long tradition of promoting innovation. technology.”
The senator then referred to the disturbing case of Moscow’s potential evasion of sanctions following Russia’s invasion of Ukraine and economic sanctions from the West.
“Now there is no completely airtight sanctions regime, so it is possible that there is an oligarch somewhere who is using a variety of tools, including cryptography, to try to hide certain assets,” Toomey said. “But according to administration officials from multiple agencies, there is simply no evidence that Russia is using cryptocurrencies to evade sanctions in any meaningful way.”
On the other hand, Toomey added, Ukraine has been actively using cryptocurrencies to “do tremendous good,” with donations to its military “helping Ukrainians defend their country.” The crypto assets, Toomey continued, funded some 5,500 body armor, 500 helmets, and more than 410,000 meals.
In his testimony, Chainalysis’ Levin said his company’s software helped take down “the largest darknet marketplaces, prevented the use of cryptocurrency for terrorist financing, prevented scams, and investigated campaigns. ransomware”.
Levin again argued that the software enables anti-money laundering compliance for the digital asset industry under the obligations of the Bank Secrecy Act, a decades-old law requiring financial institutions in the United States to help government agencies to detect and prevent money laundering.
Levin added: “The transparency of the blockchain and the permanence of the records contained therein allow us to eradicate illicit activities. Law enforcement leverages the permanence of these records and their openness to take proactive steps to investigate crimes.
The Chainalysis executive called for the construction of “new rails”, saying it “encourages transparency” and “protects – and enhances – our national security and public safety”.
“Work to do for Web3”
Also taking the pro-crypto line, Mosier, the former head of FinCEN, told lawmakers that “over-attribution of cybercrime to cryptocurrency misses critical causes and preventative measures that can be taken.” .
“There is definitely still work to be done for Web3 [an iteration of the internet incorporating blockchain technology] be safely accessible. But the early days of the internet also had a lot of cheats and exploits. Instead of closing [it] downwards, we have worked tirelessly to find balance while prioritizing risks and pathways to consensus and clarity,” he said.
Mosier advised lawmakers to “focus on regulatory arbitrage” — the practice of seeking cost savings or pursuing other opportunities through different jurisdictions — before “venturing into new rules.” Mosier said “diligent American trading” should be assisted before strict regulations are imposed.
Comment from Ukraine
Briefing the committee from an undisclosed location in Ukraine, KUNA Exchange’s Chobanian provided an anecdote to highlight the benefits of crypto.
Fleeing eastern Ukraine with his family on February 24, Chobanian said he “decided to create a fund in order to help my people, my army”.
Just hours after the fund was established, Chobanian said, he was contacted and aided by high-ranking Ukrainian officials in an effort to centralize it.
“Now it’s run by both the Department of Digital Transformation and the Department of Defense,” he told US lawmakers. “Right now, we’ve already raised over $50 million, and we’re reaching around $100 million.”
He said the fund – managed on KUNA – is “fully compliant with applicable Ukrainian laws and regulations”. Chobanian said one of the first orders of business was to shut down all ruble trading on the platform.
He also said he remains convinced that the Russians cannot use crypto to avoid sanctions.
“It is physically impossible to transfer large sums of money from fiat to crypto,” Chobanian said. “And yet, even if they do, which is impossible, they can do nothing with it. [to off-ramp].”
He also warned the United States and allied countries not to sanction the Russians so heavily that they would “kill the opposition [coming from] within Russia”, which “would help us bring down the regime”.
New bill focused on penalties
In her Q&A, Sen. Elizabeth Warren, D-Mass, slammed Chainalysis’ Levin on the many ways bad actors can hide funds on the blockchain and effectively launder ill-gotten gains.
Warren also argued that while Russia may not be able to “evade all sanctions by moving its assets into crypto,” the assets are a viable option for Putin’s oligarchs trying to ” hide a few billion dollars”.
She then announced the introduction of related legislation – the Digital Asset Sanctions Compliance Enhancement Act.
The bill would discourage foreign crypto firms from doing business with sanctioned Russian elites, giving the Biden administration the power to suspend transactions with Russian-linked crypto addresses.
The bill would also require U.S. taxpayers engaged in offshore transactions over $10,000 to file a FinCEN 114 form.