The United States House of Representatives’ Committee on Financial Services’ Subcommittee on Terrorism and Illicit Finance recently held a hearing on the Illicit Use of Virtual Currency and the Law Enforcement Response. The only three people to testify at the hearing before the Subcommittee on Terrorism and Illicit Finances were all law enforcement agents who worked for the federal government.
During the hearing Representative Robert Pittenger of North Carolina called the illicit use of cryptocurrencies one of the greatest emerging threats to the national security of the United States.
The first person to testify at the hearing was the Deputy Assistant Director of the Secret Service’s Office of Investigations, Robert Novy. During his testimony he asked Congress to regulate anonymous cryptocurrencies like Monero and ZCash. Novy also called on Congress to regulate cryptocurrency mixing (also known as tumbler) services and even cryptocurrency mining pools. The Deputy Assistant Director also praised Congress for passing the CLOUD Act, legislation which many civil liberties groups have called an unconstitutional violation of 4th amendment rights.
“We should also consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies, services intended to obscure transactions on blockchains (i.e. cryptocurrency tumblers or mixers) and cryptocurrency mining pools,” Robert Novy, said in his testimony to the subcommittee. Novy also called for Congress to authorize the hiring and training of new investigators focused on transnational cybercrime involving digital currencies.
Robert Novy’s testimony was echoed by another federal law enforcement official who testified before the subcommittee. Greg Nevano, the Deputy Assistant Director of Illicit Trade, Travel, and Finance division of the Immigrations and Customs Enforcement (ICE) and the Department of Homeland Security’s (DHS) Homeland Security Investigations, testified before the subcommittee that newer cryptocurrencies were very complicated to track. “These new anonymity-enhanced cryptocurrencies are clearly ripe for illicit use in an effort to subvert legitimate law enforcement inquiries. Although it is more difficult to trace the movement of illicit proceeds using these newer anonymity-enhanced cryptocurrencies, it is not impossible,” Nevano told the Subcommittee on Terrorism and Illicit Finance.
Nevano went on to ask Congress to pass legislation allowing law enforcement to force companies and organizations that use cryptocurrencies into handing over customer data. It is likely Nevano may have been referring to cryptocurrency companies such as Coinbase, which was partially successful in preventing the government from getting access to Coinbase customer data. Nevano testified that DHS and ICE were most concerned about unregistered peer-to-peer exchanges, such as people who post cryptocurrency listings on Craigslist, or on decentralized exchanges. He also mentioned one peer-to-peer exchange service which he said illegally charged an extra fee to allow customers to be anonymous. Nevano also testified that as of April of this year, his agency had seized approximately 25 million dollars worth of cryptocurrencies during various enforcement actions. He also praised blockchain analysis services for enabling law enforcement to deanonymize cryptocurrency users.
The last federal law enforcement agent to testify during the hearing before the Subcommittee on Terrorism and Illicit Finance was Thomas P. Ott, the Associate Director of the Enforcement Division of the Financial Crimes Enforcement Network (FinCEN). Ott testified that FinCEN believes that there have been billions of dollars worth of transactions on what they call suspicious activity.
Ott went on to testify that some of the billions of dollars in suspicious activity that FinCEN has observed includes approximately a billion dollars worth of ransomware payments made using cryptocurrencies, and $1.5 billion worth of cryptocurrencies stolen from exchanges during hacks. During his testimony Ott praised jurisdictions such as Australia, Japan, and South Korea for their efforts to further regulate money laundering activity with regard to cryptocurrencies. Some of the illicit financing risks Ott highlighted during his testimony were money laundering and the evasion of sanctions.