Crypto Illicit Financing Concerns Grow In Senate; California Approves Regulatory Framework Path

sanctions evasion

The chances of Congress taking up terrorist financing – whether through hearings or legislation or both – appear to be increasing.

On Friday, reporter Angus Berwick of The Wall Street Journal again chronicles an example of sanctions evasion where crypto is the middleman for “Criminal Gangs, Rich Russians and a Hamas-Linked Terror Group.” At the center of the storm is a Moscow-based exchange called Garantex which the WSJ says allows a rubles-to-crypto-to-dollar transfer. Mr. Berwick draws a connection to his previous article which used blockchain analytic firm Elliptic’s data saying, “Garantex’s growing role as a global conduit for illicit funds was underscored this month by evidence that Palestinian militants in part financed their operations through crypto in the lead-up to the Oct. 7 attacks in Israel.” Read Friday’s WSJ article on Garantex.

Back in March, Haaretz reported that Hamas was no longer using “Bitcoin Cryptocurrency” due to its trackability by government authorities. Read more.

Congress reacts

Meanwhile, Politico picked up the baton on Congressional reaction to sanctions evasion using crypto with more concerns expressed by Senator Elizabeth Warren (D, MA). The Senator tells Politico’s Jasper Goodman, “The danger of crypto-financed terrorism is real and should be an urgent priority for Congress… There’s a growing bipartisan coalition of senators who are committed to passing this bill and fighting back against terrorism worldwide by choking off the financing.” Read more. Her bill – “The Digital Asset Anti-Money Laundering Act” [S.2669] – now has 15 co-sponsors including 2 Republicans and 1 Independent.

Senator Roger Marshall (R, KS), the original co-sponsor of Sen. Warren’s bill, told Politico’s Morning Money on Friday, “The abuse of crypto by terrorist organizations should serve as a wake-up call to Congress to crack down on digital assets and money laundering that we now know is helping bankroll the horrific massacres in Israel.” Read that one.

sanctions evasion – industry

Industry spokesmen pushed back on the Senator and her bill on Friday, too.

Blockchain Association CEO Kristin Smith told Politico that in regards to Sen. Warren’s proposed bill, “… it would create an unfeasible new regime that law-abiding American companies simply can’t satisfy, forcing crypto activity into unreachable, unregulated venues and jurisdictions.”

Policy executive Alexander Grieve with venture firm Paradigm tweeted on X, “Warren-Marshall does more to set crypto AML efforts back than it does to enhance them. If no one can comply with bill (searchers filing SARs?), no choice but to exit US. Offshore=less US oversight. *It’s that simple.*” See it.

Earlier in the week, Coinbase’s Chief Legal Officer, Paul Grewal, responded to growing terrorist financing concerns in the wake of the terrorist attacks in Israel and explained in a tweet thread on X his company’s approach saying, “[Coinbase] has been laser-focused on rooting out bad actors seeking to use crypto for illicit purposes. We do all we can- KYC checks, sanctions screening, SAR reporting, strong law enforcement partnerships, you name it- so this doesn’t happen on our platform.” Read more.

CoinDesk’s Jesse Hamilton reported on Friday on an investor note by TD Cowen analyst Jaret Seiberg regarding the Hamas-crypto financing connection: “We believe this materially improves prospects for the Digital Asset Anti-Money Laundering Act of 2023.” See more.

mining concerns

The New York Times reported on Friday that Chinese Bitcoin mining operations across the United States are causing national security concerns due to their potential underlying ability for “intelligence collection operations.” The NYT says, “Some of the U.S. mining operations appear to be straightforward efforts by wealthy Chinese nationals to make money outside the purview of Chinese authorities. For others the ownership is opaque, while several can be traced to the Chinese government.” The article notes the potential conflict the businesses represent in a state like Texas where Sen. Ted Cruz (R, TX) and his fellow conservative constituents have embraced crypto and mining facilities but are no friend to Chinese interests. Read more.

states – California framework

On Friday, California took another step to try and catch up to the bar set by New York State to create clarity for crypto companies operating in the Sunshine state. Governor Gavin Newsom (D) signed Assembly Bill 39, “Digital Financial Assets Law” which allows for an 18-month period of rulemaking by the Department of Financial Protection and Innovation (DFPI). The DFPI will “create a robust regulatory framework including licensure and enforcement authority for certain crypto activities,” according to an official statement by the Governor.

Cointelegraph summarizes the news and notes, “…the new crypto bill will allow the DFPI to impose stringent audit requirements on crypto firms and force them to uphold recording requirements.” Read more from Cointelegraph.

It was a little over a year ago that Governor Newsom released his own Executive Order – very similar to President Biden’s – that tried to lay the groundwork for the law signed Friday.

Crypto Council for Innovation CEO Sheila Warren said on X Saturday: “California adopted AB39 – a digital asset regulatory framework similar to New York’s and Louisiana’s. We appreciate the advancement of Chairman Grayson’s and the legislature. As Governor Newsom recognized in his signing statement, more work is needed to keep California at the forefront of global finance and tech…” Read more.

The two largest “blue” states (Dem Governors, Dem Senators, voted for Biden in the last election) are now developing – at different stages – comprehensive digital assets regulatory frameworks in spite of the push back by Democratic leadership to Federal digital assets legislation in Washington, D.C.

States gotta pay the bills.

White House rumor

On Friday, Messari Crypto CEO and Founder Ryan Selkis said in a tweet on X, “Rumor is Jon Donenberg, Liz Warren’s [Chief of Staff], is heading to the White House to replace Bharat Ramamurti. Bharat was responsible for most of the admin’s deep crypto hostility. Some in DC told me to ‘wait & see’ Biden soften with Bharat gone. If Donenberg is in, that won’t happen.” Read it.

Ramamurti was a member of the Biden Administration’s National Economic Council and  left the White House in September.

Custodia Bank CEO Caitlin Long reacted to Selkis tweet on Saturday saying, “…[Galaxy CEO Mike Novogratz] – I think you said in your interview onstage at #Mainnet [in September] that Warren’s senior staff didn’t agree with her. Let’s hope Jon is among those you were alluding to, now that he’s at the White House…Read her entire thread on X.

h/t: Tony Edwards summarizes the drama on his “Thinking Crypto” podcast here.

hearings this week?

With a vote for House Speaker expected to start Tuesday, schedules in the House may be up in the air … for a while?

We reported on Friday: “House Financial Services has already planned a hearing on Iran sanctions for October 19 (Thursday). Right now, Politico reports that Senate Banking Chair Sherrod Brown (D, OH) may want to review crypto’s role in the Israel attacks in a hearing later this month.” Read or re-read.

But, the House Financial Services calendar shows no hearing yet.

And, the Senate Banking hearing calendar shows only an unrelated hearing tomorrow thus far.

United States of Bitcoin

Did you know that the U.S. government holds approximately 1% (200,000 BTC) of the world’s supply of Bitcoin? Now you do. In fact, all of the Bitcoin comes from “bad guys” as The Wall Street Journal explained yesterday that the government is a bit slow in liquidating its holdings. “When a government agency takes control of a crypto asset, Uncle Sam doesn’t immediately own that asset. Only after a court issues a final forfeiture order does the government take ownership and transfer the tokens to the U.S. Marshals Service, the primary agency tasked with liquidating seized assets,” says The WSJ. Read more.

lawsuit – Grayscale 

In an announcement that was not officially announced, the Securities and Exchange Commission (SEC) “revealed” on Friday that it would not appeal the court’s ruling in late August in the Grayscale lawsuit. At that time, the court said, “The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs (Exchange-Traded Products) but not Grayscale’s proposed bitcoin ETP. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”

On Friday, Bloomberg analyst James Seyffart, who has been tracking the lawsuit as Grayscale attempts to convert its Bitcoin Trust ETF (Exchange-Traded Fund) into a spot market ETF, set expectations, “Dialogue between Grayscale and SEC should begin next week. Hoping for more info on next steps sometime next week or week after?” Read Seyffart’s thread on X.

tl;dr: Grayscale’s Bitcoin Trust is not a Bitcoin spot market ETF, yet. Expect more delays.

Another “track” in the Bitcoin spot market ETF narrative is the applications filed by nearly a dozen companies – such as BlackRock – to start their own Bitcoin spot market ETFs pending approval by the SEC. These approvals have been rumored to be imminent.

Crypto advocates are hoping that the new spot market ETF offerings will help re-ignite the price of Bitcoin and, in turn, the industry, which has been suffering through a bear market.

lawsuit – Coinbase

Coinbase’s efforts to have the SEC lawsuit against the company dismissed took another step. On Friday, Coinbase Chief Legal Officer Paul Grewal said on X, “We’ve filed our response with the Third Circuit. Tl;dr: the SEC’s unilluminating ‘update’ is mere bureaucratic pantomime and confirms that nothing short of mandamus will prompt the agency to take its obligations seriously.” See the filing (PDF).

The agency originally filed its suit in June accusing Coinbase of operating an “unregistered national securities exchange, broker, and clearing agency.”

Grewal continued on X, “…We respectfully request an order to the SEC to act on Coinbase’s rulemaking petition within 30 days…. We appreciate the Court’s careful consideration of this matter.” Read his thread.

CFPB on digital assets

In their weekly newsletter published on Friday, the DeFi Education Fund headed by Miller Whitehouse-Levine, took a look at comments by Consumer Financial Protection Bureau chief’s Rohit Chopra last week at a Brookings Institute event which ventured into the digital asset space and the implications around payments and centralization.

The Fund commented, “In the talk, it was clear that Director Chopra was mostly concerned with bank and nonbank entities issuing stablecoins and did not express concern with DeFi. We agree that establishing regulatory oversight of custodial stablecoin issuers is in everyone’s interest. But it is only Congress that can do so, as the Administration and FSOC (of which Chopra is a member) have publicly stated repeatedly.” Read more.

still more tips

Tether has a new CEO and an overview of “Tether’s focus on P2P, energy and bitcoin mining ventures” – The Block

Taurus expands Europe footprint after Deutsche Bank link-up – Blockworks