House Financial Services Holds FinTech And Illicit Financing Hearings; NDAA As Vehicle

digital assets hearing

For Republicans – with the (successful) election of Rep. Mike Johnson (R, LA) as House Speaker looming later in the day – yesterday’s House Financial Services (HFS) Digital Assets, Financial Technology and Inclusion Subcommittee hearing was perhaps both a distraction and a welcome respite from the politicking and drama of the past three weeks.

Titled, “Modernizing Financial Services Through Innovation and Competition” (agenda and witnesses), Chair French Hill (R, AR) noted the Subcommittee’s accomplishments on digital assets legislation in his opening statement and explained that the day’s hearing would explore the broader FinTech topic.

Ranking Member Steven Lynch (D, MA) opened by skewering his Republican counterparts about whether the hearing’s timing was appropriate considering the acute need for a House Speaker.

Moving to the day’s subject matter of financial technology, Lynch echoed themes heard from Democratic Party leadership in previous hearings on digital assets: “I believe technology does have the potential to lower costs and improve accessibility for those left out of the traditional financial services service sector. However, while remaining interested in, and really believing in, the potential of FinTech and and ‘Buy Now Pay Later’ products, I want to say that some of these are simply repackaged versions of traditional finance -but packaged in a way to evade laws and regulations under the claims of innovation.”

See the video. The hearing’s duration was 1 hour and 45 minutes.

more tips:

Rep. Hill Statement on Rep. Mike Johnson (R, LA) Elected To Speaker Of The House –

what you should know: Republicans wanted it to appear that it was “business as usual” in the House Financial Services Digital Assets Subcommittee hearing room. Yet, the House Speaker drama remained a heavy, gauze curtain on the proceedings and HFS Democrats didn’t let the majority forget it. With the new House Speaker finally decided today, Republicans will need to come hard out of the gates in the days to come to try and save face with the electorate by effectively legislating and moving forward impactful law. In turn, Democrats will likely have significant “asks” that they wouldn’t have had a chance to make a month ago. For example, in digital assets, a re-negotiation of the stablecoin bill could be on the table, which Chair McHenry seemed to originally declined during the bill’s July markup. That bill’s success (makes it to law) likely turns on the states rights versus Federal oversight of stablecoins. The Dem conundrum: Democratic leadership in D.C. supports the latter, even though Democratic states such as New York support states rights.

illicit financing hearing

House Financial Services’ Subcommittee on National Security, Illicit Finance, and International Financial Institutions and its Chair, Rep. Blaine Luetkemeyer, (R, MO) dug into crypto’s hottest topic lately – terrorist financing – with a hearing titled: “How America and Its Allies Can Stop Hamas, Hezbollah, and Iran from Evading Sanctions and Financing Terror.”  See agenda and witnesses.

Chair Luetkemeyer and Ranking Member Joyce Beatty (D, OH) set the stage in their opening remarks and made clear that the recent terrorist attack in Israel were repugnant and had given additional focus to the work of the subcommittee – though there was little mention of crypto, initially. Read Luetkemeyer’s opening statement.

Adam Zarazinski, CEO of blockchain analytics firm Inca Digital and a current Major in the U.S. Air Force Reserve, was the sole digital assets-related witness, and provided in his prepared testimony (see it) a useful discussion of how crypto terrorist financing works into addition historical examples.  On the WSJ article that had recently circulated on crypto financing of terrorist organization Hamas, Zarazinski claimed that crypto is only 6% of the estimated financial activity of terrorist organizations though he didn’t mean to minimize its impact. His testimony concluded in part, “The problem is not primarily on shore in the United States. The problem is the list of companies I provided above – these organizations are completely outside of our jurisdiction. These companies will exist outside of our reach and whatever solution we opt for must acknowledge this fact. Eradicating crypto is simply not possible, and likely has not been possible for at least a decade, if not more.” In brief, Zarazinski sees technology as the solution. Read more.

Washington Institute’s Matthew Levitt also appeared as a witness and said that he would defer his commments on crypto given Mr. Zarazinski’s testimony. But, he did say more comments on the history of terrorist financing using crypto were in his testimony.

what you should know: Inca Digital, Chainalysis, TRM Labs, Elliptic… blockchain analytics and “forensics” companies are having a moment and leading the industry side of the discussion for blockchain technology.

illicit financing hearing – Q&A

Given the reaction from Rep. Leutekemeyer, the most surprising observation of the day may have been an assertion by Gabriel Noronha (see testimony) of The Jewish Institute for National Security of America.

Noronha was a former staffer for Senators John McCain (R, AR) and Jim Inhofe (R, OK) and was removed by the Trump Administration from his work at the State Department after tweets critical about the January 6 Capitol riot.

At the hearing, Noronha said that terrorist cells in the United States were plotting assassinations and were being funded via cryptocurrency. He mentioned former National Security Advisor John Bolton having a “bounty” of $300,000.

HFS Ranking Member Maxine Waters (D, CA) brought her gravitas to the Subcommittee hearing with her 5-minute Q&A allotment. She wanted to discuss how cryptocurrency could be used to facilitate terrorist financing and wondered if there was a crypto connection between Iran and Hamas. Both Levitt and Zarazinski said  Iran wasn’t funding Hamas using crypto. Rather, crypto was used in fundraising campaigns.

Rep. Zach Nunn (R, IA) in his 5-minutes drove home the importance of new digital assets regulation that keeps crypto in the U.S. but will also combat terrorist financing.

Rep. Nunn: The more that we push it out of the United States, the more illicit actors will use cryptocurrency in nefarious ways. Is that correct?

Mr. Zarazinski: Yes, Sir.

Rep. Nunn: This is why we need to address it in this Committee, to bring it back home and regulate it.

what you should know: Though Ranking Member Waters dutifully spoke to Democratic leadership themes regarding crypto and terrorist financing, one wonders how supportive she truly is. The fact that Rep. Sean Casten (IL) was the featured House Member in last week’s letter by Senator Warren and 100 other Democrats – and the fact Waters signature was nowhere to be found – may be indicative of her ambivalence. And/or, a generational “changing of the guard” could be afoot within House Democratic leadership.

illicit financing hearing – 3 Dems

Members of the National Security, Illicit Finance, and International Financial Institutions Subcommittee include three Democrats who voted “for” the recent digital assets market structure bill approved in a July HFS markup: Reps. Wiley Nickel (NC), Brittany Pettersen (CO), Josh Gottheimer (NJ). (Nickel and Gottheimer also voted for the stablecoin bill during the Committee’s markup of the legislation.) Each took their turn during the hearing’s Q&A.

In her questioning, Rep. Pettersen’s primary concern was Iran’s involvement in terrorism and also the strategy of sanctions – their potential over-use – and the consequences for the United States and its economy.

Rep. Gottheimer, noting the senseless death of American and Israelis in the terror attacks in Israel, asked witness Michael Levitt his view on the proper policy positioning in the Middle East for the United States. Gottheimer emphasized the importance of crushing Hamas. He also inquired about the panel’s thoughts on the adequacy of sanctions.

Later, Rep. Nickel explored the challenge of tracing funds “in the era of digital currencies and decentralized finance,” the significance of the threat and what tools or legislation should be considered to counteract terror groups active in crypto. Inca Digital’s Zarazinski demurred on legislation specifics but was unequivocal on the needed outcome, “What we need to do is we need to bring crypto markets back onshore. It is literally a zero sum game. The more liquidity that is offshore that is outside of US jurisdiction. That that’s a bad thing.”

what you should know: Not one of the three Members who reside on the Subcommittee and had provided their support to the digital asset market structure bill in July gave any inkling that they’ve changed their minds on digital assets in spite of recent events. Gottheimer was the only one of the three that signed last week’s letter on crypto and terrorist financing from Senator Warren.

illicit financing hearing – Rep. Casten

Rep. Sean Casten (D, IL) began his Q&A by immediately invoking the letter in which he was prominently featured and sent last week by “Senator Warren, Senator Marshall and I” – as well as 101 other Congressional Democrats and one other Republican – which asked the White House and U.S. Treasury about how cryptocurrency was involved with the recent terror attacks in Israel. The unspoken theme of the letter was bringing urgency to Senator Warren’s Digital Asset AML bill.

Bringing up crypto mixers and their facilitation of money laundering, Casten emphasized, “As long as we have mixers and anonymous wallets, blockchain is just a really bad accounting system.”

Casten then seemed to announce that he’ll be introducing Senator Warren’s bill in the House, “We need to strengthen the BSA. We will be introducing a bill that Senator Warren has already introduced on the Senate side to do that over here. I’m hoping we will get some bipartisan support this time because I think this is a bipartisan issue. Our goal is not to cripple the people of Iran. It is to cripple Hamas and if they’re getting funding from any source then let’s go through and get all of that.”

Turning to his Committee colleagues on both sides of the aisle, Casten said, “I would also just put a request into this committee that…  we’ve had long conversations about the cryptographic industry and lots of bills and it is a tragedy that it took October 7 to have this conversation. But, I would truly hope that we can revisit some of the bills that we have passed on a partisan basis out of this committee –that among other things, provided a safe harbor for the crypto industries that it doesn’t have to comply with AML Rules. That was a bill led by Mr. Emmer. Mr. Davidson’s bill to prohibit regulation of all selfhosted wallets. This is a real problem. And either we either we agree that we don’t want to launder money, or we don’t …”

See the hearing on YouTube.

what you should know: What Rep. Casten revealed during his five minutes is that Senator Warren has apparently chosen Casten to drive the Digital Asset Money Laundering bill in the House. Given Republican control of House Financial Services, it seems like a daunting challenge for the bill to make the HFS agenda in the 118th Congress especially given Casten’s remarks about Majority Whip Tom Emmer (R, MN) and Rep. Warren Davidson (R, OH). What would be interesting to see is which Republicans, if any, might agree to co-sponsor the bill just as Senator Warren was able to bring aboard Republican Senator Roger Marshall, initially. On that note – nobody knows what a House floor vote looks like for any digital assets bill. Yet.

today’s hearing

Today’s 10 a.m. hearing titled, “Combating the Networks of Illicit Finance and Terrorism,” at the Dirksen House Office Building promises to bring digital assets to the discussion. See agenda and witnesses -including the live (and recorded) video.

Among those added to the witness list is Dr. Shlomit Wagman, who is the former Chair of Israel’s Money Laundering and Terror Financing Prohibition Authority. Dr. Wagman apparently has been asked specifically about terrorist financing using crypto. She writes, “My goal in today’s testimony is to review the funding channels used by illicit and terror organizations and – as per your request – focus specifically on the use of cryptocurrencies, which most likely funded (both directly and indirectly) Hamas’s activities.” Later in her prepared testimony,  Dr. Wagman observes: “In April 2023, following a further series of Israeli asset freezing orders and seizure of many accounts, Hamas announced to its supporters that it would stop receiving fundraising via the crypto currency Bitcoin, citing an increase in ‘hostile’ activity against donors and that ‘this comes out of concern about the safety of donors and to spare them any harm’.  Such a statement demonstrates that the FATF approach of signaling to the market of ‘blacklisted’ crypto, was proven to be efficient.Read more.

what you should know: Chair Sherrod Brown (D, OH) may be deciding whether it’s time to support Senator Elizabeth Warren’s Digital Asset Money Laundering Act and bring it to the Senate Banking Commitee stage.

Rep. Barr raises NDAA

So far, a bipartisan group of Senators (Sens. Lummis (WY), Warren (MA), Gillibrand (NY) and Marshall (KS)) have attached an Anti-Money Laundering (AML) amendment to the NDAA. At a Capitol Account event yesterday in Washington, D.C., HFS Committee member Rep. Andy Barr (R, KY) spoke up for his side of the bicameral equation, “We do need some regulatory clarity in this space, and I think the National Defense Authorization Act could be a vehicle for Chairman McHenry and [digital assets subcommittee] Chairman [French] Hill to move their products.” Read a bit more.  Later, Punchbowl’s Brendan Pedersen reported on X Rep. Hill’s response to Barr’s comments, “Remains to be seen.”

what you should know: Stablecoins and digital asset market structure bills, right this way? It remains to be seen, indeed, but with observations such as the those from the Federal Reserve’s stability report last week (see it) which talked about instability introduced by the stablecoin market (e.g. pages 8, 10 and 45), there may be more willingness to get a stablecoin law done by Democratic leadership. Treasury and Secretary Janet Yellen appear to realize that it’s time to address “stables.” Sec. Yellen said as much at an Oversight hearing in June, “…and there are gaps in regulations. I would point out specifically stablecoins. And I do believe that we need a comprehensive federal prudential framework and would be pleased to work with you, with Congress, to see if we can develop such a framework.”

still more tips

Terrorists raised $130m in crypto since 2021; sought more via social media after attack – The Times of Israel

Binance is behind the Hong Kong crypto exchange HKVAEX, which is seeking a license in the city – South China Morning Post

“Thank you [Rep. Darren Soto (D, FL)], Co-Chair of the Congressional Blockchain Caucus, for a productive meeting with [Digital Power US] members.” – Perianne Boring, Chamber of Digital Commerce, on X

The tragically millennial vocabulary of the Sam Bankman-Fried trial – The Verge