senate banking hearing
With 13 mentions of the word “crypto” in his opening statement, Senate Banking Chair Sherrod Brown (D, OH) made sure everyone knew where yesterday’s hearing on illicit finance was going.
Some Democratic senators took pains to paint crypto with a broad brush (smearing U.S. digital asset companies in the process) only to have witnesses largely push back on the suggested scope of the AML challenge with crypto. See the hearing page and video.
Brown said, “Too often, crypto platforms don’t use the same commonsense protections that help keep illicit money out of the traditional banking system—safeguards like knowing their customers, or suspicious transaction reporting. Some crypto services and tokens even help users keep their transactions anonymous.” Read his statement. But, if you’re a U.S.-based company, you already must comply with existing AML laws.
senate banking hearing – Q&A
Overall, the pro- (Republican) and anti-crypto (Dems) positions were along partisan lines.
Some senators did not bother with crypto in their Q&A – such as Sen. Katie Britt (R, AL) – who maintained focus on how on broader solutions for preventing the atrocities in Israel earlier in the month.
But, Senator Jack Reed (D, RI) promoted his CANSEE Act [S.2355] during the hearing and asked the star witness of the day – former Chair of Israel’s AML authority Dr. Shlomit Wagman – about decentralized finance (DeFi) and its role in terrorist financing. She steered the answer away from potential threats from DeFi saying that toolboxes existed for tracing and emphasized the transparency of the blockchain. She then re-shared a well-known anecdote about Hamas stopping the use of Bitcoin due to its traceability.
Senator Mark Warner (D, VA) shared during his Q&A allotment that what he’s learned in Intelligence briefings might help everyone understand the danger in crypto. He also issued a full-throated rejection of DeFi saying, “I do not accept the premise that there is no father or mother of a DeFi system. Someone is making money off of that.”
Senator Elizabeth Warren (D, MA) was deferential to witnesses but tried to make the most of her Q&A time and build a case for the Digital Asset Money Laundering Act [S.2669] which her and Senator Roger Marshall (R, KS) are driving in the Senate. Warren tried to steer questions in support of the legislation but heard from witness Matthew Levitt (his testimony) who said crypto estimates are “inflated.” Israel’s Wagman told the Senator: “Crypto is a problem but not the major problem,” and advocated for sanctions and “creating environments for compliance.”
Some Republican Senators also participated in the Q&A with Senator Bill Hagerty (R, TN) noting that the WSJ article on crypto – which originally ignited new scrutiny on crypto in Congress – is now being disputed. Furthermore, to anyone that would listen in the hearing room, Hagerty said that “scalpel not a sledgehammer” was necessary regarding crypto legislation and he made clear that the U.S. should not push digital assets offshore.
Sen. Cynthia Lummis (R, WY) raised her bipartisan National Defense Authorization Act [S.712] digital assets AML amendment as well as the new letter (see below) she sent to the Department of Justice with Rep. French Hill (R, AR). Witnesses noted during Lummis’ Q&A that “crypto assets are easier to trace than cash.”
(Read this update on the NDAA amendment from Politico on Wednesday.)
At one point during the hearing, Dr. Wagman tapped her real world experience in the Israeli government and spoke eloquently about today’s reality in illicit finance: “Let’s not lose sight and focus from the big picture. Crypto is currently a very small part of the puzzle, the major funding channels are, were, and remain state funding. Iran and others, those are the major players. Most of the funds are still being transferred by the traditional channels that we all know from the past: banks, money transmitters, payment system, Hawala, money exchange, trade-based terrorism financing, charity, cash, shell companies, and crypto.”
“The topic of illicit finance is a wildly complex one, especially when layered atop decades of history and recent weeks of violence…” – Rashan Colbert, former staffer to Sen. Booker (D, NJ), on X
what you should know: If there was one thing witnesses stressed was the importance of sanctions in addressing the illicit finance problem – sanctioning humans, sanctioning their bank accounts and their crypto wallets. The time for shutting down through government intervention had long since passed. Also of note: bipartisanship on digital assets policy in the Senate only exists behind the curtain currently.
letter to AG
In the ongoing chess match on Capitol Hill regarding illicit finance and anti-money laundering (AML) legislation for cryptocurrency, Sen. Cynthia Lummis (R, WY) and Rep. French Hill (R, AR) partnered on a bicameral letter sent yesterday to U.S. Attorney General Merrick Garland. See it (PDF).
Given recent news about Hamas receiving financing via crypto in the past two years, they ask the AG to “reach a charging decision on Binance that reflects their level of culpability and expeditiously and conclude your investigations into the ongoing illicit activities involving Tether.” They add, “Crypto assets and distributed ledger technology have the potential to drive responsible innovation in U.S. financial markets, therefore we must be careful not to paint all crypto asset intermediaries as suspect when a small handful of bad actors use them for nefarious purposes.”
what you should know: Appearances are important. In competition with the bipartisan Warren-Marshall AML bill, and at a sensitive moment in time, Lummis and Hill want to promote legislation which will provide digital assets room for growth in the United States and look pro-active about addressing AML in crypto, too. Legislation includes the Lummis-Gillibrand Responsible Financial Innovation Act in the Senate and the stablecoin and digital asset market structure bills from the House Financial Services Committee.
data source controversy
CoinDesk’s Jesse Hamilton covers the evolving controversy around the veracity of the data – and conclusions drawn – in the Wall Street Journal articles on terrorists use of crypto financing. “After Hamas’ deadly attacks in Israel, media reports linked the terrorist group with tens of millions in crypto donations, but that data was misinterpreted and hugely exaggerated, according to the blockchain analytical firm that was cited,” reports Hamilton. Elliptic was the company which is now trying to walk back observations using its data. See Elliptic’s blog post from Wednesday. One of the WSJ’s illicit finance reporter tweeted what seems like a defense of the use of the data on Wednesday.
what you should know: The current narrative isn’t going to be turned around unless, maybe, the WSJ were to retract the story – that seems unlikely.
hear ye, hear ye
HEARING NOTICE: Subcommittees on Capital Markets and Housing & Insurance – House.gov
use case – bank coin
Bloomberg reports that JPMorgan Chase’s a stablecoin-of-sorts known as “JPM Coin” is now handling $1 billion worth of transactions daily as the bank continues to grow the product. Global Head of Payments Takis Georgakopoulos says, “JPM Coin gets transacted on a daily basis mostly in US dollars, but we again intend to continue to expand that.”
In this use case, stablecoins are being used to move funds since settlement using the blockchain is faster than traditional finance methods with more intermediaries. JPM Coin is internal to JP Morgan, but it’s global client base requires efficient transfers around the world within its own banking system. They may be among the first, but all global banks will do something like this someday. Efficiency means more profit.
what you should know: Settlement, baby! Cutting out the middleman is the blockchain’s killer app/feature.
still more tips
UK passes bill aimed to help law enforcement seize crypto – Blockworks
What is tokenization? – McKinsey
Here’s How FTX Executives Secretly Spent $8 Billion in Customer Money – The Wall Street Journal