blockchain tipsheet

WSJ money laundering data

Blockchain industry participants are continuing their pushback on the data from Elliptic that was used two weeks ago in the original Wall Street Journal article and the follow-up on October 13 about terrorist financing and crypto. Some even want a retraction by the WSJ regarding its conclusions.

Yesterday, Coinbase Chief Legal Officer Paul Grewal said in response to discussion of the disputed data in a tweet on X, “Yes- wrong is wrong. This reported misinformation furthers agendas that demean real human tragedy and genuine and effective efforts to thwart those who are responsible.” And, crypto venture capitalist Nic Carter claimed on X yesterday that, “The [journalists] are aware of their abominable mistake and failed reporting and refused to retract. (Reached via email).”

At the center of the current “retraction” discussion seems to be blockchain analytics firm Chainalysis (the U.S. government is a large client) blog post last Wednesday which provided a deep dive on specific wallet addresses and suggested an incorrect reading of the data used by the WSJ such as: “Of the roughly $82 million in cryptocurrency received by this address, about $450,000 worth of funds were transferred from the known terror-affiliated wallet.” Read the whole thing.

Nevertheless, on Friday, the Wall Street Journal expanded and summarized its coverage of crypto and terrorist financing and, in the process, re-affirmed the use of Elliptic’s data in an article, “Why Hamas Uses Crypto to Raise Money.” Read it.

what you should know: There’s a lotta future business at stake for blockchain analytics firms – specifically, future business with the U.S. government. Among several narratives here is Chainalysis taking on Elliptic, which provided the original data to the WSJ.

WSJ opinion fight

Continue reading “Tillis And Hickenlooper Introduce Proof Of Reserves Bill; Crypto Wallet Data For Terrorist Financing Gets Pushback”

mixers and money laundering

U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a new proposed rulemaking “that identifies international Convertible Virtual Currency Mixing (CVC mixing) as a class of transactions of primary money laundering concern.” Citing terrorist organizations and illicit finance entities such as Hamas, Palestinian Islamic Jihad, and the Democratic People’s Republic of Korea (DPRK) as customers of mixing technology, Treasury said the new rules will promote transparency for mixing activities and therefore combat money laundering. Read the release.

Read the 80-page proposal from FinCEN here.  Comments are due 3 months from now pending publication of the proposal in the Federal Register.

FinCEN Director Andrea Gacki, who came aboard in July from the Office of Foreign Assets Control (OFAC), notes the use of the Patriot Act (Section 311) in the release, “This is FinCEN’s first ever use of the Section 311 authority to target a class of transactions of primary money laundering concern, and, just as with our efforts in the traditional financial system, Treasury will work to identify and root out the illicit use and abuse of the CVC ecosystem.”

Back in August of last year, Treasury made some of its first steps against mixers when it placed Tornado Cash and several dozen crypto wallet addresses on an OFAC’s SDN (Specially Designated Nationals) list. Unfortunately for some crypto owners a few days later, many wallets ran afoul of compliance when they were hit with a “dusting attack” – i.e. law-abiding crypto wallets were sent crypto from sanctioned wallet addresses using the mixing service. 

Coin Center responded forcefully to Treasury’s actions last year which included the observation: “The Tornado Cash Entity, which presumably deployed the Tornado Cash Application, has zero control over the Application today.” CoinCenter also said at the time, “By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority.” Read that one.

What you should know: There is no denying mixers are used for illicit purposes. On the other hand, it’s privacy-preserving processes can protect vulnerable populations needing to transfer funds.

more tips:

Crypto Mixers and AML Compliance – Chainalysis Continue reading “U.S. Treasury Proposes Rulemaking On Crypto Mixers; TradFi Firm DTCC Acquires Securrency”

letter from Sen. Warren

A new Congressional letter originating with Senator Elizabeth Warren (D, MA) and dated Tuesday (see it) makes requests of the White House and Treasury and expresses concerns about terrorist financing using crypto.

A footnote references last week’s Wall Street Journal article connecting the terrorist attacks in Israel to crypto donations received by the terrorist organization Hamas.

The letter and its questions align with the Senator’s [S.2669] Digital Asset Money Laundering Act” co-sponsored by Senator Roger Marshall (R, KS) and a bipartisan list of Senators. Though the questions may be rhetorical (“What steps is the Biden Administration taking to address the use of cryptocurrency by terrorist organizations, including but not limited to Hamas, PIJ, and Hezbollah?”) given Warren’s legislation, answers are requested by October 31.

letter from Sen. Warren – signers

For emphasis on urgency, Sen. Warren reached across Congress and collected a list of 105 signatures (29 Senators and 76 Members of the House) including her own for the letter. Only two were Republicans: Sen. Marshall and Senator John Kennedy (LA).

Notable signers among Democrats include Rep. Jim Himes (CT) and Rep. Josh Gottheimer. Both were “yes” votes on the digital asset market structure and stablecoin bills coming out of the House Financial Services Committee in July.

Notable non-signers among Democrats include House Financial Services (HFS) Ranking Member Maxine Waters (CA) and Senator Kirsten Gillibrand (NY).

Waters has publicly supported Democratic leadership’s efforts to stymie digital assets legislation in HFS in the 118th Congress.

Meanwhile, Senator Gillibrand along with Senator Cynthia Lummis (R, WY) have tried to build a bridge to Senator Warren and anti-crypto legislators with the NDAA amendment among other efforts. Gillibrand is also a co-sponsor of the Senate version of the Financial Technology Protection Act [S.1340] along with Senator Ted Budd (R, NC).  The bill was re-introduced in April in both Houses and seeks “to establish an Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing.”

more tips:

Bipartisan group presses Biden for crypto crackdown after Hamas attacks – Punchbowl News Continue reading “100 Democrats Join Sen. Warren Letter On Terrorist Financing, Crypto; EU Central Bank On CBDC”

Rep. Emmer on national debt

Speaking just prior to the House Speaker vote at the U.S. Capitol, Majority Whip Rep. Tom Emmer (R, MN) made his case for at a at PGP For Crypto event in Washington, D.C.

Rep. Emmer’s case for digital assets has different elements, but he made clear one benefit, in particular.

He said: “You [have] $33 trillion in debt -we have no way to pay for it right now. We’re not even thinking about how we pay for it. We’re bleeding about a trillion and a half a year.”

“The only hope in my mind we have is… much like the Internet when it exploded back in the 90s – it was allowed to explode. We had something in this country called ‘the boom’ – 25 years of the largest wealth creation in history. Now, some of us believe that the ‘pie’ is just *this* big and we [have] to divvy up the ‘pie’. Others of us believe this is just the beginning. And if we keep this here [in the U.S.] – we allow this innovation to grow here, we allow the 21st century economy and opportunity to be here in the United States of America.”

“And when we start to make some better decisions on how we pay our bills – and what we’re putting money into – we can grow this economy to the point where we can pay that off. That’s the future for the United States of America. And I would argue to my friends on the Senate side [and] my house colleagues that are playing this political game… we gotta stop [and] figure out how to work with the technology and the entrepreneurs that are creating it so it stays right here. This is where it belongs. This is where I think we benefit dramatically from it.”

See the full video of Rep. Emmer at the PGP for Crypto event on YouTube.

Continue reading “Digital Assets To Address National Debt Says Majority Whip Emmer; Fed’s Bowman Wants Regulatory Framework”

protect DeFi

Blockchain industry advocates led by DeFi Education Fund are promoting the new “protectDeFi.org” website, which aspires to protect the interests of decentralized finance particularly as it relates to new digital asset tax rules proposed by U.S. Treasury and the Internal Revenue Service (IRS) on August 28.

The origins of industry pushback is the Infrastructure Investment and Jobs Act of 2021 as Blockchain Association CEO Kristin Smith explains in a tweet thread on X.  And on the new Treasury proposal, she adds, “…the proposal includes software developers who might have worked on a front-end interface to a DeFi protocol, and [because] they did so, the IRS may consider them ‘in a position to know’ about future activity on that protocol.. These developers would then have to furnish 1099s and abide by other reporting requirements… This is untenable + would force those persons to stop work or move to more welcoming jurisdictions. As it stands, if this updated definition is adopted by the IRS, it would result in a decimation of the digital assets industry in the U.S.” Read it.

Consensys counsel Bill Hughes joins the industry chorus on X, “… the cost and time required by reporting obligations would cripple most start-up software development projects. And IRS is gravely underestimating those costs (which is typical for agencies during rulemakings).” View more on X.

Final feedback to Treasury and the IRS is due on October 30. The protectDeFi.org website offers an artificial intelligence tool for interested parties who wish to create a letter for feedback purposes.

protect DeFi – Congress

In Congress, the Keep Innovation In America Act co-sponsored by House Financial Services (HFS) Committee Chair Patrick McHenry (R, NC) and Rep. Ritchie Torres (D, NY) among many others (see H.R. 1414) is a bipartisan Congressional effort introduced in March to fix the IRS issue created in the Jobs Act. So far, the bill has not made it out of Committee.

Continue reading “DeFi Meets Treasury And IRS Proposal; Offshore Momentum In Hong Kong And Australia”

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. Continue reading “Crypto Illicit Financing Concerns Grow In Senate; California Approves Regulatory Framework Path”

Peirce on digital assets

The agenda for yesterday’s Security Trader Association conference in Washington, D.C., included another regulator who discussed digital assets regulation. Securities and Exchange Commission (SEC) Commissioner Hester Peirce (R) participated in an on-stage interview and covered a range of crypto-related topics that built on the need for digital assets legislation outlined by Commodity Futures Trading Commission Chair Rostin Behnam (D) the previous day.

On a question about innovation leaving the United States, Commissioner Peirce said, “I think the idea that you are comfortable driving an entire set of innovation outside the US is really a concern. And people will say to me, ‘Well, projects aren’t actually moving out of us. Look, you just were in San Francisco, you met with a ton of projects.’ But, what they’re telling me is that – yes, they’re in the U.S., but they’re they’re not letting any U.S. persons participate in any anything they’re doing. It’s all happening overseas. And, that’s the problem. I think we don’t know which pieces of it will last and end up changing the way we do things, but I suspect some of it will and I would rather have that innovation happen here.”

The Commissioner’s next response recalled themes of the Q&A grilling by Rep. Ritchie Torres (D, NY) of SEC Chair Gary Gensler at the House Financial Services Committee SEC Oversight two weeks ago. Gensler admitted Pokemon cards were not securities – though tokenized Pokemon cards gave him pause.

Yesterday, rather than Torres’ use of Pokemon cards, Peirce chose chinchillas.

Continue reading “SEC’s Hester Peirce On Innovation, Chinchillas And ETFs; McHenry As Speaker Rumors Instensify”

CFTC Behnam on legislation

Speaking at yesterday’s Security Traders Association conference in Washington, D.C., Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam participated in a fireside chat and said that he remains optimistic – but realistic – about digital asset legislation prospects given the election cycle.

He said, “So, it’s been a tough ride over the past couple of years because there are, in fact, opponents. But there’s been a number of legislative efforts in both the House and the Senate. Obviously, it took a little bit of a pause last year with a number of failures and bankruptcies in the crypto space. This, to me, feels like something that’s inevitable. When it happens, as we’re approaching, obviously, 2024 in an election year, remains to be seen -obviously a lot going on on The Hill right now: shutdowns, elections and whatnot.”

Behnam continued, “But, this remains a priority of a number of members of Congress on both the House and Senate side, and it’s just a matter of process: the friction of partisanship and debate and policymaking that hopefully we’ll come up with a sound policy that gives us additional authority over the commodity markets and, of course, gives the SEC what it needs to regulate the securities market.”

letter – crypto tax

Bloomberg’s Allyson Versprille reported yesterday on X that a group of senators led by Sen. Elizabeth Warren (D, MA) and Sen. Angus King (I, ME) are requesting that the date be moved up two years for crypto exchanges and brokerages to report client transactions to the federal government. Bloomberg’s headline says that the goal is to “Snag Crypto Tax Cheats.”

See the Congressional letter dated October 10 which was sent to Treasury and the IRS. Five other Democratic Senators signed on including Sen. Richard Blumenthal (CT), Sen. Bernie Sanders (VT), Sen. Brian Schatz (HI), Sen. Sheldon Whitehouse (RI) and Sen. Gary Peters (MI). Continue reading “CFTC Chair Behnam Optimistic About Legislation; Senators Make Urgent Crypto Taxation Request”