U.S. government officials are increasingly worried about the potential national security threat posed by the rise of cryptocurrencies.
In the past week, the Department of Justice, congressional lawmakers and even Federal Reserve Chairman Jerome Powell have voiced concern about the misuse of digital currencies, especially for money laundering. The topic sparked new interest following Bitcoin’s prominent mention in the indictments of Russian military intelligence officers by special counsel Robert Mueller earlier this month.
Story Continued Below
Both critics and champions of cryptocurrencies agree that getting the policy right toward the emerging financial technology could be key to the future of the upstart industry — as well as the ability of the U.S. and its allies to cut off funding for terrorists and rogue states.
In a report issued July 20, the Justice Department said it has formed a Digital Currency Initiative to ramp up anti-money laundering prosecutions in cases involving cryptocurrency, which it sees as increasingly used in illicit financing. The initiative is meant to encourage the pursuit of cybercrime using cryptocurrencies across federal law enforcement agencies.
Investigators also noted an increased pattern of money laundering through a series of virtual currency transactions.
“While law enforcement has made strides in its ability to trace virtual currency transactions, criminals often launder their virtual currency by mixing one user’s money with multiple other users’, or sending their virtual currency through a convoluted series of transactions,” the Attorney General’s Cyber Digital Task Force wrote.
The topic of illicit financing using virtual currencies has also fueled passion at recent congressional hearings.
“We should prohibit U.S. persons from buying or mining cryptocurrencies,” Rep. Brad Sherman (D-Calif.), a senior Democrat on the House Financial Services Committee, declared at a July 19 hearing. “There is nothing that can done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society.”
Earlier that day, Powell expressed similar concern, although he didn’t call for the outright banning of cryptocurrencies. Virtual currencies are poor for payments and storing value, said Powell, but great, “if you’re trying to hide or launder money.”
Powell said international regulators were increasingly preoccupied about the role of the virtual currencies in terror financing and funding other illegal activities.
“Blockchain and the technology behind it is kind of where the Internet was in the early ‘90s,” said Gilbert Verdian, a former U.K. Treasury and Ministry of Justice official. He added that when his government began to look at Bitcoin transactions it saw some of the same patterns in other avenues of terror financing.
“You’re seeing a lot of potential misuse,” said Verdian, who founded a blockchain startup called Quant in 2015.
So far, the U.S. government’s relatively agnostic approach toward digital assets resembles Verdian’s view more than Sherman’s, reflecting a broader embrace of the underlying technology’s potential than of money laundering concerns.
One senior congressman, Rep. Bob Goodlatte (R-Va.), the chairman of the House Judiciary Committee, even reported jointly owning up to $80,000 worth of Bitcoin, Bitcoin cash, and Ether in his 2017 financial disclosure. The Virginia conservative sold between $2,000 and $30,000 worth of Bitcoin in December, near the cryptocurrency market’s all-time peak.
Despite the peer-to-peer nature of many cryptocurrencies, most sales and purchases take place in online exchanges. Still, oversight remains uneven, with several internationally based exchanges operating in a gray area — if not outright violation — of U.S. anti-money laundering rules.
One, the Russia-based BTC-e, was shut down by U.S. officials in coordination with European law enforcement agencies. An alleged operator of the exchange, a Russian national, was arrested in Greece and will stand trial in France.
Regulating exchanges more actively could help both clean up fraud and market manipulation in markets and aid anti-money laundering efforts, argued former Commodity Futures Trading Commission Chairman Gary Gensler in testimony before the House Agriculture Committee last week.
Gensler advocated rigorously requiring cryptocurrency exchanges to register with the CFTC and the Securities and Exchange Commission, whose authority over exchanges is, for now at least, limited.
“[Y]ou may have to pass a law to do that,” Gensler told the congressional panel, which, like the House Financial Services Committee, focused heavily on the potential abuse of cryptocurrencies. Gensler even touted the use of distributed ledger technology at the core of cryptocurrencies to help cut down on money laundering.
“Beneficial ownerships will be able to be tracked in a matter of milliseconds and nanoseconds,” said Gensler, adding that the government should avoid being “hasty” in clamping down on cryptocurrencies.
“As long as the stupid criminals keep using Bitcoin we’ll be great, but then the smart ones will pivot to something that allows them to hide better behind this,” said House Agriculture Chairman Mike Conaway (R-Texas), also a senior member of the Intelligence Committee.
Conaway referred to the fact that every Bitcoin transaction is recorded on a decentralized digital ledger, though newer cryptocurrencies can be more difficult to track.
For its part, the House Financial Services Committee passed legislation, H.R. 5036 (115), from freshman Rep. Ted Budd (R-N.C.) that would create a new task force chaired by the Treasury secretary to study illicit financing with cryptocurrencies and, with input from industry, propose new policy and law to combat it.
Budd’s bill, called the Financial Technology Protection Act, would also make it the sense of Congress that, “the Federal Government should prioritize the investigation of terrorist and illicit use of new financial technology, including digital currencies.”
If passed into law it could also constitute what may be Congress’s first attempt at officially defining virtual currency — a potentially major milestone, since it could set future legal precedent.
The committee reported out the bill on Tuesday by a 57-0 vote. It’s unclear whether the Senate will take up the legislation amid a crowded legislative calendar as Congress heads into election season.