US Congress Subcommittee on Terrorism and Illicit Finance hosted a hearing on Virtual Currencies investigating national security concerns and innovation. They found that the government needs to invest in its personnel and technology to mitigate the risks posed to society. One of the most difficult issues they face is international regulatory cohesion and cooperation on investigations.
Interest in virtual currencies as a global means of exchange has never been higher. Daily trading volume across the currencies has broken $5 billion dollars. The liquidity and global nature of the market sparked US lawmakers to host a hearing, where experts closely examined the technology’s relation to national security concerns.
Congressman Ed Perlmutter opened summarizing Congress’ key concern:
“The reality is that criminals today use cash, money service businesses, and other means for illicit purposes, but we’ve provided law enforcement the regulatory tools to catch the bad guys. The question is: does law enforcement have the tools to catch the criminals using these new technologies and currencies?
Chainalysis co-founder, Jonathan Levin elaborated initially on the nature of technology: “Bitcoin and other virtual currencies are decentralized and as such resistant to censorship restraint. Receiving Bitcoin can be done by anyone with basic computing equipment anywhere in the world.” This accessibility and the inability for governments to quash these technologies, he asserts, “offers nefarious actors the ability to abuse the technology.”
But despite this potential threat, actual evidence of virtual currency usage within terrorist organizations is nascent and minimal. Levin gave three scenarios that we might see terrorists using virtual currencies.
- Using virtual currencies in cybercriminal activities to fund operations
- Crowdfunding operations from sympathizers around the world
- Paying for everyday items and internet infrastructure
While cybercriminals have been making millions of dollars in cybercriminal activities, such as ransomware facilitated by virtual currencies, there has not been any substantial connection of this activity to terrorist financing. However, there has been one proven case of crowdfunding by an ISIS affiliated group that managed to raise $1,000 from sympathizers around the world. This was used to cash out and these services have been identified by Chainalysis and Law Enforcement was able to follow up these leads.
Despite the minimal volume of transactions currently tied to terrorist activities, the general lack of training and cooperation across government agencies presents a challenge for combating any future threat. Congressman Stephen Lynch offered the view on the challenges of federal personnel training, saying the government’s transition from legacy tech is “terribly slow”, and proposing that “it would be better to buy the system on the private side and have cutting edge technology.”
The subcommittee members’ sophistication was demonstrated through their examination of mixing : the use of applications designed to obscure transaction history. Levin addressed the committee once again, explaining that virtual currency exchanges that use Chainalysis can identify mixing and assign the right risk associated to this activity, and if judged necessary, report this suspicious activity to FinCEN. The real problem of interest may, in fact, be the use of unregulated exchanges which lack oversight from the US government.
Despite the diverse backgrounds of the hearing’s contributors, their dispositions remained congruent on one idea: with or without government permission, this technology is being developed and adopted by individuals in the private sector, and will need its cooperation to mitigate any national security concerns. The risk that bad actors will abuse the technology will continue to grow alongside the accessibility and liquidity of digital currencies. Proponents from both sides agree that technology from the private sector must be paired with education that informs and equips those hosting regulatory power, worldwide.
The US government has made a notable start in mitigating this risk by investing in software, providing early Anti-Money Laundering guidance and training its people. With the global nature of cyber investigations, the US also needs international partners to gain access to important case information. Ms Haun, a former federal prosecutor, gave a “direct and passionate” call for a reform of the MLAT process that the DOJ requires to gain access to such information.
In his statement which accurately captures the sentiment of the hearing, congressman Warren Davidson remarks:
“…blockchain is a little bit like the cell phone. Did criminals gain an advantage when they could communicate by cell phone? Well of course they did. But so did the rest of the planet.”
Chainalysis is the leading provider of investigation software and risk management software for virtual currencies. Our products enable organizations from both the public and private sectors to track illicit activity associated with virtual currencies. For more information, please visit us at: www.chainalysis.com