Dispatch from D.C.: Libra, Trust, and National Security

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Following Facebook's announcement last month of plans to launch its own private cryptocurrency, Libra, lawmakers intensified their scrutiny of the cryptocurrency industry and kickstarted important discussions around its future. Last week, I spent 3 days on Capitol Hill attending both the House and Senate Libra hearings and meeting with staff from the House Financial Services Committee as well as several individual members. 

It is clear that trust and transparency are among the U.S.’s top concerns in evaluating Libra and other cryptocurrencies. While much of the discussion was dominated by classification (security vs commodity), data privacy & data protection, impacts on the USD and the global financial system, and concerns around illicit activity, lawmakers also do not want to hinder innovation. 

My main takeaway is that the cryptocurrency industry has a tremendous opportunity to seize the Libra moment and educate our elected officials on how transparency into blockchains can not only alleviate their (valid) concerns, but build a better, more trustworthy financial system. 

To be sure, Facebook's move into cryptocurrency is an exciting development for the industry as the company could make cryptocurrencies available instantly to billions of users. However, the more pervasive use of cryptocurrency creates financial inclusion for both good and bad actors, and robust compliance offerings for anti-money laundering (AML) and combating the financing of terrorism (CFT), including transaction monitoring, will be essential- providing the trust and transparency needed to build and maintain Libra’s financial integrity, meet the legal requirements of regulators, and assist law enforcement around the world. 

Further, proper compliance from the Libra Association, combined with collaboration with properly resourced law enforcement agencies and regulators, could potentially provide better visibility and more effective mitigation in combating illicit financial activity than many traditional financial systems currently in place. 

This is the crux of the argument we made in our letter to Congresswoman Maxine Waters in anticipation of the House hearing, which was reiterated by David Marcus, Head of Calibra, the Facebook subsidiary whose goal is to provide financial services that will let people access and participate in the Libra network, during his testimony. 

Time and again, Marcus cited the importance of proper AML/CFT programs, and went on to explain that Libra chose blockchain technology precisely because it can provide more visibility than current systems, which rely on self-reporting. Libra is betting that the right technology combined with the right regulations and collaboration with law enforcement will improve, not hinder, efficacy in this space.

The Executive Branch also weighed in on Libra and cryptocurrency in the past several days. President Donald Trump commented on Twitter, saying he's "not a fan of bitcoin and other cryptocurrencies… Unregulated crypto-assets can facilitate unlawful behavior, including drug trade and other illegal activity." 

Of course, cryptocurrency isn’t the only method of payment used to fund illicit activity; banks have been fined billions of dollars for these problems and continue to incur such fines today. But unlike cross-border wire transfers and cash transactions, blockchains perfectly preserve the provenance of financial transactions and do not suffer from data integrity issues. That means that with blockchain analysis tools, cryptocurrency businesses like Calibra can identify risky transactions and regulators and law enforcement can investigate suspicious activity. For example, on Thursday, the United States Attorney for the Southern District of New York announced the arrest of an individual charged with money laundering assets from dark web narcotics trafficking thanks in part to blockchain analysis.

Treasury Secretary Steven Mnuchin went a step further than the President during his press briefing on regulatory issues associated with cryptocurrency, making headlines for calling out the financial technology as a national security threat. While cryptocurrency is often associated with buying drugs on the darknet, most people probably don’t think of it as a national security threat. But cryptocurrency is cross-border and, without the proper KYC and transaction monitoring solutions, could be a blind spot for pretty much any national security program you can think of, including counterintelligence, counterproliferation, and counterterrorism. 

It is clear the President and his administration wanted to show they are conscious of the threats imposed by cryptocurrency before the Congressional Libra hearings and their concerns regarding illicit activity and national security threats are valid. The ball is now in the industry’s court to show how cryptocurrencies, including Libra, can manage these risks as well as or better than traditional finance. 

Indeed, the increased scrutiny from both Congress and the Executive branch in light of Libra’s ambitious plans is an opportunity. Based on my conversations on Capitol Hill this week, there is clearly a newfound appetite from lawmakers to learn more about AML/CFT in the industry. If nothing else, the introduction of Libra has elevated cryptocurrency so that officials from across the U.S. government have taken notice. 

Now it’s our job to educate lawmakers and elected public officials on how blockchain analysis can mitigate illicit activity in cryptocurrency and build trust and transparency in these new markets. 

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Learn more about KYT for Stablecoins & Token Issuers

Monitor transactions across the token’s full lifecycle, from issuance to redemption—and any transaction in between.

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How Transaction Monitoring Works at Chainalysis

One of the reasons Chainalysis KYT is so popular is that it uses global anti-money laundering (AML) standards common across regulatory bodies. We apply these standards when each transaction is screened.

Cryptocurrency businesses also need to understand the aggregate risk profile of each of their users. That’s why Chainalysis KYT provides a view of risk profiles at the user level, which reflects all of a user’s screened transactions. For example, if an organization has a user who receives funds from a darknet market, our software automatically flags that transaction as high risk. If the user sends funds to a regulated exchange, our software marks that transaction as low risk. And so on. Every screened transaction feeds into a user’s risk profile. Chainalysis KYT displays all user profiles, sortable by high, medium or low risk (using traffic light colors) for easy scanning.

We apply our risk methodology in real time to all users within an organization’s user base. This saves compliance teams from laborious, manual screening work. They can instead focus on developing comprehensive compliance programs. Organizations that work with us tell us this has enabled them to meet regulatory expectations and launch or grow their businesses.

Customizable risk level

We’re now giving our customers the ability to adjust the risk level of a category or a service. For example, not all jurisdictions around the world treat gambling the same way. In some countries, gambling is not considered a legitimate business activity and thus online gambling sites would be treated as high risk. In other countries, gambling is not considered illicit, which means properly licensed online gambling sites would be treated as low risk.

The ability to customize the risk level of categories and specific services means our customers can automate even more of their compliance workflows.

Organization-wide dashboard

One of the most useful facets of Chainalysis KYT is having a view of all users and their risk profiles directly accessible upon first logging in. It provides a visual alert of which users have high risk profiles and therefore require the most immediate attention. In keeping with the spirit of simplified visual cues, we have now launched a dashboard that summarizes key indicators at the total organization level. For example, organizations can now see what percentage of their user base is falling under high, medium or low risk. They will soon be able to see things like total exposure by category, or total transaction volume per day. These and other metrics will provide our customers additional understanding of their organization’s total exposure trends over time.

In-app chat

At Chainalysis, we strive to provide as much support to our customers as we can. To make it easier to interact with us, we added in-app chat to Chainalysis KYT. This allows our customers to send us questions or feedback without having to leave the environment. Our team typically responds within minutes.

Looking ahead

We know software is most valuable when it makes the lives of our customers easier and more productive. This means we’ll continue to add intuitive capabilities to our compliance products while increasing versatility for ongoing transaction monitoring. In the coming months, we will improve how transaction information is displayed. We will also boost our monitoring capabilities for other cryptocurrencies beyond Bitcoin. And we will deepen the integration with Chainalysis Reactor, which is used for enhanced due diligence and investigations.

The momentum around cryptocurrency compliance is only just starting and we look forward to continuing to offer software that builds trust in blockchains.

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