Cryptocurrency crime hearing highlights advantages of cryptocurrencies for all uses, legal and illegal

Lawmakers praised the design of cryptocurrencies, with the hearing discussing the idea that what makes cryptocurrencies at risk of illicit use is exactly what makes them attractive to legal users as well.

The House Financial Services Committee hearing on “Cryptocurrency Crime in Context Part II: Examining Tactics to Combat Illicit Activity” doubled down on “context,” focusing on the nuances and understanding the benefits and harms of everything from mixers to self-hosted wallets and validators.

The hearing featured speakers well-versed in cryptocurrencies, including speakers from TRM Labs, Coinbase, and Circle, among others.

After multiple testimonials highlighted the benefits of being able to track transactions on-chain when it comes to illicit financial uses, such as the case of… Ransom of colonial pipeline breachRep. Ritchie Torres (D-N.Y.) said what many in the room seemed to be thinking.

“Using cryptocurrencies as a scapegoat provides more instant gratification than promoting cyber hygiene,” Torres said.

However, the controversy with lawmakers has highlighted the nuances of cryptocurrencies and shown that illicit financing is still likely to occur in the world. The context of the traditional financial system.

Michael Mosier, co-founder of Arktouros and former head of the Financial Crimes Enforcement Network, told lawmakers it doesn't make sense to subject miners and validators to oversight requirements like those set forth in the Bank Secrecy Act.

“Miners and validators basically produce blocks and verify blocks,” Mosier said. “And they operate like any ISP on the Internet today. This is not something we subject to KYC [requirements] Meaning it is just data being processed. In the same way for miners and validators, it is basically a random process of allocating processing data.

The hearing focused on the key issues of who should be held liable for illicit financing when it comes to cryptocurrencies. While there appears to be agreement among lawmakers that tools like mixers should be subject to greater scrutiny, overall there has been a recognition that cryptocurrencies in and of themselves do not lead to illicit finance.

Where encryption is vulnerable

“It's clear in every assessment of treasury risk and every assessment of blockchain analytics that the vast majority of illicit financing to the extent that it even occurs in cryptocurrencies happens on centralized exchanges, where ups and downs happen,” Mosier said. “And almost all of this happens abroad.”

The lack of a coherent AML/KYC framework for cryptocurrencies contributes to this.

“What is strange to me is that one of the most promising ways to help bridge regulatory gaps and manage risks surrounding decentralized infrastructure is to develop digital identity systems, something both the US government and private sector companies are working on,” said Yaya Fanusi, director of AML and Risk Policy. “This topic has only been mentioned and discussed briefly,” he said at the Crypto Council for Innovation, in an email to Unchained. He was an observer of the session. “But digital identity development may be the only emerging innovations that satisfy anti-money laundering regulators and blockchain creators alike.” whether.”

The transparency and public nature of the blockchain ledger is a mitigating factor for the illicit use of cryptocurrencies, according to testimony by Carol House, a senior fellow at the Atlantic Council. “SWIFT, FedWIRE, and cash movements do not post transactions to public ledgers or records for anyone to see.”

“However, cash also takes a lot of time and space to get from point A to point B around the world,” House said.

House stated that the design of cryptocurrencies makes them more vulnerable to the risk of illicit use because many of the attractive features from the traditional suite of financial products are contained together in a single asset, which is cryptocurrencies.

“Crimes involving cryptocurrencies still exist, and many of them exploit the aspects of cryptocurrencies that make the technology generally attractive — fast, limitless, irreversible, with the ability to transfer funds without an intermediary. These are features, not bugs,” Fanusie added. .

He also raised the fundamental issue of tackling the illicit use of cryptocurrencies, which is that they have many benefits for legitimate users as well.

“There is a tension between those who want to address the risks of cryptocurrencies through stricter regulations that disrupt the industry’s infrastructure and those who want a more careful and responsible approach that enables these features to grow and benefit consumers,” Fanusi said.