Money laundering is a $2 ton problem and crypto’s role is bigger than you think, Congress hears – DL News

The extent to which crypto is being used to fund bad actors such as drug traffickers and militant organizations is worse than analysts estimate, Congress said Thursday.

The role of crypto in illicit financing is currently a topic of bitter debate among lawmakers.

The crypto industry likes to cite research showing that money laundering accounts for a small fraction of crypto transaction volume — 0.62% in 2022, according to Chainalysis.

But these numbers underestimate the extent of crypto’s role in illicit financing, Carole House told Congress on Thursday, because they don’t account for offchain activity.

Blockchain analytics firms “see the information they have access to, and it’s available on chain. They don’t see offchain activity. They don’t know what law enforcement and agencies know,” House said.

House is a non-resident senior fellow at the Atlantic Council GeoEconomics Center, and a resident manager at the venture capital firm Terranet Ventures.

She was one of the expert witnesses who testified during a hearing in a digital assets subcommittee in the House of Representatives, held to discuss how policy can improve tools used to fight cryptocrime.

House said analytics companies — which can track illicit financing on the blockchain — provide a critical service, and law enforcement and regulators rightly rely on them.

Nevertheless, she said, their tracking does not capture a broad spectrum of illegal activity in offchain transactions.

This runs counter to a favorite narrative of the crypto industry – that the transparency of the blockchain is a robust defense against illegal activity, and the problem is greater by orders of magnitude in the opaque mainstream financial system.

For example, Coinbase’s Financial Crimes Legal Director Grant Rabenn told Representative Ritchie Torres at the hearing that the United Nations says money laundering accounts for a staggering 5% of global gross domestic product — up to $2 trillion a year.

Others, including House, say blockchain transparency has limits.

One limitation to blockchain tracking is that a lot of illegal activity occurs at exchanges, which match the customer orders internally but don’t report that volume on the blockchain.

The National Bureau of Economic Research estimates that when it comes to Bitcoin, this offchain transaction volume is at least 10 times greater than onchain transaction volume.

Another limitation to blockchain transparency is the obfuscation provided by crypto-mixers.

Crypto mixers like Tornado Cash allow users to mix their assets with others before they are transferred to their intended recipient, obscuring the trail for those seeking to trace transactions.

Tumblers have become a popular method for cybercriminals to cover their tracks after a heist.

‘Bad criminals are stupid’

Representative Sean Casten said at the hearing that he is concerned that criminals are using mixers and chain bridging techniques to hide their tracks.

“Bad criminals are stupid. Those who get away with it are smart, and they are not going to commit the crime where it is easy to detect the crime,” he said.

Casten’s comments reflect broad concerns in government that lawbreakers are using mixers.

In October, the Treasury’s Financial Crimes Enforcement Network designated commingling as a major money laundering problem and ‘acute’ national security threat.

FinCEN has proposed rules that would essentially compel banks to report suspicious transactions in their mix of customers.

The government has also launched enforcement actions against popular mixers such as Tornado Cash, which has been accused of facilitating transactions by North Korea-affiliated Lazarus Group hackers and others.

But data shows that as authorities get wiser to mixers, criminals are turning to cross-chain bridges.

“We’re playing this Whac-a-Mole game … we’re moving into these chain-hopping techniques,” Casten said.

“We’re playing this Whac-a-Mole game … we’re moving into these chain-hopping techniques.”

But Ari Redbord, head of legal and government affairs at blockchain intelligence company TRM Labs, said firms like his can actually detect this activity.

TRM tracks “the flow of funds across 29 different blockchains and about 70 million different assets today,” Redbord said.

“So we track the flow of funds across different blockchains, cross-chain exchanges, across bridges.”

This prevents bad actors like North Korean hackers from finding loopholes to realize their ill-gotten gains, he added.

Lazarus stole over $293 million worth of crypto in 2023.

Fierce debate

The hearing was the culmination of months of heated debate over the role cryptocurrencies play in funding terrorism and financial crimes — particularly in the wake of Hamas’ October 7 attack on Gaza.

The Wall Street Journal reported on Oct. 10 that a Hamas affiliate has raised $93 million in crypto financing over the past few years, citing data from analytics firms Elliptic.

Anti-crypto firebrand Senator Elizabeth Warren rallied about 100 members of Congress to write an open letter, using the Journal article, calling on the Biden administration to crack down on “crypto-financed terrorism.”

After a backlash from the crypto industry, Elliptic said the Journal misinterpreted its data.

During a separate hearing in the House Financial Services Committee on Wednesday, Brian Nelson, Under Secretary of the Treasury’s Office of Terrorism and Financial Intelligence, conceded that crypto’s role in terrorist financing is limited.

“Terrorists still prefer, to be honest, to use traditional products and services,” he said.

Joanna Wright is a regulation correspondent at DL News. Sebastian Sinclair, is a market correspondent at DL News. Do you have a tip? Reach out to them at [email protected] and [email protected].

Correction, Feb. 16: An earlier version of this story incorrectly attributed Coinbase’s director of financial crimes legal Grant Rabenn’s quote about money laundering figures to Rep. Ritchie Torres. The story has been updated to correct the error.