The House Financial Services Committee recently held a hearing focused on illicit activity in digital assets. The discussion follows two others conducted last month, amidst reporting of Hamas’s alleged use of cryptocurrency to fund terrorist activities.
However, presumptions that terrorists proportionately benefit from any illicit usage of cryptocurrencies have largely been proven exaggerated, and reflect deep-rooted misconceptions about the nature of cryptocurrencies that require clarification if the US aims to formulate proportionate regulations.
The misconceptions are fuelling proposed legislation in the Senate, and imminent introduction in the House, alleging to fill the imagined gaps in the financial system perpetuated by crypto.
The common assumption that terrorists and criminals majorly source contributions through crypto due to its perceived lack of records and reporting requirements, comparable to the regulated banking system, needs a careful reassessment. Albeit bad actors will endeavor to exploit any available resource for their objectives, crypto is no exception.
The latest US Department of the Treasury annual report on terrorism financing indicates that instances of crypto-related terrorism funding are actually “less prevalent than those involving traditional financial assets”.
The rising blockchain intelligence industry, valued in billions of dollars, precisely tracks activities on public blockchains in order to identify potential miscreants. This highly valuable work is a service to not only government agencies globally, but also to all conscientious actors within the global crypto sector who proactively employ these analytics to identify illicit actions and mitigate risk for everyone.
The public nature of blockchains and the equipped technologies make it relatively easy, in cooperation with the right players, to identify bad actors and seize assets before they’re used for nefarious purposes. This is one of the reasons the US government is among the largest holders of Bitcoin worldwide.
However, certain areas within the crypto ecosystem do warrant special policy attention. For instance, crypto “mixers” that obscure the identities of crypto users, in ways that potentially undermine the inherent transparency of public blockchains. While mixers can serve legitimate financial privacy purposes, they are often exploited to launder money.
Considering the revelations and more provisions of the current legislation, along with growing analytics capabilities, crypto proves to be a less viable platform for terrorism than the Internet itself. Nevertheless, this should not infer that it should escape regulation.
Authors: Brian Brooks and Sujit Raman