The US Government Keeps Mentioning Terrorism


Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

The past two months have seen multiple government officials discuss crypto projects in the same breath as the Jan. 6 insurrection. This is a potential sign that regulators might tie cryptocurrencies to domestic terrorism.

Frequent refrain

Key narrative

The Subcommittee on National Security, International Development and Monetary Policy, a part of the House Financial Services Committee, will hold a hearing on Thursday titled “Dollars against Democracy: Domestic Terrorist Financing in the Aftermath of Insurrection.” While it’s unclear what the subcommittee plans to focus on, likely to come up is a December transaction of 13.5 bitcoin, worth around $500,000 at the time, to far-right figures who may have been present at the Jan. 6 Capitol Hill insurrection in Washington, D.C.

Why it matters 

Related: The State of Crypto in Germany

Is this part of a larger trend? U.S. goverment officials, particularly Treasury Secretary Janet Yellen, have mentioned cryptocurrencies in relation to domestic terrorism multiple times over the past two months. Congresspeople are investigating whether DLive, a crypto-based video streaming project associated with the Tron Foundation, was used to fund insurrectionists at the Capitol on Jan. 6. 

It is worth paying attention to how government officials are discussing cryptocurrencies and what that could mean for the industry.

Breaking it down

Details are currently scarce about this week’s House hearing. There’s still no witness list or hearing memo (CoinDesk reached out to the Chair of the subcommittee, but had not heard back by press time). But here’s what we know so far:

  • Secretary Yellen has now said on three different occasions there are concerns about crypto use in terrorism, most recently saying, “Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”

  • Reps. Raja Krishnamoorthi (D-Ill.) and Jackie Speier (D-Calif.) have asked Justin Sun and DLive CEO Charles Wayn if “foreign-based blockchain donations” went to individuals present on Capitol Hill on Jan. 6.

  • Earlier this month, Buzzfeed News published a confidential Treasury Department assessment about how cryptocurrencies were being used by terrorists overseas. The assessment mentioned mixers and other privacy-enhancing tools, according to the report.

  • If we zoom out a bit, the U.S. Department of Justice just charged three North Korean programmers with allegations of stealing $100 million in crypto (as part of a broader scheme that let the hackers steal $1.3 billion).The DOJ also alleges these programmers tried raising funds in an initial coin offering (ICO) to fund the North Korean government.

  • The United Nations has said North Korea is using its crypto programs to fund its nuclear program

How crypto is perceived in the halls of government will help determine what sort of regulations are enforced. The Financial Crimes Enforcement Network (FinCEN), for example, is still considering a proposed rule that would force onerous identification requirements onto crypto exchanges sending funds to private wallets. While this rule is currently on a sort of pause during an extended comment period, some version of it  could still be implemented in a few months. 

Related: NY AG’s Probe of Tether, Bitfinex Ends in $18.5M Settlement

When it comes to the Jan. 6 insurrection in particular, I expect these questions to come up during the hearing:

  • Can these bitcoin transactions be tracked (yes, for the most part) or prevented (maybe)?

  • Has crypto been used by individuals barred from centralized payment processors? 

  • Are there laws in place to address these sorts of transactions?

Let’s see where lawmakers land on these issues.

Tether

NY AG’s $850M Probe of Bitfinex, Tether Ends in an $18.5M Settlement. The New York Attorney General’s office settled with Bitfinex and Tether today. In short: The companies will pay $18.5 million as a fine and provide quarterly reports breaking down how much of the USDT reserve is in cash or a cash equivalent. My initial takeaway is this seems to be a positive sign for the companies. My big question is, what do these reports look like? Will they be attestations or something else? For more details, see my full report here. 

Robinhood

The full House Financial Services Committee held its first hearing on the GameStop pump last week. I live-tweeted it. The 5.5 hour hearing seemed fairly positive for the crypto industry, I think, in the sense that lawmakers were largely looking at Wall Street as the villains rather than the retail traders who boosted GameStop’s share price. 

Most of the lawmakers focused on the actions of Robinhood, and to a somewhat lesser degree Citadel and Melvin Capital, rather than on the behavior of the r/WallStreetBets participants. A few representatives did ask whether posts on Reddit were being manipulated by foreign or malign actors, and whether or not the Chinese government was stealing data. But by and large the emphasis was on piecing together what actually happened or grandstanding about Robinhood’s practices.

A lot of the questions were focused on Robinhood’s suspension of GME trading (and other securities), its payment for order flow model, margin requirements, etc. 

I wrote a few weeks ago that my initial takeaway from the episode was that a properly decentralized crypto entity might be able to operate without fear of a shutdown by the Securities and Exchange Commission. So far at least, that thesis hasn’t been challenged much. Based on that initial hearing, if it’s a group of folks who aren’t just trying to manipulate a stock to make a profit off other folks, there’s not a whole lot out there to indicate they’re going to get dinged. 

Still, the SEC has yet to weigh in, though the House committee Chair ,Maxine Waters (D-Calif.), has promised to hold a hearing with the regulators to talk about GameStop. 

Side note: One of the heroes of the hearing, according to r/WSB, was Rep. Brad Sherman (D-Calif.), the famously anti-crypto congressman who once compared libra to 9/11

Biden’s rule

Gary Gensler, former CFTC Chair and President Joe Biden’s nominee to head the SEC, will face his confirmation hearing next Tuesday at 10 a.m. ET. Rohit Chopra, formerly of the Federal Trade Commission, will also sit for a confirmation hearing to become director of the Consumer Finance Protection Bureau. As far as I know, both are expected to be confirmed. 

Changing of the guard

Elsewhere: 

  • “I don’t see any reason why there can’t be a coexistence of a central bank digital currency and … cryptocurrencies,”  said Jim Cunha, a senior vice president at the Boston branch of the Federal Reserve. Speaking on CoinDesk TV with anchor Christine Lee, Cunha also discussed the Boston Fed’s current work with the MIT Digital Currency Initiative exploring a digital dollar. Also showing support for a central bank digital currency: Treasury Secretary Janet Yellen.

  • Brave Browser Was Exposing Addresses in Tor Mode for Months: My colleague Ben Powers reported that the Brave browser had been leaking Tor domain requests to internet service providers for months. In other words, people who thought they were privately searching for domains in Brave were essentially doing so publicly. Brave said it patched the vulnerability last Friday.

  • Shares in Iced-Tea Maker-Turned Blockchain Firm Delisted by SEC: Anyone who was in the crypto space in December 2017 probably remembers when Long Island Iced Tea announced it was rebranding itself as Long Blockchain in an effort to boost its stock price and prevent Nasdaq from delisting it. This move succeeded, for about two months, before Nasdaq delisted the shares of Long Blockchain anyway. Three years later (yesterday), the SEC has now revoked the former iced tea purveyor’s registration, ending its stock market ambitions for good.

  • MoneyGram Puts Relationship With Ripple’s XRP on Hold: MoneyGram, which Ripple partnered with (and took a stake in) in 2019, is suspending its usage of Ripple’s On-Demand Liquidity product, at least until Ripple’s current legal fight with the SEC is concluded. The SEC filed an amended complaint last week, adding some new details but not changing its charges. I’ll be talking about this case tonight during a virtual panel hosted by the New York Financial Writers’ Association at 7:00 p.m. ET. Come check it out.

Outside crypto:

  • Highlights From the House COVID Bill (NPR): The U.S. House of Representatives looks to be on track to approve a massive, $1.9 trillion stimulus bill that would include $1,400 relief checks for individuals, rental existence, unemployment benefits, parental support and other forms of financial assistance. 

  • Federal Reserve Chairman Jerome Powell will appear before the Senate Banking Committee today and House Financial Services Committee tomorrow to give his semi-annual report on the state of the economy. There is some concern about inflation, and the market will be looking to hear his long-term view on the economy.

  • One last note: Last week I wrote that the Financial Accounting Standards Board hadn’t created any guidance around digital assets, which means Tesla’s bitcoin buy will have some tax reporting weirdness. A reader pointed out that the FASB can set policy for financial reporting standards but the IRS still creates the actual rules around this space. Mea culpa and thanks for keeping me honest!

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde

You can also join the group conversation on Telegram

See ya’ll next week!

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