As a U.S House Committee scrutinizes crypto, experts warn greater regulation and transparency are needed for mainstream acceptance.
On February 25, the U.S. House Committee on Financial Services, Subcommittee on National Security, International Development, and Monetary Policy held a hearing titled "Dollars Against Democracy: Domestic Terrorist Financing in the Aftermath of Insurrection" (audio link).
The committee is interested in following the flows of funds that could be used to fund extremists looking to incite insurrection, including the attack on the U.S. Capitol Building in Washington DC on January 6th.
According to committee memos, the committee is examining the role of Bitcoin transfers used to support far-right extremists that participated in storming the Capitol.
According to a report by Chainalysis alt-right internet personality, Nick Fuentes, is among those who received a BTC transfer prior to joining the attack on the Capitol Building.
The report states: "On December 8, 2020, a donor sent 28.15 BTC — worth approximately $522,000 at the time of transfer — to 22 separate addresses in a single transaction. Many of those addresses belong to far-right activists and internet personalities."
Nick Fuentes was transferred 13.5 BTC (worth approximately $250,000 at the time of the transfer), far more than other recipients, several other parties received significant funds, including anti-immigration organization VDARE, alt-right streamer Ethan Ralph, and several addresses whose owners are as yet unidentified.
We interviewed Laura Hoffner, Security Analyst, Concentric Advisors, and Sarah P. Alexander, an attorney at Constantine Cannon LLP who specializes in whistleblower cases to learn more about how Bitcoin's role in transfers of money around the attack.
"Almost since its inception, the allure of anonymity that cryptocurrency has provided bad actors meant they were the quickest to adopt its use. The latest use for the Capitol Attack is part of a long line of cryptocurrency being used for nefarious purposes because of both its anonymity and lack of central control, as well as transaction transparency (via the blockchain)," Hoffner said.
Hoffner and Alexander concurred that greater regulation will ultimately serve as a key part of the "mainstreaming" of crypto which seems so close at hand.
"I see AML regulation as a necessary step to allow BTC to go mainstream. There’s nothing inherently at odds between an investment going mainstream and increased regulation. Usually, these go hand and hand. As more retail investors join an investment vehicle, the regulators have an increased motivation to protect the public’s interests," Atty. Alexander said.
The involvement of so many institutional investors, which have been largely responsible for the 400% bull run BTC has had in the past 12 months, despite the recent price correction, is changing the uniform -- less blue jeans and ironic t-shirts more slate gray suits of traditional finance.
"There's no question the wild west ethos of crypto is being forced to confront the reality that secretive money exchanges are going to attract people motivated to keep where their money goes a secret. As regulators begin to get a handle on this, I do expect the traditional financial bodies to update their regulatory tools to encompass crypto. Treasury, and particularly FinCEN, doesn't have an option not to if it wants to have any hope of reigning in money laundering," Atty. Alexander said.
Hoffner pointed out this is just one incident in a tangled web of crime that benefits from the anonymity of crypto.
"The use of cryptocurrency as a method of ransom payment in cyber extortion is on an alarming rise. Ransomware gangs made $350 million in 2020, which is up 311% from 2019. We only anticipate this trend to continue in prevalence," Hoffner said.
As Bitcoin moves to mainstream adoption and grabs more retail investors and more mainstream awareness, it is unfortunately also likely to be used in more crime.
"The movement of dark money is becoming harder in the traditional banking system thanks to increased attention on international banks’ internal control and accounting failures, not to mention sunshine acts revealing beneficial ownership information in the UK and US. Dark money will go somewhere. I think it’s a not crazy prediction that we’ll see even more of it moving to crypto," Atty. Alexander said.
According to Alexander, tracking "dark money" is key to the healthy growth of crypto as an accepted asset class. The original meaning of dark money applies to anonymous donations to non-profits and political campaigns in order to gain influence and launder money; in this case, the idea is being extended to money that can be transferred between individuals while remaining anonymous by using cryptocurrencies.
"Washington appears to have realized just how closely tied money-laundering and good governance is. I expect we’ll see more efforts to stem the movement of dark money. The parallel growth of crypto will undoubtedly lead to a further tug-of-war between those with a vested interest in making crypto-friendly to dark money and those who want to see the end of money laundering and tax avoidance."
Cover image modified from photo by David Mark from Pixabay