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Money laundering is a $2 trillion problem and crypto’s role is bigger than you think, Congress says – DL News
- A lot of criminal activity happens off-chain, experts say.
- Blockchain analysis may miss this activity.
- Blending and bridging techniques can also mask the extent of crime captured.
The extent to which crypto is used to fund bad actors such as drug traffickers and activist organizations is worse than analysts estimate, Congress said Thursday.
The role of crypto in illicit financing is currently the subject of fierce debate among lawmakers.
The crypto industry likes to cite research showing that money laundering represents only a tiny fraction of crypto transaction volume – 0.62% in 2022, according to On-Chain Analysis.
But those numbers underestimate the extent of crypto’s role in illicit financing, Carole House told Congress on Thursday, because they don’t account for off-chain activity.
Blockchain analytics companies “see the information they have access to, and it’s available on-chain. They don’t see off-chain activity. They don’t know what law enforcement and agencies know,” House said.
House is a nonresident senior fellow at the Atlantic Council’s Geoeconomic Center and a resident executive at venture capital firm Terranet Ventures.
She was among the expert witnesses who testified at a hearing before a House Digital Assets Subcommittee, convened to discuss how policy can improve tools used to combat crypto crime.
House said analytics companies — which can track illicit financing on blockchain — provide an essential service, and law enforcement and regulators rightly rely on them.
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Nonetheless, she said, their tracing does not take into account a broad spectrum of illicit activity in off-chain transactions.
This runs counter to a favored crypto industry narrative – that blockchain transparency is a strong defense against illicit activity, and the problem is far more serious in the opaque traditional financial system.
For example, Grant Rabenn, Coinbase’s financial crimes legal director, told Rep. Ritchie Torres during the hearing that The United Nations Money laundering is said to account for 5% of global gross domestic product, or up to $2 trillion per year.
Others, including House, say blockchain transparency has limits.
One limitation of blockchain tracing is that much illicit activity occurs on exchanges, which internally match customer orders but do not report that volume on the blockchain.
The National Bureau of Economic Research estimates that when it comes to Bitcoin, this off-chain transaction volume is at least 10 times higher than the on-chain transaction volume.
Another limit 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 who want to track transactions.
The cups have become a popular method for cybercriminals to hide their tracks after a robbery.
“Bad criminals are stupid”
Rep. Sean Casten said during the hearing that he is concerned that criminals are using channel mixing and bridging techniques to hide their tracks.
“Bad criminals are stupid. Those who get away with it are smart, and they will not commit crimes where it is easy to follow crime,” he said.
Casten’s comments reflect the government’s general concerns that offenders are using blenders.
In October, the Treasury’s financial crime network designated mixture as a major money laundering concern and an “acute” threat to national security.
FinCEN has proposed rules that would essentially require banks to report suspicious transactions among their mixer clients.
The government has also taken enforcement action against popular mixers like Tornado Cash, which has been accused to facilitate the transactions of North Korea-affiliated Lazarus Group hackers and others.
But data shows that as authorities become more careful about mixers, criminals turn to crossed chain bridges.
“We play this game Whac-a-Mole…we evolve into these chain jumping techniques,” Casten said.
“We play this Whac-a-Mole game…we move on to these chain jumping techniques.”
But Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs, said companies like his can actually trace this activity.
TRM traces “fund flows across 29 different blockchains and approximately 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 outlets to realize their ill-gotten gains, he added.
Lazarus stole $293 million in crypto in 2023.
Heated debate
The hearing was the culmination of months of heated debate on the role cryptocurrencies play in financing terrorism and financial crimes – particularly following the Hamas attack on Gaza on October 7.
THE Wall Street Journal reported As of October 10, a Hamas affiliate had raised $93 million in crypto funding over the past few years, citing data from analytics firms Elliptic.
Anti-crypto senator Elizabeth Warren rallied around 100 members of Congress to pen an open letter, building on the Journal article and calling on the Biden administration to crack down on “crypto-funded terrorism.”
After backlash from the crypto industry, Elliptic said that Newspaper had misinterpreted his data.
In a separate hearing before the House Financial Services Committee on Wednesday, Brian Nelson, Under Secretary of the Treasury’s Bureau of Terrorism and Financial Intelligence, conceded that the role of cryptography in financing terrorism is limited.
“Terrorists still, frankly, prefer to use traditional products and services,” he said.
Joanna Wright is a regulatory correspondent at DL News. Sebastian Sinclair, is markets correspondent at DL News. Do you have any advice? Contact them at joanna@dlnews.com And sebastian@dlnews.com.
Correction, February 16: A previous version of this story incorrectly attributed Coinbase financial crimes legal director Grant Rabenn’s quote on money laundering numbers to Rep. Ritchie Torres. The story has been updated to correct the error.