Congress has become increasingly interested in the current state of knowledge about potential links between terrorist financing and money laundering. In the House of Representatives, the Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance held a hearing on June 8, 2017, titled “Virtual Currency: Financial Innovation and National Security Implications.” In the Senate, Senator Grassley (R-IA), along with Senators Feinstein (D-CA), Cornyn (R-TX), and Whitehouse (D-RI), recently introduced Senate Bill 1241, titled “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” The bill, which generally aims to strengthen criminal money laundering statutes, is specifically aimed at fighting terrorism and terror finance.
Of particular relevance with respect to S. 1241 are the potential implications of the bill on blockchain and digital currencies. There are three relevant proposed changes:
- Inclusion of digital currency in the definition of financial institution and monetary instrument under 31 U.S.C. § 5312(a): This provision of the Bank Secrecy Act (“BSA”) would be amended to state that “(2) “financial institution” means – […] (K) an issuer, redeemer, or cashier of travelers’ checks, checks, money orders, prepaid access devices, digital currency, or similar instruments, or any digital exchanger or tumbler of digital currency” [changes in bold];
- GAO Report: The bill calls for the Comptroller General to submit a report to Congress on: (1) the impact the amendments would have on law enforcement, the prepaid access industry, and consumers; and (2) the implementation and enforcement of the Treasury Department’s Bank Secrecy Act (“BSA”) regulations (76 Fed. Reg. 45403); and
- Homeland Security and Customs and Border Protection (“CBP”) Report: The bill calls for the Secretary of Homeland Security and the CBP Commissioner to submit a report to Congress on: (1) a strategy to interdict and detect prepaid access devices, digital currencies, and similar instruments at border crossings; and (2) an assessment of the infrastructure needed for this strategy.
Under the BSA, a person or an agent or a bailee of the person who is transporting, will transport, or has transported “monetary instruments” of more than $10,000 at one time to, from, or through the US must file a Report of International Transportation of Currency or Monetary Instruments . Including digital currency in the definition of “monetary instrument” would subject those devices to these anti-money laundering reporting requirements under the BSA, as stated in the bill summary.
The expanded definition of monetary instruments raises numerous logistical and technical questions. Digital currency can be stored in digital wallets, or “hot wallets,” through companies like Coinbase, Xapo, or BitGo, or stored offline in a hardware wallet. In theory, a person always carries their digital currency—or the ability to transact their digital currency—with them, including as they cross a border. This provision effectively requires the declaration of more than $10,000 in digital currency holdings whenever a person or persons jointly filing a declaration cross the border.
The challenge, of course, is that many of today’s financial instruments work this way. If you have online banking access on your phone, or the ability to draw cash off of your credit cards, and this exceeds $10,000, then you are similarly carrying digitally-accessable currency across the border. Moreover, these digital capabilities enable a person to access the overwhelming currency of choice for criminals: Cash.
This challenge is less about virtual currency and more about how to adapt regulatory structures designed for an earlier era to today’s digitally-enabled economy. Singling out virtual currencies at the border doesn’t materially impact the risk of money laundering or terrorism financing. While criminals are using digital currencies like bitcoin, the majority of digital currency activity does not involve illicit activity (See Jonathan Levin of Chainalysis’s Written Testimony). In fact, according to a recent report from the Center for a New American Security (CNAS), “there is no more than anecdotal evidence that terrorist groups have used virtual currencies to support themselves.” The technology does have features that may be attractive to criminals, including enabling low cost, efficient, peer-to-peer transactions, but those features are exactly why the technology may bring huge benefits to myriad industries (e.g., Digital Identity, Smart Contracts, Pharmaceuticals).
At the recent hearing on virtual currencies convened by the House Terrorism and Illicit Finance Subcommittee, the witnesses repeatedly emphasized that criminals and terrorists are mostly using unregulated, overseas exchanges. Due to existing guidance and regulation within the US, US blockchain and digital currency companies are already registering with FinCEN and complying with anti-money laundering (AML) and know your customer (KYC) procedures. This deters criminals from using their services as should the permanence and transparency inherent in blockchain technology. Former Assistant United States Attorney Kathryn Haun suggested the best way to address illicit use of virtual currencies is “more statutory authority to go after the segments of their [unregulated and overseas] businesses that rely upon US companies for support.” In that way, Section 15 of S. 1241, which seeks to strengthen existing laws that allow law enforcement to obtain foreign bank records, is a more impactful step.
Congress should consider the impacts of singling out virtual currency users, the majority of whom are not using virtual currency for illicit purposes. A better and more risk-based approach should strike a balance between discouraging illicit use while still encouraging innovation.