Lawmakers should be alarmed by the increasing use of digital assets like cryptocurrencies for money laundering, drug trafficking, terrorist financing and other financial crimes. Nations like Russia, Iran and North Korea have used digital assets to evade sanctions, launder stolen funds, and fund illegal weapons. North Korean actors, for example, reportedly stole more than $1.7 billion in digital assets in 2022 and laundered the coins using sophisticated techniques such as chain-hopping, the process of converting one cryptocurrency into another to hide illicit funds.
There is a pressing need for a clearer and workable regulatory framework to prevent financial crimes using cryptocurrency. Currently, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Internal Revenue Service each have some authority over cryptocurrency. This regulatory patchwork makes enforcement of anti-money laundering laws difficult, leaving huge loopholes in the anti-money laundering and countering the financing of terrorism space.
Recognizing this urgency, some in Congress are beginning to address the issue, first with an amendment to the National Defense Authorization Act (NDAA) for 2024.
Introduced by Sen. Kirsten Gillibrand (D-N.Y.), Sen. Cynthia Lummis (R-Wyo.), Sen. Elizabeth Warren (D-Mass.) and Sen. Roger Marshall (R-Kan.), the amendment requires regulators to set examination standards for financial institutions engaged in crypto activities. It also requires the Treasury Department to give recommendations to Congress regarding crypto asset mixers and anonymity-enhancing crypto assets.
The amendment was successfully attached to the Senate’s version of the NDAA in late July. The Act now needs to be reconciled with the House version of the military spending bill. This is very important legislation and should be included in the final NDAA.
Sen. Joe Manchin (D-W.Va.), Sen. Lindsey Graham (R-S.C.), Warren and Marshall have also introduced the Digital Asset Anti-Money Laundering Act to close recognized loopholes in the monitoring and regulation of digital assets. The legislation would, among other things, extend Bank Secrecy Act responsibilities to companies that facilitate digital asset transactions; direct the Financial Crimes Enforcement Network to issue guidance to financial institutions on mitigating the risks of transacting with digital assets that have used anonymity-enhancing technologies; and address gaps in “unhosted” digital wallets, which allow users to bypass anti-money laundering and sanctions checks.
These proposals would help establish clear regulations so that law enforcement can more effectively detect and prevent illicit activity in the crypto industry. This much needed clarity will also allow whistleblowers to recognize and report industry failures before they are exploited by criminal actors. Our civil and criminal enforcement agencies must increasingly devote their limited resources to policing the growing and ever-changing crypto landscape, and insiders with first-hand knowledge have never been more critical to their success. According to CFTC data, more than 20 percent of the 82 enforcement actions the agency filed in 2022 involved digital assets, while the SEC recently ramped up hiring in its crypto assets division.
Without a clear regulatory framework, investors are at enormous risk for fraud and money laundering, and sanction evasion becomes too easy while the crypto market operates largely in the dark.
Sam Brown is an attorney at Phillips & Cohen, a whistleblower law firm in Washington, D.C. Erika Kelton is a partner at Phillips and Cohen and teaches a course on whistleblower law at Berkeley Law at the University of California. Follow her @erikakelton.