TESTIMONY OF
Jane Khodarkovsky
BEFORE THE
U.S. House Financial Services Committee, Subcommittee on Digital Assets, Financial
Technology and Inclusion“Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets”
November 15, 2023
INTRODUCTION
I am honored to speak with you today and grateful to be able to contribute to what I
believe is the unique challenge to preserving the United States’ ideals and values. In 1992, when
I was a child, my family and I left Odesa, Ukraine, then part of the former Soviet Union, as
refugees. I sit before you the product of the United States’ leadership in innovation andpromotion of democratic ideals while countering illicit finance and autocratic regimes. Today,
more than ever before, those ideals and commitments are being challenged around the world, andwe are at a critical juncture to safeguard those ideals and the country’s national security.
As a Trial Attorney and Human Trafficking Finance Specialist in the Money Launderingand Asset Recovery Section of the U.S. Department of Justice (DOJ), and previously as a local
and state prosecutor, I investigated and prosecuted financial crimes, including money launderingand corruption. Following the money to detect, dismantle, and disrupt those who disguise,
conceal, and attempt to obfuscate the U.S.’s financial system to commit crimes, including
funding terrorism or authoritarian leaders, was critical. My former colleagues, law enforcement
partners, and the whole of government (including other federal agencies, such as the Financial
Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), Internal
Revenue Service (IRS), etc.) worked to identify not only those directly engaging in criminal
activity but also those who were acting as “gatekeepers” or third-party facilitators like bankers,
real estate agents, and lawyers, to help facilitate and conceal those crimes. It was critical toconduct financial investigations in parallel to the investigations of the underlying criminal
activity, whether human trafficking, child exploitation, terrorist financing, and other financial
crimes, to ensure that real property and assets that were proceeds of, facilitated, or were involvedin the criminal network could be seized and forfeited.
I am often asked why I transitioned from DOJ to the private sector to work and support
software developers in the blockchain space. The answer is quite simple - I believe that thistechnology, which is open, transparent, immutable, and can be accessed by people of all
backgrounds around the world, is critical to the future. And, technology is not inherently goodor bad. It is how the technology is used that must be evaluated and addressed. We live in aworld where innovation is moving rapidly, including changing how people and companies
interact with the new technology and its applications. As a particular technology – and the way
1

in which it is used – evolves, so too should the risk based analysis of whether the legislative,
regulatory and legal frameworks need to follow. I believe that we cannot promote innovation
without also protecting consumers and combating illicit finance and terrorist financing. We must
do so with circumspection and nuance.
The 2020 DOJ Report of the Attorney General’s Cyber Digital Asset Task Force statedthat there were over 2,000 cryptocurrencies used to transfer value around the globe in exchange
for goods, services, and other sources of value.1 As of 2022, data from Chainalysis suggests thatthe percentage of all cryptocurrency activity associated with illicit activity was 0.24%.2 While
all statistics should be evaluated in context, there is little verifiable comparison between thepercentage of illicit activity through traditional financial systems given the lack of an immutablepublic ledger.
Importantly, in my experience, sophisticated criminal actors who engage in money
laundering and terrorist finance leverage all available financial instruments and methods tofurther their criminal activity and often do not do so in silos. This is evident in the below DOJ
cases.
After the Russian invasion of Ukraine on February 22, 2022, DOJ launched theKleptocapture Taskforce.3 The taskforce specifically targets criminal actors—regardless ofwhatever means of exchange they use—to defend and protect the U.S. economy from illicit
funds linked to Russia. As of March 2023, thirty-five individuals and corporations werecharged.4 The assets seized in the United States and abroad included at least four yachts5 whose

1

U.S. Department of Justice, Report of the Attorney General’s Cyber Digital Task Force: Cryptocurrency
Enforcement Framework (October 2020), at 5,
https://www.justice.gov/archives/ag/page/file/1326061/download#:~:text=As%20the%20Task%20Force%2
0has,crimes%2C%20such%20as%20theft%2C%20directly (herein referred to as “2020 Crypto
Enforcement Framework”).

2

Chainalysis, The 2023 Crypto Crime Report (February 2023), at 6,
https://go.chainalysis.com/2023-crypto-crime-report.html.

3

Press Release, U.S. Department of Justice, Attorney General Merrick B. Garland Announces Launch of
Task Force KleptoCapture (March 2, 2022),
https://www.justice.gov/opa/pr/attorney-general-merrick-b-garland-announces-launch-task-force-kleptocapt
ure.

4

Ryan Lucas, Over the Past Year DOJ’s Task Force Kleptocapture Has Been Extremely Busy, NPR Illinois(March 3, 2023),
https://www.nprillinois.org/2023-03-03/over-the-past-year-dojs-task-force-kleptocapture-has-been-extremel
y-busy.

5See, e.g., Press Release, U.S. Department of Justice, $300 Million Yacht of Sanctioned Russian Oligarch
Suleiman Kerimov Seized by Fiji at Request of United States (May 5, 2022),
https://www.justice.gov/opa/pr/300-million-yacht-sanctioned-russian-oligarch-suleiman-kerimov-seized-fiji-request-united; Press Release, U.S. Department of Justice, $90 Million Yacht of Sanctioned Russian
Oligarch Viktor Vekselberg Seized by Spain at Request of United States (April 4, 2022),
https://www.justice.gov/opa/pr/90-million-yacht-sanctioned-russian-oligarch-viktor-vekselberg-seized-spai
n-request-united; Tal Yellin, From Yachts to Lavish Estates, Tracking Russian Assets Seized So Far, CNN

2

combined value was just under $1 billion dollars, six real estate properties in New York andFlorida worth an estimated combined $75 million,6 and none of which were reported to bepurchased using digital assets.7 This past week, on November 8, 2023, the U.K. added
twenty-nine additional Russian individuals and entities operating in and supporting Russia’sgold, oil, and other strategic sectors.8 Simultaneously, the U.K. also issued a red alert to raiseawareness of common evasion techniques used by enablers in the gold industry.9
Similarly, DOJ launched the National Cryptocurrency Enforcement Team (NCET)10 to
specifically target criminal actors using cryptocurrency or related technologies to move andtransfer illicit funds. What I found as a prosecutor—and my experience is not unique—is thatwhen criminals turn to digital methods, they actually leave breadcrumbs for investigators tofollow. Baked into this technology are lines of code which make up the blockchain itself. When
analyzed by sophisticated professionals, blockchain analytics help investigators follow themoney in a way that they cannot with more traditional payment systems, such as outgoinginternational wire transfers from U.S. banks or cash transfers.
Importantly, there are already robust enforcement mechanisms enshrined in U.S. law todeal with the issues we are discussing today. The bigger question is whether U.S. authorities andlaw enforcement are adequately empowered and funded to enforce those laws that are already on
the books. For instance, just because the means of exchange is crypto-based does not reduce a
U.S. person’s legal obligation to comply with U.S. economic sanctions, which would be the sameas transferring fiat currency through a U.S. bank. So if a U.S.-based crypto exchange facilitates
cryptocurrency transfers to Hamas, or a sanctioned country, they are violating U.S. law, and canbe fined or prosecuted accordingly. As we are currently seeing, the issue is not necessarily
U.S.-based crypto exchanges or U.S. based entities. Given the global nature of the blockchain
many of the most challenging questions for lawmakers is how to ensure foreign entities arecompliant.
(April 13, 2022),
https://www.cnn.com/interactive/business/russian-oligarchs-yachts-real-estate-seizures/index.html.
6

Lucas, supra note 4.

7

Dareh Gregorian, Here Are the Super Yachts Seized from Russian Oligarchs, NBC News (May 22, 2022),
https://www.nbcnews.com/politics/politics-news/are-superyachts-seized-russian-oligarchs-rcna20346.

8

Press Release, Foreign, Commonwealth & Development Office, National Crime Agency, and The Rt HonJames Cleverly MP, UK Cracks Down on Gold and Oil Networks Propping up Russia’s War Economy(November 8, 2023),
https://www.gov.uk/government/news/uk-cracks-down-on-gold-and-oil-networks-propping-up-russias-wareconomy.

9Id.; See also, the use of oil by Iran to attempt to circumvent sanctions. Press Release, U.S. Attorney's
Office, District of Columbia, Largest U.S. Seizure of Iranian Fuel from Four Tankers (Aug. 14, 2020)
https://www.justice.gov/usao-dc/pr/largest-us-seizure-iranian-fuel-four-tankers.

10

Press Release, U.S. Department of Justice, Deputy Attorney General Lisa O. Monaco Announces National
Cryptocurrency Enforcement Team (Oct. 6, 2021),
https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-national-cryptocurrencyenforcement-team.

3

In April 2022, Secretary Yellen said, “we are aware of the possibility clearly that crypto
could be used as a tool to evade sanctions, and we are carefully monitoring to make sure that
doesn’t occur. But I would say we have a good deal of authority in this area and are using it andwill use it, and it is harder on a large scale for an economy to actually use crypto to evadesanctions. Even large-scale transactions would become apparent by those who regularly examine
the blockchain. We would see that there were large transactions taking place. Exchanges, andthose who use crypto need to get in and out of it to buy things in hard currencies and exchanges
are subject to AML/CFT regulations. So, they are part of the financial system that is subject tothose regulations.”11 Indeed, the traditional financial system remains a big avenue for illicit
actors to evade sanctions and launder money. There is no means of exchange that is moreanonymous than cash, which truly leaves no footprint, and there is no blockchain for cash.
Over the last month, in the wake of the heinous and barbaric terrorist attack on Israel,
there were public reports about the use of digital assets by terrorist organizations. The analysis
shows that terrorist organizations use diverse and sophisticated methods to facilitate their illicit
activity, including through the use of global investment portfolios, hawalas, international
exchanges, transfer of cash and remittances.12 Of the methods described, only the movement ofdigital assets on a public blockchain can be traced in real time by anyone with access to theInternet. Moreover, administering fund flows in global investment portfolios requires the“gatekeepers” and third party facilitators that I used to investigate during my tenure at the DOJ.
It is clear that U.S. anti-money laundering and counter terrorist financing regulations
must not be focused only on the use of digital assets but all aspects of the financial system, andthe government must find ways to develop tools to address the rising illicit finance of foreign
nations and autocratic regimes that could have devastating consequences for the U.S. democratic
ideals and national security interests. We must also find safeguards without jeopardizing the ruleof law and liberties such as privacy and financial inclusion.
Recommendations:● Ensure that compliant U.S. based companies and projects in the digital asset ecosystemremain in the United States to avoid increased criminal activity offshore, a brain drain,

11

The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System:
Hearing Before the Comm. on Financial Services, 117 Cong. 37 (April 6, 2022),
https://www.govinfo.gov/content/pkg/CHRG-117hhrg47477/pdf/CHRG-117hhrg47477.pdf.

12

Sam Lyman, How Misinformation On Hamas And Crypto Fooled Nearly 20% Of Congress, Forbes Digital
Assets (Nov. 8, 2023),
https://www.forbes.com/sites/digital-assets/2023/11/08/how-misinformation-on-hamas-and-crypto-fooled-nearly-20-of-congress/?sh=e3e3ef582706; Elliptic Team, Setting the record straight on crypto crowdfunding
by Hamas, Elliptic Blog (Oct. 25, 2023),
https://www.elliptic.co/blog/setting-the-record-straight-on-crypto-crowdfunding-by-hamas; Chainalysis
Team, Correcting the Record: Inaccurate Methodologies for Estimating Cryptocurrency’s Role in Terrorism
Financing, Chainalysis Blog,
https://www.chainalysis.com/blog/cryptocurrency-terrorism-financing-accuracy-check/.

4technological decline, and further undermining of U.S. democratic ideals and national
security interests.
○ Use whole of government tools to isolate autocratic and oppressive regimes that
use technology to surveil their civilian communities, undermine basic liberties,
and fund terrorists domestically and abroad.
● Lean into innovation through genuine sandboxes where the private sector could showcase
in a prudent and compliant manner risk management tools that could be effective toprotect and empower users. This will help ensure that before passing additional
regulation we fully understand the technology and its uses.
○ Help further develop additional software to better leverage activity-based risk
management on public ledgers, which is harder to spoof than static identities, as
we see in the traditional finance world.
● Increase funding for government agencies like FinCEN, OFAC, DOJ and law
enforcement for capacity building, increasing knowledge, expertise, and technology tomore quickly and efficiently analyze large data sets (including suspicious activity reports)
provided by financial institutions, centralized exchanges and other regulated andcompliant actors in the digital asset space. This will help law enforcement proactively
identify criminal networks, including sophisticated third party facilitators.
● Improve processes that already exist—adding precision and granularity in the information
provided by regulated entities in suspicious activity reports (SARs), real time reporting,cross collaboration and information sharing between blockchain analytic firms.
● Develop and use blockchain technology to help the U.S. government and U.S.
corporations from inadvertently funding illicit actors, terrorist organizations, orauthoritarian governments. Using blockchain can help to prevent corruption ingovernment procurement, counterfeit parts in law enforcement and military defense, andsupply chains free of forced labor or sanctioned goods/funds (including from China13,
Russia), among other benefits.
● Promote education and engagement for both the public and private sector to ensure thatnew technology can be used by all sectors of society to help secure privacy, promote
financial inclusion, and preserve national security interests.
● Lead cross-border collaboration between regulators and law enforcement to close gaps or
prevent jurisdictions with poor or no regulatory frameworks to take advantage of U.S. or
the international financial systems.

13

Uyghur Forced Labor Prevention Act (UFLPA) (Public Law No. 117-78).

5

I.

Blockchain Technology Can and Does Help Combat Illicit Finance

The U.S. government should use all tools available to combat illicit finance and counter
terrorism in a thoughtful and prudent manner. I believe that digital technology can and does help
combat illicit finance, but as with any instrument or method, it can be coupled with alreadyexisting systems to leverage its full potential and mitigate risk.
Virtual currency is a digital representation of value that functions as a medium of
exchange. The exchange value of a particular virtual currency may be dependent on agreements
between parties, and virtual currency can be both convertible (equivalent to the value of realcurrency) or non-convertible. Cryptocurrency is a form of virtual asset that uses cryptography tosecure financial transactions.
Blockchain is a distributed ledger technology (DLT) that allows users to record messages
in real time on a database that is public, transparent, and where the messages cannot be reversed.
The base layer of a blockchain is distinct in that it operates through distributed nodes (computersthat speak to each other), with no one centralized actor and no one single point of failure.
Consensus mechanisms, as defined in the code of a blockchain, facilitate work by dictating how
consensus gets done and by whom, and how these parties will be compensated to influenceparticipant behavior. The unique nature of the blockchain has even been accepted by some statelegislators as self-authenticating for evidentiary purposes.14
No Central Point of Control/Owner
The two most prevalent consensus mechanisms are proof-of-work (PoW) andproof-of-stake (PoS). Bitcoin and Ethereum were both PoW protocols until Ethereum’s
long-awaited transition to PoS occurred on September 15, 2022.15 In PoW systems, participants,
known as miners, expend effort to solve arbitrary mathematical hash computations to confirm
transactions, create new blocks, and mine new digital assets. Miners compete with one anotherfor valuable block rewards, either newly minted digital assets or payments in the native digitalasset, and the computations needed to be performed create a level of difficulty that prevents
gaming the system. Miners also function to secure the network because to attack a network
would require 51% of the network's computing power, which would be an almost impossible
endeavor.
PoS was introduced, in part, as an eco-friendly solution to the high energy consumption
problem, and to provide a solution to inefficiencies of digital assets operating in a PoW
consensus mechanism that inhibits scalability. Instead of miners, validators act as the server
running the blockchain’s network. Validators verify incoming additions to the blockchain’s
14

For example, Vermont enacted legislation declaring blockchain evidence self-authenticating. See 12 V.S.A.
§ 1913(b)(1) (“A digital record electronically registered in a blockchain shall be self-authenticating
pursuant to Vermont Rule of Evidence 902.”).

15

Sam Kessler, The Ethereum Merge Is Done, Opening a New Era for the Second-Biggest Blockchain,
CoinDesk (September 15, 2022),
https://www.coindesk.com/tech/2022/09/15/the-ethereum-merge-is-done-did-it-work.

6

database and access to a record of historical activity and secure the network. PoS consensus
mechanisms provide more transparency, equitability, a lower barrier of entry, and provide ahigher throughput enabling scalability—thus increasing the potential participation—due to agreatly reduced need for specialized mining equipment, high energy costs and overall efficiency.
As such, PoS systems include incentivization for long-term participation and building inherent
trust by introducing a degree of transparency and punishing bad actors. Regardless of whether ablockchain operates as a PoW or PoS, because it does not have a central owner or operator,
anyone can build applications or services on top of it.
Immutability
Immutability in the context of blockchain technology means the blockchain’s ledger ispermanent and unalterable. The ability for digital assets to be verified on a blockchain andavailable for anyone to see on the Internet makes it easier for law enforcement to follow the
movement of those assets in real time. Blockchain’s immutability also allows law enforcement
to view all transaction history, for all time, associated with any wallet address involved in a
known transaction.16 When a prosecutor or law enforcement has information about the source ofpotential “dirty” funds, a grand jury subpoena or other court authorized process can be used toobtain information from a centralized exchange or custodial service provider. The immutabilityof the blockchain coupled with its traceability is critical to investigations being effective.
Immutability is also critical to preserving evidence to be admissible in court. Moreover, nomatter how long an investigation or trial will take, the blockchain data will be there and willremain the same.17 This information could also be used to corroborate witness testimony, andhelp to seize, restrain, and forfeit proceeds or assets involved in the criminal activity. In victim
crimes, this information is critical to helping victims obtain restitution and forfeiture.

16

Alexandra D. Comolli and Michele R. Korver, Surfing the First Wave of Cryptocurrency Money
Laundering, 69 DOJ J. FED. L. & PRAC., no. 3, 2021 at 185 (“As such, even if an individual uses a
different address for every transaction, the historical trail from the present, Z, to the past, A, will betransactionally connected. This means that, if law enforcement can tie wallet address Z to Jane Doe, alltransactions from Z to A may also have a connection to her. Thus, blockchains may, in some respects, beworse for criminals than cash because any operational security failure may allow all their transactions to belinked to them—whereas cash has no ledger associated with it.”).

17

Sanjeev Bhasker, Alexandra D. Comolli, and Olivia Zhu, Carpe Crypto: Prosecuting Cases Involving
Digital Assets and Blockchain Technology, 70 DOJ J. FED. L. & PRAC., no. 4, 2022, at 110 (“The publicblockchain enables investigators to trace funds forwards and backwards from a single address or a single
transaction, akin to how investigators trace the movement of funds in fiat currencies. Yet, unlike more
traditional bank records, the blockchain does not identify the sender or receiver, apart from the public
addresses. It is here that blockchain analysis brings the great irony of digital assets front and center: The
need to cash out (that is, convert) digital assets into traditional currency remains the reality. Some virtual
asset service providers (VASPs), such as cryptocurrency exchanges, provide the all-important on and off
ramps connecting the “real world” and the “virtual world.” VASPs, which are generally recognized as
money service businesses (MSBs) domestically, are regulated in the United States under the Bank Secrecy
Act and respond to legal process with valuable attribution evidence—a result of their anti-money
laundering recordkeeping obligations (thank you, FinCEN!).”).

7

Pseudonymity
During my tenure at the DOJ, one of the biggest misnomers about digital assets and theblockchain was that digital assets were anonymous.18 Digital assets such as “bitcoin” operate on
ledgers with the use of addresses, or a long string of alphanumeric characters. Although theledgers do not contain what we ordinarily see as a first and last name of an individual, theinformation on the blockchain can be used to identify individuals by analyzing the transactions
between an individual’s address and third parties. For example, transactions on the ledger thatconnect to a centralized exchange or custodial service provider would allow law enforcement toseek information that U.S. regulated exchanges are required to collect as part of their anti-money
laundering and know your customer (KYC) requirements.
There are methods, however, that allow individuals to maintain privacy or obscure
information or connections between wallet addresses. One example is Anonymity Enhanced
Cryptocurrencies (AECs), sometimes referred to as “privacy coins”,19 which may use obscured
blockchains to limit traceability of the assets. The liquidity for AECs is fairly low, and muchless than Bitcoin or other digital assets,20 so it is less likely that AECs will be used for purposesof illicit activity instead of alternative financial instruments. As Treasury Secretary Yellen
testified in April 2022, using crypto to engage in illicit activity on a large scale “is not easy todo…”21 and would likely require an individual to exchange AECs for more liquid digital assets,such as Bitcoin or another digital asset that would be visible on a public blockchain. In addition,
in September 2023, after what appears to have been a hack of a Monero wallet, despite Monero’s
complexity of transaction graphs, blockchain tracing helped identify the potential hacker using
heuristic evidence.22 As such, while the risk of these assets being used to launder funds or to
engage in illicit activity may be less than compared to other methods of money laundering
simply because they are less available to bad actors, there are also now more tools available tomitigate the risks that do exist.

18

Matthew J. Cronin, Hunting in the Dark: A Prosecutor’s Guide to the Dark Net and Cryptocurrencies, 66
U.S. ATT’YS BULL., no. 4, 2018, at 71 (“Criminals believe that cryptocurrency is anonymous. That is
only partially correct. While no one needs to reveal their identity to open a Bitcoin wallet and transact inbitcoins, all transactions are recorded and available to the public on the blockchain. Reviewing criminallyrelated transactions on the blockchain offers similar insight into a criminal organization as a review offinancial services data.”).

19

See, e.g., Monero, https://www.getmonero.org/ Dash, https://www.dash.org/; and Zcash, https://z.cash/.

20

See generally https://coinmarketcap.com/; https://www.coingecko.com/.

21

Annual Testimony of the Secretary of the Treasury, supra note 11.

22

Jamie Redman, Moonstone Research Study Etches Doubts on Monero's Privacy; Crypto Community
Reacts, Bitcoin.com (November 5, 2023),
https://news.bitcoin.com/moonstone-research-study-etches-doubts-on-moneros-privacy-crypto-communityreacts/.

8

Speed of Transactions
Digital asset transactions have near-instant settlement. While instant settlement could
make it more difficult for law enforcement to stop the movement of funds, the traceability ofdigital assets on the blockchain, even through peer to peer transactions, is more transparent thanif criminals use cash or prepaid cards (or gift cards).23 Victims who are elderly, vulnerable, orfall prey to a business compromise or romance scam could have their bank accounts drained
instantaneously. If those funds are converted into cash, it could be almost impossible for law
enforcement to identify the perpetrators. When I was prosecutor at the New York County
District Attorney’s Office, I investigated cases where defendants forced employees or contractors
to cash checks through regulated check cashers only to confiscate the cash from the victims. The
cash would be nearly impossible to trace, including how to prove that the cash was later
deposited in a defendant’s accounts.
Applications of Blockchain Technology in Traditional FinanceIn addition to the permissionless blockchains, there are now growing numbers of
permissioned applications for blockchain technology. Traditional financial institutions are also
incorporating blockchain technology into their systems. Last Friday, JPMorgan announced thatit had launched programmable payments or automatic execution of payments on its permissioned
blockchain-based payments system, JPM Coin.24 Citi announced a pilot, Citi Token Services, forcash management and trade finance, where the bank uses blockchain and smart contracttechnologies to deliver digital asset solutions for institutional clients. Citi stated that it believes
its institutional clients have an “always-on” need for programmable financial services.25 The
ability of these traditional financial institutions to adopt new uses for this technology can further
enable combating illicit activity with the current BSA framework.
II. AML/CFT Requirements Preventing Illicit Finance in the Digital Asset Ecosystem
The U.S. has robust anti-money laundering and counter terrorist financing laws andregulations. As the financial sector and economy become more global and interconnected, theways in which sophisticated criminal networks attempt to exploit the financial sector evolves. In
the last two years we have seen autocratic regimes and terrorist organizations exploit the23

FinCEN, Ruling 2003-4, Definition of Money Transmitter/Stored Value (Gift Certificates/Gift Cards) (Aug.
15, 2003),
https://www.fincen.gov/resources/statutes-regulations/administrative-rulings/definition-money-transmitterst
ored-value-gift; Gregory T. Parks, et. al., New Gift Card Rules from FinCEN, National Law Review (Dec.
26, 2021), https://www.natlawreview.com/article/new-gift-card-rules-fincen.

24

Yogita Khatri, JPM Rolls Out Programmable Payments via JPM Coin, The Block (November 10, 2023),
https://www.theblock.co/post/262595/jpmorgan-jpm-coin-programmable-payments.

25

Press Release, Citi Group, Citi Develops New Digital Asset Capabilities for Institutional Clients(September 18, 2023),
https://www.citigroup.com/global/news/press-release/2023/citi-develops-new-digital-asset-capabilities-for-i
nstitutional-clients.

9international and the U.S. financial systems to facilitate and fund their criminal activities. Theseissues are not limited to the digital assets space.
General Overview of the Bank Secrecy Act of 1970
The backbone of the United States’ efforts to combat money laundering and financial
crime comes from the Bank Secrecy Act of 1970 (BSA).26 It was designed to help prevent
criminals from exploiting the U.S. financial institutions, especially from the use of cash.27 Under
the BSA, financial institutions, including banks, money service businesses (MSBs), payment
processors, casinos and others are required to report: (1) currency transactions by any person of
more than $10,000 in cash each day; and (2) suspicious activity when they believe that afinancial transaction or series of transactions (a) involves funds derived from illegal activity or is
an attempt to disguise funds derived from illegal activity; (b) is designed to evade regulations
promulgated under the BSA; or (c) lacks a business or apparent lawful purpose. The BSA and its
implementing regulations require domestic banks and other financial institutions to establish andmaintain programs to detect and report suspicious activity, and to maintain certain records where“they are highly useful . . . in criminal, tax, or regulatory investigations and proceedings.”28
Financial institutions must make certain disclosures, including filing Currency
Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and other reports pursuant totheir BSA obligations. In addition, financial institutions are required to maintain programs ofcompliance against money laundering.29 Pursuant to 31 U.S.C. § 5318(h)(1) and 12 C.F.R.
§ 21.21, a financial institution must establish and maintain (and have a culture of compliance) ananti-money laundering compliance program that at a minimum:i. Provides internal policies, procedures, and controls designed to guard against money
laundering;ii. Provided for a compliance officer to coordinate and monitor day-to-day compliancewith the BSA and AML requirements;
iii. Provide for an on-going employee training program; andiv. Provided for independent testing for compliance conducted by bank personnel or an
outside party.

26

31 U.S.C. § 5311, et seq.

27

See, e.g., 31 CFR § 1022.210(a) (requiring money services businesses to have “[a]n effective anti-money
laundering program … that is reasonably designed to prevent the money services business from being used
to facilitate money laundering and the financing of terrorist activities.”); Steven M. D’Antuono, Combating
Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on
Reform, Statement Before the Senate Banking, Housing, and Urban Affairs Committee, Washington, D.C.
(Nov. 29, 2018) (“Cash transactions are particularly vulnerable to money laundering. Cash is anonymous,
fungible, and portable; . . . it is used and held around the world; and is difficult to trace once spent.”).

28

31 U.S.C. § 5311(1)(A).

29

31 U.S.C. § 5318(a)(2).

10

In 2013, FinCEN issued guidance applying the basic principles of the BSA to the digitalasset and cryptocurrency industry.30 FinCEN’s guidance imposed the same BSA andrecord-keeping requirements on intermediaries who act on behalf of customers in the digitalasset ecosystem as required of MSBs. Further, in 2019, FinCEN issued additional guidance that
identified “unhosted wallets” as software that allowed individuals independence over their own
digital assets, meaning individuals could hold digital assets themselves without a third-party
intermediary.31 (This is in contrast to a custodial service provider that maintains custody of athird party’s digital assets.) Moreover, the FinCEN 2019 guidance provided additional guidance
to help identify suspicious cryptocurrency transactions and the type of information that should be
included in SARs.32 The BSA and the FinCEN guidance calls for regulated entities to engage ina risk-based approach, similar to financial institutions that must evaluate their risk and establish
guardrails that are appropriate for those risks. The BSA does not require that a large, nationalbank have the same AML and CFT policies as a smaller community bank.
In 2021, Congress also passed the Anti-Money Laundering Act (AML Act),33 which
included several provisions related to beneficial ownership, expanded U.S. law enforcement
authority to obtain records from foreign financial institutions with correspondent accounts in the
U.S. through a grand jury and trial subpoena,34 and further codified FinCEN’s previous position
that the definition of a financial institution and money transmission business included businesses
involved in the transmission or exchange of “value that substitutes for currency.”35
The regulatory framework set forth by the BSA and further expanded by AML Act as it
directly relates to digital assets is also supported by international bodies, including, the Financial

30

FinCEN, FIN–2013–G001, Application of FinCEN's Regulations to Persons Administering, Exchanging, orUsing Virtual Currencies, Mar. 18, 2013,https://www.fincen.gov/​sites/​default/​files/​guidance/​FIN-2013-G001.pdf.

31

FinCEN, FIN–2019–G001, Application of FinCEN's Regulations to Certain Business Models Involving
Convertible Virtual Currencies, May 9, 2019,https://www.fincen.gov/​sites/​default/​files/​2019-05/​FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.

32

FinCEN, FIN-2019-A003, Advisory on Illicit Activity Involving Convertible Virtual Currency (May 9,2019),
https://www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf.

33

See Pub. L. No. 116–283, §§ 6001-6511, 134 Stat. 3388 (2021).
See Pub. L. No. 107-56, § 302(b)(4), 115 Stat. 272, 297 (2021).

34

Pub. L. No. 116–283, §§ 6001-6511, 134 Stat. 3388 (2021).

35

FinCEN, FIN–2013–G001, Application of FinCEN's Regulations to Persons Administering, Exchanging, orUsing Virtual Currencies, Mar. 18, 2013,https://www.fincen.gov/​sites/​default/​files/​guidance/​FIN-2013-G001.pdf; see also FIN–2019–G001, supranote 32.

11

Action Task Force (FATF). In 2018 and again in 2021,36 FATF made clear that Virtual Asset
Service Providers (VASPs) were subject to the same obligations as traditional financial
institutions, including requiring VASPs to implement AML/CFT programs that include:
●
●
●
●
●
●

risk assessments,
customer due diligence,
record keeping,filing suspicious activity reports,
conducting sanctions screening, andcomplying with Recommendation 16 “Travel Rule”37

A March 2022 survey conducted by the FATF found that only 29 of 98 jurisdictions at that time
passed the requirements to comply with the Travel Rule, and only a small subset of thejurisdictions started enforcement.38 This past July 2023, FATF once again urged countries toimplement the requirements for VASPs to close the loopholes that could be exploited for illicit
finance.39
Blockchain-Based Compliance Technologies Can Provide More Effective Safeguards to
Combating Illicit Finance
The United States centralized exchanges and fiat on-off ramps40 are considered MSBs
that must comply with BSA obligations.
As discussed above, blockchains preserve all transactions and record them on a public
ledger. This means that centralized exchanges or VASPs (as referred to by FATF) can identify
and analyze transactions on the blockchain, regardless of whether the specific transaction

36

Financial Action Task Force, Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual
Asset Service Providers (2021),
www.fatf-gafi.org/publications/fatfrecommendations/documents/Updated-Guidance-RBA-VA-VASP.html.

37

Financial Action Task Force, Virtual Assets: Targeted Update on Implementation of the FATF Standards on
Virtual Assets and Virtual Asset Service Providers (June 27, 2023),
https://www.fatf-gafi.org/content/fatf-gafi/en/publications/Fatfrecommendations/targeted-update-virtual-ass
ets-vasps-2023.html. Specifically with respect to the Travel Rule, VASPs were to obtain, hold and transmit
required information about the originator and beneficiary of funds. Id.

38

Financial Action Task Force, Targeted Update on Implementation of FATF’s Standards on VAs and VASPs(June 30, 2022),
https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Targeted-update-virtual-assets-vasps.html#:~:text=Of%20the%2098%20jurisdictions%20that,these%20jurisdictions%20have%20started%20enforcem
ent.

39

Financial Action Task Force, Outcomes FATF Plenary, 21-23 June 2023 (June 23, 2023),
https://www.fatf-gafi.org/en/publications/Fatfgeneral/outcomes-fatf-plenary-june-2023.html.

40

An “on-ramp” is a service that would allow the transfer or exchange of fiat currencies, such as the U.S.
dollar for a digital asset (Bitcoin, Ether, etc.), whereas an “off-ramp” allows the transfer or exchange of adigital asset for fiat. These services are already regulated in the United States under the BSA as describedabove.

12

occurred on their platform.41 This is in contrast to a traditional financial institution, which may
only have visibility into the customers or transactions that occur within that specific banking
institution. Moreover, blockchain analytics firms can help centralized exchanges and others in
the digital asset ecosystem to ensure compliance with BSA requirements, and help identify
suspicious activity that centralized exchanges can report in SAR filings, and as needed,
cooperate with law enforcement.42 The information collected by law enforcement could becritical to conducting investigations, identifying assets, co-conspirators or victims, and seizing or
freezing assets.
Centralized exchanges and custodial service providers can also implement “know yourtransaction” (KYT) monitoring to ensure they meet their AML/CFT needs.43 While KYC
processes help institutions and centralized exchanges assess potential risk through identity
verification, KYT analyzes the data from every financial transaction. As such, sanctions
compliance and AML/CFT is expanded to include transactional data that is not limited only bydirect transactions between parties but also includes multiple hops and counterparties providing
a much more robust assessment of counterparty risk and potential sanctions exposure. Coupling
KYC and KYT, a compliant VASP or fiat on-off ramp would be more able to take reasonablemeasures against money laundering, terrorist financing and fraud.
For example, as customers onboard with an exchange or a custodial wallet provider, theregulated entity will have the customer’s wallet address and IP address in addition to otherstandard due diligence information. If necessary, this information can be shared with law
enforcement, and law enforcement would be able to trace the digital asset transactions in realtime and request that an exchange freezes illicit funds held in the wallet(s).
Using the information collected through KYC/KYT, compliant entities can share moredeveloped data with law enforcement when filing already required SARs, which improves law
enforcement’s ability to identify and investigate criminal networks.44 The data provided to law
enforcement from the blockchain will not change even if located abroad and obtained through41

See Ari Redbord, et al., Home Alone? Never, with Transaction Monitoring, (Sept. 22, 2022),
https://www.acamstoday.org/home-alone-never-with-transaction-monitoring/ (emphasizing how “theblockchain allows for unprecedented visibility on financial flows.”).

42

See Anastasios Balaskas and Virginia N.L. Franqueira, Analytical Tools for Blockchain: Review, Taxonomy
andOpen Challenges, Int’l Conf. on Cyber Security and Protection of Digital Services, at 5 (2018),
https://core.ac.uk/download/pdf/200747549.pdf (“Blockchain analytic tools can offer law enforcement
agencies considerable benefits” as they “could have all the needed records in order to trace transferredmoney, something that would not necessarily be feasible within the traditional economy.”); Michele R.
Korver, et al., Attribution in Cryptocurrency Cases, 67(1) Department of Justice Journal of Federal Law
and Practice 246 (Feb. 2019) (“Armed only with the knowledge of a target’s cryptocurrency address andthis single—but highly valuable—data set, law enforcement can learn a myriad of vital pieces of
information about a target.”).

43

See, e.g., https://withpersona.com/blog/know-your-transaction-kyt.

44

FIN–2019–G001, supra note 32.

13the Mutual Legal Assistance Treaty (MLAT) process, which is too slow even for traditional andcontemporary cross border investigations.45
Even if a criminal uses a self-hosted (or unhosted) wallet, when the criminal needs toexchange the digital asset to fiat, the individual will still be required to use an “off-ramp” inorder to convert to fiat currency. Once the funds move to a centralized exchange or custodialservice provider, AML/KYC screening will be conducted under the BSA requirements. Using
blockchain technology to assess a particular customer’s transactions or wallet activity allows
dynamic assessments of a customer or wallet’s risk – which could be deemed low risk at the timeof on-boarding but then be high risk later. In this situation, the centralized exchange or custodialservice provider could request additional due diligence, enhance monitoring if wallet activity
includes interactions with higher risk jurisdictions, engage in IP address monitoring, file a SAR
or freeze the wallet’s funds.46
The ability of participants to see across blockchain platforms contrasts with the available
information from traditional financial institutions. A bank may only have information related toa client’s activity or due diligence relative to that client’s activities at that bank. Even the levelof due diligence banks apply to retail or private bank clients may differ and would require
coordination within the bank to identify any information that may be suspicious. When
conducting an investigation, law enforcement must also be careful to ensure that the bank does
not close an account after receiving a grand jury subpoena, otherwise valuable information could
be lost since it is not maintained on an immutable ledger.
Additionally, a traditional financial institution could be filing a SAR on one transaction or
multiple transactions but no other financial institution may know of the existence of a SAR orthat the customer of the bank is accused of engaging in illicit activity. In contrast, alltransactions on public blockchains are visible to anyone using the Internet, which means that
information that may be identified and flagged by a VASP would be available to other actors
across blockchains. Importantly, compliant VASPs that are encouraged to transact with
self-hosted wallets would also be able to report on any suspicious activity or transactions that
occurred from that wallet. The information tracked, maintained, and if necessary documented ina SAR or shared with law enforcement would be helpful for mitigating the risk of money
laundering or terrorist financing associated with self hosted wallets.
Compliance by U.S. Digital Asset Ecosystem Participants
The above described BSA requirements are already being implemented by ecosystem
participants to trace illicit flows of digital assets, filing SARs, cooperating with law enforcement,
and when necessary, freezing assets. For example, in 2020, at the request of law enforcement,
45

Evan Norris and Morgan J. Cohen, How US Authorities Obtain Foreign Evidence in Cross-Border
Investigations, Global Investigations Review (Oct. 13, 2020),
https://globalinvestigationsreview.com/review/the-investigations-review-of-the-americas/2021/article/howus-authorities-obtain-foreign-evidence-in-cross-border-investigations.

46

Chainalysis Team, How Chainalysis Helps Compliance Teams Address Sanctions Red Flags (March 8,2022), https://blog.chainalysis.com/reports/fincen-russia-sanctions-red-flags-chainalysis/.

14

over 100,000 USDC was frozen and a certain address was blacklisted, demonstrating that evenwhen there is activity between a decentralized application and a U.S. regulated business,affirmative compliance and sanctions compliance occurs.47 Similarly, when a hack occurredearlier this year, swift action was taken to freeze funds by the U.S.-based entity.48 In addition, on
August 8, 2022, when OFAC sanctioned Tornado Cash,49 U.S.-based stablecoin issuers had theability to immediately blacklist interactions with the Tornado Cash application on the Ethereumsmart contract level and could freeze funds in wallets designated by OFAC.50 Additionally, just a
few days ago, another U.S.-based entity made changes to ensure compliance with the FATF’s
Travel Rule.51 The ability to freeze wallet addresses on the secondary market in compliance with
U.S. sanctions is unique to blockchain technology.
III. Utilizing Digital Assets for Illicit Activity
The United States has been on the forefront of innovation, and it is this innovation thatdrives society forward. With innovation comes the need to balance the benefits with thepotential of bad actors to misuse the technology, but that does not mean that the technology ortools should be dismissed or banned.

47

Nikhilesh De, Circle Confirms Freezing $100K in USDC at Law Enforcement's Request, CoinDesk (July 8,2020),
https://www.coindesk.com/markets/2020/07/08/circle-confirms-freezing-100k-in-usdc-at-law-enforcements-request.

48

Lacton Muriuki, Circle Freezes $63M in USDC after Multichain Hack, Cryptopolitan (July 7, 2023),
https://www.cryptopolitan.com/circle-freezes-63m-in-usdc-multichain-hack.

49

Press Release, U.S. Department of the Treasury, U.S. Treasury Sanctions Notorious Virtual Currency Mixer
Tornado Cash (August 8, 2022), https://home.treasury.gov/news/press-releases/jy0916.

50

Zhiyuan Sun, Circle Freezes Blacklisted Tornado Cash Smart Contract Addresses, Cointelegraph (August
8, 2022), https://cointelegraph.com/news/circle-freezes-blacklisted-tornado-cash-smart-contract-addresses;
Cf. Ornella Hernandez, Tether Won’t Freeze Sanctioned Tornado Cash Addresses Without Authorities’
Request, Blockworks (August 24, 2022),
https://blockworks.co/news/tether-wont-freeze-sanctioned-tornado-cash-addresses-without-authorities-requ
est.

51

Brayden Lindrea, Gemini’s Travel Rule Measures Reflect ‘Worrying Creep’ of Overregulation,
Cointelegraph (Nov. 9, 2023),
https://cointelegraph.com/news/gemini-travel-rule-trust-crypto-transfer-restrictions-hurt-self-custodytrezor.

15

As has been the case in traditional financial institutions,52 art and antiquities,53 real estate,
and real property,54 sophisticated actors use different means and methods to engage in money
laundering and illicit finance. Similarly, there are bad actors who use digital assets to commit
crimes. Chainalysis reported that in 2022, the percentage of all cryptocurrency activity
associated with illicit activity was 0.24%, which rose from 0.12% in 2021, and was the first timethat this figure rose since 2019. It is important to understand the nature, methods, means andjurisdictions through which the illicit activity occurred to best tailor an appropriate response.
Fraud
Criminals and criminal networks commit fraud. In my experience as a prosecutor, I
investigated mortgage fraud,55 exploitation of national school lunch programs,56 fraudulent
employment and immigration documents,57 and different types of scams.58 At the heart of many
fraud schemes is social engineering, including exploitation of a personal relationship or
vulnerability. In many of these cases, traditional financial institutions are used to wire funds,
52

Bob Van Voris, Deutsche Bank, Standard Chartered Sued Over Afghanistan Dead, Bloomberg (Aug. 5,2021),
https://www.bloomberg.com/news/articles/2021-08-05/deutsche-bank-standard-chartered-sued-over-afghan
istan-deaths#xj4y7vzkg (DB and Standard charter sued for providing aid to terrorist organization); Pete
Schroeder and Chris Prentice, US Fed Fines Deutsche Bank $186 Million for Slow Progress against Money
Laundering, Reuters (July 19, 2023),
https://www.reuters.com/business/finance/fed-fines-deutsche-bank-186-mln-insufficient-progress-addressin
g-anti-money-2023-07-19/.

53

Financial Action Task Force, Money Laundering and Terrorist Financing in the Art and Antiquities Market(Feb. 27, 2023),
https://www.fatf-gafi.org/en/publications/Methodsandtrends/Money-Laundering-Terrorist-Financing-Art-A
ntiquities-Market.html.

54

Press Release, U.S. Department of Justice, $300 Million Yacht of Sanctioned Russian Oligarch Suleiman
Kerimov Seized by Fiji at Request of United States (May 5, 2022),
https://www.justice.gov/opa/pr/300-million-yacht-sanctioned-russian-oligarch-suleiman-kerimov-seized-fiji-request-united.

55

E.g., Press Release, U.S. Attorney's Office, Southern District of California, Former San Diego Police
Officer and Three Others Sentenced for Crimes Stemming from Years-long Operation of Illicit Massage
Businesses (Oct. 13, 2023),
https://www.justice.gov/usao-sdca/pr/former-san-diego-police-officer-and-three-others-sentenced-crimes-st
emming-years-long.

56

E.g., Tom Hayden, Tearful Former School District Employee Denies Seeking Free Lunches for Daughter,
NJ.com (Mar. 9, 2016),
https://www.nj.com/union/2016/03/tearful_former_school_employee_denies_seeking_free.html.

57

E.g., Press Release, U.S. Attorney's Office, Southern District of Georgia, Human Smuggling, Forced Labor
among Allegations in South Georgia Federal Indictment (Nov. 22, 2021),
https://www.justice.gov/usao-sdga/pr/human-smuggling-forced-labor-among-allegations-south-georgia-fed
eral-indictment.

58

See, e.g., Press Release, U.S. Attorney's Office, Southern District of Texas, Out of state group charged in$11M Indian call center fraud ring (Oct. 11, 2022),
https://www.justice.gov/usao-sdtx/pr/out-state-group-charged-11m-indian-call-center-fraud-ring.

16

open business or personal accounts through which illicit funds flow, facilitate the use of cash,
and now more recently, transact in digital assets.
Over the last few years there have been increased reports of “pig butchering.”59 Thesescams are similar to other social engineering exploits and may involve a perpetrator identifying
and grooming a victim through the use of a personal relationship to cause the victim to invest in
fake projects or steal funds. Victims could be contacted through dating applications, social
media, or text messages, and then after developing a relationship, the victim may end up
investing in what is ultimately a fraudulent company or scheme. In some cases involving virtual
asset wallet applications, victims’ vulnerabilities are exploited and the victim provide full accessand control of their wallets to the scammers. The ability to trace these transactions on theblockchain in addition to the evidence that could be collected from social media accounts andother sources could prove helpful to law enforcement.
MixersIn certain cases, individuals could use “mixers” or a type of software service that allows
digital assets to be mixed together with other individual’s funds before being sent to the ultimate
recipient. As FinCEN noted in its recent NPRM, there are both licit and illicit purposes of using
a mixing service; FinCEN also notes that the national security risks arising from illicit money
laundering lies outside the United States.60 In other words, it is the lack of accountability andstrong AML/CFT policies abroad that could jeopardize the United States’ financial security.
In my experience as a prosecutor, the use of “mixing” services in the digital asset space issimilar to the use of funnel accounts in traditional finance.61 Funnel accounts could be set up by
multiple people across the country or in different countries; or multiple accounts could be openedby the same person. Funds would be deposited into these accounts and then sent to a third-party
account and ultimately to the final recipient. In some instances, these funnel accounts would be
set up to allow for multiple deposits under the $10,000 reporting requirement under the BSA.
Funnel accounts also allow bad actors to quickly open and close accounts to evade law
enforcement detection. Unlike when a potential criminal network opens multiple wallets or
59

See U.S. Department of the Treasury, Illicit Finance Risk Assessment of Decentralized Finance (April
2023), https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf.

60

FinCEN, FINCEN–2023–0016, Proposal of Special Measure Regarding Convertible Virtual Currency
Mixing, as a Class of Transactions of Primary Money Laundering Concern, 88 FR 72701 (Oct. 23, 2023),
https://www.federalregister.gov/documents/2023/10/23/2023-23449/proposal-of-special-measure-regarding-convertible-virtual-currency-mixing-as-a-class-of-transactions; Press Release, FinCEN, FinCEN Proposes
New Regulation to Enhance Transparency in Convertible Virtual Currency Mixing and Combat Terrorist
Financing (Oct. 19, 2023),
https://www.fincen.gov/news/news-releases/fincen-proposes-new-regulation-enhance-transparency-convert
ible-virtual-currency, (“[t]he lack of transparency surrounding international CVC mixing activity is anacute money laundering and national security risk, and increasing transparency in connection with thisactivity is a key component to denying illicit actors access to the U.S. and global financial systems.”).

61

FinCEN, FIN-2023-Alert001, FinCEN Alert on Human Smuggling along the Southwest Border of theUnited States (Jan. 13, 2023),
https://www.fincen.gov/sites/default/files/shared/FinCEN%20Alert%20Human%20Smuggling%20FINAL_
508.pdf.

17

transfers through mixers that can then be transferred to other wallets on the blockchain, there is
no ledger for funnel account data. This makes it more difficult for law enforcement to quickly
seize assets or freeze funds in funnel accounts.
Moreover, unlike cash, digital assets moving on a blockchain are easier for law
enforcement to track, as the public ledger contains the date and time of transaction, specificvirtual asset and amount transacted, wallet address, and additional unique transaction
identification. Law enforcement can trace the entire transaction history (and conduct real-timeon-chain surveillance) not only related to that specific transaction but the history of alltransactions in the identified wallet address.
Hacks
Criminal networks from autocratic regimes like Russia, North Korea, and elsewhere haveengaged in hacks and other cybercrime well before the more notable “crypto” related hacks. In
2013, the Department of Justice indicted five Russian hackers related to a sophisticated and at
the time “cutting edge” “SQL (Structured Query Language) injection attack,” which used a
sophisticated programming language designed to manage data held in particular types of
databases, identified vulnerabilities in SQL databases, and used those vulnerabilities to infiltrate
a computer network.62 Once they gained entry into the network they placed malicious code or
malware on the system, created a back door that made the system vulnerable, and stole data
including 160 million credit card numbers and over $300 million from large companies including
Heartland.63
In 2018,64 Treasury sanctioned the North Korean Lazarous group. At the time, Treasury
stated that the group used phishing and backdoor intrusions to successfully target more thansixteen organizations across eleven countries, including the SWIFT messaging system, financial
institutions, and cryptocurrency exchanges. One such example includes the theft ofapproximately $80 million from the Central Bank of Bangladesh’s New York Federal Reserve
account: “By leveraging malware similar to that seen in the SPE cyber attack, Bluenoroff andLazarus Group made over 36 large fund transfer requests using stolen SWIFT credentials in an
attempt to steal a total of $851 million before a typographical error alerted personnel to prevent

62

Press Release, U.S. Department of Justice, Five Indicted in New Jersey for Largest Known Data Breach
Conspiracy (July 25, 2023),
https://www.justice.gov/opa/pr/five-indicted-new-jersey-largest-known-data-breach-conspiracy; Press
Release, U.S. Department of Justice, Leader of Hacking Ring Sentenced for Massive Identity Thefts from
Payment Processor and U.S. Retail Networks (Mar. 26, 2010),
https://www.justice.gov/opa/pr/leader-hacking-ring-sentenced-massive-identity-thefts-payment-processor-a
nd-us-retail.

63

Kelly Jackson Higgins, Russian Hackers Sentenced in Heartland Payment Systems Breach Case,
DarkReading (Feb. 16, 2018),
https://www.darkreading.com/attacks-breaches/russian-hackers-sentenced-in-heartland-payment-systems-br
each-case.

64

Press Release, U.S. Department of the Treasury, Treasury Sanctions North Korean State-Sponsored
Malicious Cyber Groups (Sept. 13, 2019), https://home.treasury.gov/news/press-releases/sm774.

18

the additional funds from being stolen.”65 Simultaneously with Treasury’s sanctions designation,
the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency(CISA) and U.S. Cyber Command (USCYBERCOM) worked together to disclose malware
examples to the private cyber security sector to help proactively protect the U.S. financial systemand critical infrastructure.66
The Lazarous group has continued to expand its illicit activity, including targeting thedigital asset ecosystem. The methods, however, remain the same—exploiting computer
programming vulnerabilities. The Ronan hack was committed by compromising computersknown as nodes, operated by the Axie Infinity Maker Sky Mavis and the Axie DAO, that
supported the bridge that enables converting digital assets to be used on another network.67 The
compromised private keys were used to forge fake withdrawals. Information from theblockchain, visible to anyone on the Internet, helped identify the wallet where the stolen funds
were being held—an Ethereum address which was also tied to an offshore centralized exchange.
Using blockchain forensics, Treasury was able to trace and identify that the Ethereum wallet
belonged to the Lazarus group.68 This is an example where the importance of cyber security andimprovements to the technology are critical to combating the exploitation of the technology.69
In addition to using the blockchain to identify and designate bad actors under Treasury’s
sanctions authorities related to hacks in the digital asset space, the DOJ has successfully beenable to identify, investigate, prosecute and convict money launderers after hacks of an exchangeeven years later. In February 2022, the U.S. Attorney’s Office in the District of Columbia usedmoney laundering and other criminal authorities to charge two defendants with stealing over $3.6
billion dollars from a 2006 hack of the Bitfinex network, which authorized over 2,000transactions.70 At the time of the indictment, U.S. Attorney Graves stated that “[t]he Department
65

Id.

66

Id.

67

See Andrew Thurman, Axie Infinity’s Ronin Network Suffers $625M Exploit, CoinDesk (Mar. 29, 2022),
https://www.coindesk.com/tech/2022/03/29/axie-infinitys-ronin-network-suffers-625m-exploit/; Olga
Kharif, Hackers Steal About $600 Million in One of the Biggest Crypto Heists, Bloomberg (Mar. 29, 2022),
https://www.bloomberg.com/news/articles/2022-03-29/hackers-steal-590-million-from-ronin-in-latest-bridg
e-attack#xj4y7vzkg.

68

Ryan Browne, U.S. Officials Link North Korean Hackers to $615 Million Cryptocurrency Heist, CNBC
(April 15, 2022),
https://www.cnbc.com/2022/04/15/ronin-hack-north-korea-linked-to-615-million-crypto-heist-us-says.html.

69

The Harmony bridge exploit was also reported to have been related to security loopholes in the bridge thatwas exploited by the Lazarus Group. Brian Quarmby, North Korea’s Lazarus Group Masterminded $100M
Harmony Hack: FBI Confirms, CoinTelegraph (Jan. 24, 2023),
https://cointelegraph.com/news/north-korea-s-lazarus-group-masterminded-100m-harmony-hack-fbi-confir
ms.

70

Press Release, U.S. Attorney's Office, District of Columbia, Two Arrested for Alleged Conspiracy toLaunder $4.5 Billion in Stolen Cryptocurrency (Feb. 8, 2022),
https://www.justice.gov/usao-dc/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency.

19

of Justice and our office stand ready to confront these threats by using 21st century investigativetechniques to recover the stolen funds and to hold the perpetrators accountable.”71 As detailed in
the Statement of Facts filed with the Indictment, the transparency of the blockchain allowed law
enforcement to trace all the steps taken in an attempt to conceal the hacked funds, which may nothave been possible if a similar theft occurred without a public blockchain.72
Terrorist Financing
After the terrorist attack on the World Trade Center in 1993 and then again after
September 11, 2001, reports and analysis showed that charities were being used to fundterrorism.73 There were many reports that identified small amounts of money being transferredthrough traditional financial institutions to alleged charities, which turned out to be shellcompanies for terrorist organizations.74 Unfortunately, terrorist organizations have solicited
donations in the form of digital assets too.75 However, accurate data about the alleged use ofdigital assets by Hamas and other terrorist organizations after the horrific terrorist attack on
Israel on October 7, 2023, is harder to confirm.76
For example, in 2019, reports showed that Hamas was using Bitcoin to fund theiractivities.77 Fast forward to April 2023, and it would appear that Hamas was urging its
supporters not to send digital assets.78 One article inaccurately described that “Bitcoin” and

71

Id.

72

See United States v. Ilya Lichtenstein, 22-mj-00022-RMM, ECF No. 1-1 (Feb. 7, 2022), available athttps://www.justice.gov/opa/press-release/file/1470211/download.
National Commission on Terrorist Attacks Upon the United States, Chapter 1: Introduction and Executive
Summary, Terrorist Financing Staff Monograph,
https://9-11commission.gov/staff_statements/911_TerrFin_Ch1.pdf.

73

74

Matthew Levitt, Charitable Organizations and Terrorist Financing: A War on Terror Status-Check, The
Washington Institute for Near East Policy (March 19, 2004),
https://www.washingtoninstitute.org/policy-analysis/charitable-organizations-and-terrorist-financing-war-terror-status-check#:~:text=The%20International%20Islamic%20Relief%20Organizations,Islamic%20Relief%20Organizations%20(IIRO).

75

Tom Wilson and Dan Williams, Hamas Shifts Tactics in Bitcoin Fundraising, Highlighting Crypto Risks:
Research, Reuters (April 26, 2019),
https://www.reuters.com/article/ctech-us-crypto-currencies-hamas-idCAKCN1S20FA-OCATC.

76

Sam Lyman, How Misinformation On Hamas And Crypto Fooled Nearly 20% Of Congress, Forbes (Nov. 8,2023),
https://www.forbes.com/sites/digital-assets/2023/11/08/how-misinformation-on-hamas-and-crypto-fooled-nearly-20-of-congress.

77

Nidal Al-Mughrabi, Hamas Armed Wing Announces Suspension of Bitcoin Fundraising, Reuters (April 28,2023),
https://www.reuters.com/world/middle-east/hamas-armed-wing-announces-suspension-bitcoin-fundraising2023-04-28.

78

Id.

20

other digital assets provided “high levels” of anonymity to Hamas,79 which has been refuted bylaw enforcement and prosecutors. And a now-debunked report by the Wall Street Journal allegedthat blockchain data showed that $130 million in cryptocurrency was raised to fund the war on
Israel, which was subsequently corrected to say that “Palestinian Islamic Jihad and Hezbollah
may have exchanged up to $12 million in crypto since 2021, according to crypto-research firm
Elliptic . . . .”80
Notably, the Wall Street Journal also reported that researchers who study Hamas’
financing methods have found that the use of crypto by Hamas remains only one of a number ofmethods used. The researchers noted the transport of cash from Egypt to Gaza, and Hamas
funding from Tehran (Iran) of roughly $100 million a year.”81 If accurate, this means that moremust be done by foreign jurisdictions to prevent cash and traditional financial instruments frombeing used to fund terrorism. It is also critical to find effective ways to ensure compliance byforeign centralized exchanges. This data also suggests that U.S. based centralized exchanges areeither not being used by illicit actors or the already existing AML/CFT requirements to mitigate
risk of sanctions evasion, illicit finance, and terrorist financing flowing through the U.S.
financial system are working. But the United States cannot combat illicit finance or stop terrorist
financing alone.
In a November 12, 2023, Wall Street Journal article, it describes the use of
cryptocurrency⸺specifically international exchanges⸺by Hamas, but it also describes theiruse of global investment portfolio, raising money through charitable organizations (which has
previously been shown to be done by terrorist organizations prior to 9/11, and skimming off
funds from official foreign aid and tax revenues in Gaza.”82 The use of the foreign exchanges forterrorist activity suggests that lawmakers must consider how to collaborate with internationalcounterparties to prevent illicit actors from jurisdictional arbitrage83 that jeopardizes U.S. efforts
to combat terrorist financing.

79

Id.

80

See Angus Berwick and Ian Talley, Hamas Militants Behind Israel Attack Raised Millions in Crypto, The
Wall Street Journal (Oct. 10, 2023),
https://www.wsj.com/world/middle-east/militants-behind-israel-attack-raised-millions-in-crypto-b9134b7a.

81

Id.

82

See Angus Berwick and Ian Talley, Hamas Needed a New Way to Get Money From Iran. It Turned to
Crypto, The Wall Street Journal (Nov. 12, 2023),
https://www.wsj.com/world/middle-east/hamas-needed-a-new-way-to-get-money-from-iran-it-turned-to-cry
pto-739619aa; Rory Jones, Ian Talley, and Benoit Faucon, How the West—and Israel Itself—Inadvertently
Funded Hamas, The Wall Street Journal (Oct. 19, 2023),
https://www.wsj.com/world/middle-east/hamas-gaza-humanitarian-aid-diverted-cf356c48.

83

2020 Cryptocurrency Enforcement Framework, supra note 1 at 56.

21

Hawalas
In my experience investigating financial crimes and money laundering case, it is moredifficult to trace money where individuals use hawalas,84 black market peso exchanges,85 ortrade-based money laundering than when an investigator traces digital assets on a publicblockchain. Hawalas allow transfers of funds outside conventional banking systems and often
rely on trust between community members, non-bank financial institutions, and in some cases,
handwritten or manual reporting of how much money was transferred and to whom, and can bedone crossborder.86 When I was investigating human trafficking and human smuggling networks
at DOJ,87 there were illicit massage business networks using cash,88 hawalas,89 and trade-based
money laundering from Africa, Middle East and Southeast Asia.90 Unlike digital assets on theblockchain, following the money when defendants were using hawalas was incrediblychallenging, time consuming, and often constrained law enforcement ability to seize assets.
Moreover, some foreign jurisdictions where hawalas are more commonly used are lesscooperative and may not respond to U.S. MLAT requests or other legal process.
Despite the disputed data on how terrorist organizations may be using digital assets tofund their criminal activity, it is critical to find effective ways to curb terror finance. It is also
clear that if terrorist organizations are using foreign exchanges, the United States cannot combat

84

FinCEN, Advisory: Issue 33, Informal Value Transfer Systems (March 2003),
https://www.fincen.gov/sites/default/files/advisory/advis33.pdf (“An ‘informal value transfer system’ refers
to any system, mechanism, or network of people that receives money for the purpose of making the funds
or an equivalent value payable to a third party in another geographic location, whether or not in the sameform. The transfers generally take place outside of the conventional banking system through non-bankfinancial institutions or other business entities whose primary business activity may not be the transmissionof money.”).

85

Press Release, U.S. Attorney's Office, Southern District of Texas, Six Convicted for Roles in Multi-Million
Dollar Black Market Peso Exchange Money Laundering Scheme (Feb. 12, 2019),
https://www.justice.gov/usao-sdtx/pr/six-convicted-roles-multi-million-dollar-black-market-peso-exchangemoney-laundering.

86

Advisory: Issue 33, supra note 84.

87

E.g., Press Release, U.S. Attorney's Office, District of Minnesota, Thirty-Six Defendants Guilty For Their
Roles In International Thai Sex Trafficking Organization (Dec. 13, 2018),
https://www.justice.gov/usao-mn/pr/thirty-six-defendants-guilty-their-roles-international-thai-sex-trafficking-organization.

88

See, United States v. Kyong Burgos, No. 18-CR-126 (S.D. Miss.); see also See United States v. Michael
Morris, et al., No. 17-CR-107 (D. Minn. 2017); United States v. Sumalee Intarathong, et al., No.
16-CR-257 (D. Minn. 2017); United States v. Peter Griffin et al., 22-CR-1828 (S.D. Cal. 2022)(https://www.justice.gov/usao-sdca/pr/former-san-diego-police-officer-and-three-others-sentenced-crimes-s
temming-years-long).

89

Advisory: Issue 33, supra note 84 (“An ‘informal value transfer system’ refers to any system, mechanism,or network of people that receives money for the purpose of making the funds or an equivalent value
payable to a third party in another geographic location, whether or not in the same form.”).

90

Thirty-Six Defendants Guilty, supra note 87.

22

illicit finance or stop terrorist financing alone, but that also does not mean that lawmakers should
prohibit all use of blockchain technology.
IV. Importance of Digital Asset Ecosystem to Protect the Vulnerable from Oppressive
Regimes, Authoritarian Leaders, and Maintaining U.S. National Security Interests
Digital assets and blockchain technology can often be the only access available to themost vulnerable and a protection of democratic ideals.
Ukraine Relief
We also must allow the most vulnerable to be supported. Over two years ago, when
Russia invaded Ukraine, thousands of innocent civilian Ukrainian citizens lost access to funds.
My family scrambled to assist friends and family in cities like Odesa, Kherson, Nikholai, andelsewhere. Onerous sanctions and compliance processes of traditional financial institutions andmoney transmitter businesses caused weeks-long delays in processing payments leaving many
civilians and refugees with limited to no access to necessary funds. In fact, in the European
Union, the European Banking Authority had to publish a statement to ensure traditional financial
institutions and supervisors ensured access to Ukrainian refugees for at least basic financial
products and services.91
On the other hand, data suggests that cryptocurrency, including Bitcoin and Ether,92 werecritical to supporting the Ukrainian people.93 According to Alex Bornyakov, Ukraine’s deputy
minister at the Ministry of Digital Transformation, Ukraine raised $100 million in crypto after
soliciting donations.94 This aid was possible because cryptocurrency can be transferredinstantaneously, cross-border, and directly to the people who need it the most and may not be

91

European Banking Authority, EBA Calls on Financial Institutions and Supervisors to Provide Access to theEU’s Financial System (April 27, 2022),
https://www.eba.europa.eu/eba-calls-financial-institutions-and-supervisors-provide-access-eu-financial-syst.em; See also, Zofeen Ebrahim, Afghan Refugees Fear Return as Pakistan Cracks Down on Migrants,
ReliefWeb (Feb. 1, 2023),
https://reliefweb.int/report/pakistan/afghan-refugees-fear-return-pakistan-cracks-down-migrants.

92

Elliptic Threat Intel, Live Updates: Ukraine Government Turns to Crypto to Crowdfund Millions of
Dollars, Elliptic (March 11, 2022),
https://www.elliptic.co/blog/live-updates-millions-in-crypto-crowdfunded-for-the-ukrainian-military.

93

Id.; Ananya Kunar and Nikhil Raghuveera, Can Crypto Deliver Aid amid War? Ukraine Holds the Answer,
Atlantic Council (April 4, 2022),
https://www.atlanticcouncil.org/blogs/new-atlanticist/can-crypto-deliver-aid-amid-war-ukraine-holds-the-an
swer.

94

Amitoj Singh, Ukraine Has Received Close to $100M in Crypto Donations, CoinDesk (May 11, 2023),
https://www.coindesk.com/business/2022/03/09/ukraine-has-received-close-to-100-million-in-crypto-donati
ons/.

23

able to get to a bank. The ability to reduce scam risk of vulnerable communities with real-timeverification of the flow of digital assets during times of crisis is key.95
Humanitarian Relief and Aid to Human Rights Defenders
In the aftermath of the heinous and barbaric terrorist attack by Hamas on civilians in
Israel, U.S.based company Fireblocks, which assists digital asset projects with compliance,
helped establish a relief fund for displaced Israelis and humanitarian aid.96 In addition, after the
Taliban took over governmental control in Afghanistan, local communities and civilians lost
access to bank accounts, cash, and ways to receive funds from abroad, so they turned to digitalassets.97 Unfortunately, in response to civilians turning to digital assets in order to maintaincontrol over their lives and financial independence, the Taliban banned cryptocurrency and called
Bitcoin fraudulent.98 In recent months, human rights organizations in the United States have also
struggled to get financial aid to human rights defenders in Afghanistan because similar to myfamily’s experience with Ukraine, traditional financial options are no longer available or will be
too costly.
Access to Financial Institutions for Vulnerable Population
I also believe that using new and emergent technology in a thoughtful manner is criticalto the United States’ ability to secure its national security interests at home and abroad. During
my tenure at the DOJ, I interviewed dozens of survivors of human trafficking and learned how
our traditional financial systems can deprive them of tools to reenter society, obtain educationand employment, and thrive in the community.
The growth of blockchain technology has helped reduce costs and give communities
access to basic financial services. According to UNICEF, 31% of adults globally are unbanked,
and cannot access basic financial services.99 Through the use of tools in the digital asset
ecosystem, unbanked users can borrow capital or earn interest in savings without having toutilize a traditional banking institution. UNICEF is partnered with UC Berkeley to explore the95

See United Nations Office on Drug and Crime, Conflict in Ukraine: Key Evidence on Risks of Trafficking in
Persons and Smuggling of Migrants, UNODC (December 2022),
https://www.unodc.org/documents/data-and-analysis/tip/Conflict_Ukraine_TIP_2022.pdf.

96

See Margaux Nijkerk, Israel War Prompts Crypto Firms Including Fireblocks, MarketAcross to Start Aid
Fund, CoinDesk (Oct. 9, 2023),
https://www.coindesk.com/tech/2023/10/09/israel-war-prompts-crypto-firms-including-fireblocks-marketac
ross-to-start-aid-fund/; Crypto Aid Israel, https://cryptoaidisrael.com/.

97

Anamaria Silic, Afghans Turn to Cryptocurrencies amid US Sanctions, BBC News (March 16, 2022),
https://www.bbc.com/news/world-asia-60715707.

98

Eltaf Najafizada, Taliban Ban Crypto in Afghanistan, Arrest Dealers of Tokens, Bloomberg (August 26,2022),
https://www.bloomberg.com/news/articles/2022-08-26/taliban-ban-crypto-in-afghanistan-arrest-digital-coin-dealers.

99

Mehran Hydary and Christina Lomazzo, Generating Income to Benefit Communities, UNICEF Office ofInnovation (August 12, 2021),
https://www.unicef.org/innovation/stories/generating-income-benefit-communities.

24

growing potential of the technology.100 In addition, during a time of high unemployment foryouth in Kenya during COVID-19, MercyCorps. and Celo Foundation partnered with NairoBits
to train 200 Kenyan youth to have access to digital microwork from global platforms - using amobile app and integrating their wallet on the blockchain.101 Helping empower youth andprovide infrastructure in a meaningful and democratic way will help the United States combat
the national security risks that will be described below.
V. Combating Illicit Finance through Cross Border Collaboration and Protecting to
National Security
The United States should continue to support and allow innovation to flourish while
tailoring current regulatory frameworks to continue to combat anti-money laundering andterrorist financing. I believe lawmakers should ensure that compliant U.S.-based companies andprojects using digital assets are not pushed out of the country and into regimes that have moreopaque legal and financial safeguards, which could undermine America’s national security
interests.
China
China leverages traditional and emergent financial systems to further its interests. For
example, evidence related to the DOJ’s seizure of $11 million from corporations used by North
Korea to circumvent sanctions showed that certain corporations were incorporated in China.102
As technology evolves, China has evolved its approach to digital technology to its advantage.
Even after China cracked down on Bitcoin mining in 2021, the Chinese government has leaned
into innovation in the digital asset space. Last year, Chinese state-owned banks participated in atrial focused on cross-border transactions developed by the Bank of International Settlements.103
China is also actively digitizing the yuan.104 Hong Kong, which is now under Chinese control,
has also leveraged uncertainty toward digital assets by the United States to partner with large,
100

Id.

101

Celo Foundation, Pilot Spotlight: How Celo and Mercy Corps Ventures Partnered to Benefit Microworkers
in Kenya, The Celo Blog (Feb. 22, 2022),
https://blog.celo.org/pilot-spotlight-how-celo-and-mercy-corps-ventures-partnered-to-benefit-microworkers-in-kenya-882dc767aee.

102

Press Release, U.S. Attorney's Office, District of Columbia, United States Files Complaints to Forfeit MoreThan $11 Million From Companies That Allegedly Laundered Funds To Benefit Sanctioned North Korean
Entities (August 22, 2017),
https://www.justice.gov/usao-dc/pr/united-states-files-complaints-forfeit-more-11-million-companies-allege
dly-laundered.

103

Jason Xue and Brenda Goh, China Trials Cross-Border Settlement Involving Cenbank Digital Currencies,
Reuters (September 29, 2022),
https://www.reuters.com/markets/currencies/china-trials-cross-border-settlement-involving-cenbank-digital-currencies-2022-09-29.

104

Rae Wee, China's Digital Yuan Transactions Seeing Strong Momentum, says CBank Gov Yi, Reuters (July19, 2023),
https://www.reuters.com/markets/asia/chinas-digital-yuan-transactions-seeing-strong-momentum-says-cban
k-gov-yi-2023-07-19.

25

global institutions, to explore green bonds and smart contracts.105 If the U.S. does not stay ahead
or at least keep up with China’s use of new technology, that could put the U.S. at both an
economic and national security disadvantage.
It is also important to note that after the passage of the Uyghur Forced Labor Protection
Act (UFLPA)106 in 2021 and its enforcement starting in June 21, 2022107⸺which aims toidentify, detain and seize shipments of goods from Xinjiang Uyghur Autonomous Region of thePeople’s Republic of China⸺the U.S. Customs and Border Protection has denied108$67,690,123 from China alone.109 I believe lawmakers should consider whether this law could
be more effective if CBP and U.S. corporations used blockchain to trace the source of goods andservices.
RussiaWhen Russia invaded Ukraine in February 2022, many questioned whether Russia would
evade sanctions through the use of digital assets. While some said the Russian Federation would
try to use all financial tools and natural resources at their fingertips, the traceability of Bitcoin
and other digital assets, and lack of robust liquidity makes it difficult to achieve that objective.
However, Russia has capitalized on the use of blockchain technology, and like China, hasdigitized the ruble.110 Russia has also established centralized exchanges to help launder funds for

105

BIS Innovation Hub, Genesis 2.0: Smart Contract-Based Carbon Credits Attached to Green Bonds, Bankof International Settlements (October 23, 2022),
https://www.bis.org/about/bisih/topics/green_finance/genesis_2.htm.
Prarthana Prakash, As America Obsesses over ChatGPT, It’s Losing the Race with China on Tech in 37 outof 44 Key Areas, Study Funded by the State Department Says, Fortune (March 2, 2023),
https://fortune.com/2023/03/02/tech-race-china-us-stunning-western-democracies-losing-ai-quantum-statedepartment.

106

Public Law No. 117-78.

107

U.S. Customs and Border Protection, Uyghur Forced Labor Prevention Act (July 21, 2023),
https://www.cbp.gov/trade/forced-labor/UFLPA.

108

U.S. Customs and Border Protection, Uyghur Forced Labor Prevention Act Statistics (October 21, 2023),
https://www.cbp.gov/newsroom/stats/trade/uyghur-forced-labor-prevention-act-statistics.

109

Id.; Annual Testimony of the Secretary of the Treasury, supra note 11.

110

Ananya Kumar and Charles Lichfield, Russia Is Ramping Up Its CBDC. Will Putin’s ‘Robot Ruble’ Work?,
Atlantic Council (August 29, 2023),
https://www.atlanticcouncil.org/blogs/new-atlanticist/russia-is-ramping-up-its-cbdc-will-putins-robot-rublework.

26

their allies, like Iran,111 and continued to attempt to circumvent sanctions,112 in order to further
advance their foreign policy objectives against the free world.
If the United States allows China and Russia and others to harness new technology only
for nefarious purposes, the detrimental consequences to democratic ideals and national security
risks could be catastrophic.
Strengthening Collaboration with International Bodies and Allies
We live in a global world where the internet, cross border payments, and finance are notconfined to the digital asset space. Cross-border collaboration is critical to close gaps or prevent
jurisdictions with poor or no regulatory frameworks to take advantage of our financial
systems.113
Cross-border law enforcement cooperation has led to successful investigations andprosecutions of criminal networks using digital assets. In October 16, 2019, the DOJ indicted
the owner and operator of Welcome to Video, a darknet child pornography website that was thelargest online child sexual exploitation market at the time of the DOJ’s seizure.114 This caseinvolved global coordination of law enforcement including IRS-CI, HSI, the National Crime
Agency in the U.K., and the Korean National Police in South Korea, who together helped
identify the wallet addresses of at least 337 users of the website through the use of blockchain
data.115 In March 12, 2020, the DOJ used blockchain evidence to take down “Darkscandals,”another website that featured child abuse material.116 Related to that same case, the government
filed a civil forfeiture action seeking recovery of illicit funds from 303 virtual currency accounts
allegedly used by customers to fund DarkScandals and to promote child exploitation.117

111

Berwick et. al., supra note 82.

112

See 2020 Cryptocurrency Enforcement Framework, supra note 1 (“Rogue states like Russia, Iran, andNorth Korea may turn to cryptocurrency to fund cyber-attacks, blunt the impact of U.S. and internationalsanctions, and decrease America’s influence in the global marketplace.”).

113

See 2020 Cryptocurrency Enforcement Framework, supra note 1 at 10.

114

Press Release, U.S. Department of Justice, South Korean National and Hundreds of Others Charged
Worldwide in the Takedown of the Largest Darknet Child Pornography Website, Which was Funded by
Bitcoin (October 16, 2019),
https://www.justice.gov/opa/pr/south-korean-national-and-hundreds-others-charged-worldwide-takedown-largest-darknet-child.

115

Id.

116

Press Release, U.S. Attorney’s Office, District of Columbia, Dutch National Charged in Takedown ofObscene Website Selling Over 2,000 ‘Real Rape’ and Child Pornography Videos, Funded by
Cryptocurrency (March 12, 2020),
https://www.justice.gov/usao-dc/pr/dutch-national-charged-takedown-obscene-website-selling-over-2000-real-rape-and-child.

117

Id.

27

In November 2020, at the FATF Joint Expert’s Meeting, I presented best practices infollowing the money and asset recovery, including cases involving digital assets.118 This was anincredibly valuable opportunity for experts around the world to share information, successes andfailures, and joint paths forward for collaboration around the same topics we are addressing
here: international legal frameworks to prevent illicit finance, terrorist financing, and advancing
digital transformation (including privacy preserving technology) and how technology could
increase efficiency in identifying and disrupting suspicious activity.119
The DOJ’s 2020 Cryptocurrency Enforcement Framework also advocates for close
collaboration with international partners to effectively investigate and prosecute cases involving
virtual currency.120 Given the July 2023 FATF call on more jurisdictions to implement the Travel
Rule to close loopholes for criminal networks suggests that more cross border collaboration isnecessary. The small number of jurisdictions implementing current FATF guidance may also be
why illicit crime is occurring through overseas entities.
As such, lawmakers in the U.S. should work as they have with partners abroad like theU.K., European Union, and others, to be on the forefront of closing the jurisdictional arbitrage
that foreign actors are currently exploiting not only in the digital asset space but across thefinancial sectors. It is clear that failure by actors abroad to comply with AML/CFT could
jeopardize the U.S. and the entire international financial system much beyond the digital asset
ecosystem. Coordinated efforts and international cooperation among regulators will benecessary to effectively address regulatory challenges in this space. The objective should be toachieve minimum global standards, supported by cross-border cooperation and information
sharing across jurisdictions, to help ensure optimal consistency.
CONCLUSIONThe United States must stay at the forefront of innovation to ensure democratic values arepreserved while being measured and deliberate about what steps are necessary to preserve
national security interests. Blockchain technology is not inherently good or bad. Blockchain
technology can be used to more effectively trace supply chains, prevent fraud in government
procurement, provide access to vulnerable populations to financial independence, digital identity,
and much more.
The U.S. also has a robust anti-money laundering and countering terrorist financing legal
and regulatory framework. It is critical that these laws are used to detect, disrupt, and dismantle
criminal organizations and networks. I urge lawmakers to ensure that the nexus between
blockchain and global affairs is seen in the nuanced context that emerging technology brings.
Thank you again for the opportunity to participate in this conversation. I am grateful tobe able to share my personal and professional experiences to ensure that the U.S. continues to be
118

Financial Action Task Force, Joint Meeting of Experts 23-26 November 2020 (November 26, 2020),
https://www.fatf-gafi.org/en/publications/Methodsandtrends/Jem-2020.html.

119

Id..

120

2020 Cryptocurrency Enforcement Framework, supra note 1 at 61.

28

at the forefront of innovation, a beacon of hope for the most vulnerable, and a staunch allyagainst the abhorrent actions of autocratic regimes and terrorist organizations.

29