The Week in Crypto Policy: Sen. Warren Letter, FinCEN Rule, and Sanctions George Leonardo Oct 20, 2023 ⋅ 9 min read As policymakers key in on illicit finance concerns related to crypto, this week's newsletter reviews a letter from Senator Warren and two actions by Treasury. Key Insights Senator Elizabeth Warren (D-MA) led a letter to the White House, urging the Biden Administration to crack down on crypto use by terrorists. 28 Senators and 76 Representatives signed on — only 2 were Republicans. FinCEN is proposing to require financial institutions to record and report details of transactions they "know, suspect, or have reason to suspect involve the use of [cryptocurrency] mixing." Treasury sanctioned 10 individuals and entities linked to financing Hamas, including a crypto exchange and its owner who are based in Gaza. Senator Warren Leads over 100 Members in Letter to White House On Tuesday, Senator Elizabeth Warren (D-MA), Senator Roger Marshall (R-KS), and Rep. Sean Casten (D-IL) led a letter (the "Letter") to the White House asking how the Biden Administration plans to address "the serious national security threats posed by the use of cryptocurrency to finance terrorism." The letter is signed by 28 Senators and 76 Representatives. Only two Republicans signed on: Senators Roger Marshall (R-KS) and John Kennedy (R-LA), both of whom support Senator Warren's Digital Asset Anti-Money Laundering Act ("DAAMLA"). The Letter As the basis for their concerns, the Letter cites last week's Wall Street Journal report that Hamas and the Palestinian Islamic Jihad received millions of dollars in crypto as part of their funding. For context on the extent to which crypto is used to fund terrorism compared to other means, see the Quick Hits section below, including a Chainalysis report explaining why estimates of crypto use by terrorist groups are likely overstated. Given the potential national security concerns related to crypto financing, the Letter concludes: "Congress and this Administration must take strong action to thoroughly address crypto illicit finance risks before it can be used to finance another tragedy." To this end, the Letter asks the White House to explain: Its plan for addressing the use of crypto to fund terrorism; The extent to which the White House believes terrorists are using crypto, and What additional statutory authorities and resources the Administration needs to address crypto-related national security threats. The Letter requests a response from the White House by Halloween. So What? The sheer number of signees shows this is an issue that is not likely to go away. Who signed the Letter is also important. For example, Senator Sherrod Brown (D-OH) — Chairman of Senate Banking Committee — is a signee. Senate Banking will host a hearing next Thursday on Combating the Networks of Illicit Finance and Terrorism. And according to Politico, Chairman Brown may be considering combining aspects of DAAMLA and the CANSEE Act. (See summaries of these two bills in last week's newsletter here). Rep. Jim Himes (D-CT) and Rep. Josh Gottheimer (D-NJ) also signed on. They both voted in favor of advancing market structure and stablecoin legislation out of committee earlier this year — showing the concerns outlined in the Letter are not held by hardened crypto-skeptics alone. Further, by asking the Administration for examples of legislation that might help address the issue, Senator Warren is likely prodding the White House to support her DAAMLA legislation. If she is successful, this may pressure the Democrat-controlled Senate to push for its inclusion in a must-pass bill before year end (e.g., omnibus). Even still, it remains unlikely such legislation could pass the House. There are also less controversial and more targeted bills to which Congress could turn, including an NDAA amendment sponsored by Senators Lummis, Gillibrand, Warren, and Marshall, and the bipartisan, bicameral Financial Technology Protection Act of 2023. (Bill summaries also included in last week's newsletter.) At the very least, the letter foreshadows arguments that are likely to be raised in future hearings and negotiations. FinCEN Proposed Rule re Crypto Mixing Overview On Thursday, the Financial Crimes Enforcement Network (“FinCEN”) published a proposed rule that would designate "convertible virtual currency ("CVC") mixing" as a primary money laundering concern. Under the proposal, certain financial institutions would need to report crypto transactions they "know, suspect, or have reason to suspect involves the use of [cryptocurrency] mixing within or involving a jurisdiction outside the United States." The proposed rule is open for public comment for 90 days after publication in the Federal Register. FinCEN cites the use of mixers by the DPRK, Russian ransomware actors, Hamas, and ISIS to facilitate a range of illicit activities as justification for the proposal. The proposed rule recognized that mixing services have legitimate uses, "such as privacy enhancement for those who live under repressive regimes or wish to conduct licit transactions anonymously." Proposed Rule at 21. But weighed against their "acute money laundering risk[s]," FinCEN concluded the rule is still necessary. Id. The Proposed Rule FinCEN issued the proposed rule pursuant to USA PATRIOT ACT § 311. Who would need to file reports? Covered financial institutions include banks, brokers and dealers, money services businesses, and more. Full list in 31 C.F.R. § 1010.100(t). What transactions need to be reported? Covered financial institutions would have to record and report transactions they know or suspect involve “CVC mixing” within or involving a jurisdiction outside the U.S. Proposed 31 C.F.R. 1010.662(a)(5). CVC mixing is defined to include any facilitation of crypto transactions that “obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used.” Proposed § 1010.662(a)(3). Specific examples of “mixing” include: Pooling or aggregating crypto from multiple persons, wallets, addresses, or accounts; Using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction; Splitting transmissions into a series of independent transactions; Creating and using single-use wallets, addresses, or accounts; Exchanging between types of crypto assets or other digital assets; or Facilitating user-initiated delays in transaction activity. Id. What information needs to be reported? Regarding the transaction: amount (in both crypto and dollar terms) and type of crypto transacted; CVC mixer used; wallet address associated with the mixer and customer; transaction hash; IP address and time stamps associated with the transaction; Narrative description of the transaction. Proposed § 1010.662(b)(1)(i). Regarding the customer associated with the transaction: name, date of birth, address; email address and phone number; IRS tax ID number, passport number, or driver's license number. Proposed § 1010.662(b)(1)(ii). What's next? Comments are due within 90 days of publication in the Federal Register. Once posted there, you can submit comments via regulations.gov. Treasury Sanctions Gaza-Based Crypto Exchange and Owner Background On Wednesday, Treasury sanctioned ten Hamas operatives and financial institutions, including "Buy Cash," a virtual currency exchange based in Gaza, and its owner, Ahmed M. M. Alaqad. ​According to the press release, a wallet linked to Buy Cash was linked to a Hamas fundraising campaign and helped facilitate purchases on behalf of ISIS (dollar amounts are not provided). Buy Cash also received $2,000 in Bitcoin from an al-Qa'ida affiliate in 2019. The Sanctions The sanctions were issued pursuant to EO 13224, which authorizes the Treasury to sanction individuals and entities who pose a significant risk of supporting terrorist organizations. Because OFAC added Buy Cash and Alaqad to the Specially Designated Nationals ("SDN") List, all U.S. persons and financial institutions are generally prohibited from transacting with them. Further, all of Buy Cash and Alaqad's property interests held in the U.S. or by U.S. persons are frozen and must be reported to OFAC. So What? On the one hand, the sanctions demonstrate the Administration already has the authority and ability to detect and penalize terrorists relying on crypto for funding. On the other, crypto skeptics will likely point to Buy Cash and Alaqad as further evidence that terrorists are using crypto.