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Virtual Currency: Financial Innovation and National Security Implications

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Virtual Currency: Financial Innovation and National Security Implications VIRTUAL CURRENCY: FINANCIAL INNOVATION AND NATIONAL SECURITY IMPLICATIONS HEARING BEFORE THE SUBCOMMITTEE ON TERRORISM AND ILLICIT FINANCE OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS FIRST SESSION JUNE 8, 2017 Printed for the use of the Committee on Financial Services Serial No. 115–22 ( U.S. GOVERNMENT PUBLISHING OFFICE 28–177 PDF WASHINGTON : 2018 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\28177.TXT TERI HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. MCHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELA´ ZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia STEVE STIVERS, Ohio AL GREEN, Texas RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota ANN WAGNER, Missouri ED PERLMUTTER, Colorado ANDY BARR, Kentucky JAMES A. HIMES, Connecticut KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio MIA LOVE, Utah DENNY HECK, Washington FRENCH HILL, Arkansas JUAN VARGAS, California TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas DAVID A. TROTT, Michigan CHARLIE CRIST, Florida BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada ALEXANDER X. MOONEY, West Virginia THOMAS MacARTHUR, New Jersey WARREN DAVIDSON, Ohio TED BUDD, North Carolina DAVID KUSTOFF, Tennessee CLAUDIA TENNEY, New York TREY HOLLINGSWORTH, Indiana KIRSTEN SUTTON MORK, Staff Director (II) VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\28177.TXT TERI SUBCOMMITTEE ON TERRORISM AND ILLICIT FINANCE STEVAN PEARCE, New Mexico Chairman ROBERT PITTENGER, North Carolina, Vice ED PERLMUTTER, Colorado, Ranking Chairman Member KEITH J. ROTHFUS, Pennsylvania CAROLYN B. MALONEY, New York LUKE MESSER, Indiana JAMES A. HIMES, Connecticut SCOTT TIPTON, Colorado BILL FOSTER, Illinois ROGER WILLIAMS, Texas DANIEL T. KILDEE, Michigan BRUCE POLIQUIN, Maine JOHN K. DELANEY, Maryland MIA LOVE, Utah KYRSTEN SINEMA, Arizona FRENCH HILL, Arkansas JUAN VARGAS, California TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York RUBEN KIHUEN, Nevada WARREN DAVIDSON, Ohio STEPHEN F. LYNCH, Massachusetts TED BUDD, North Carolina DAVID KUSTOFF, Tennessee (III) VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\28177.TXT TERI VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\28177.TXT TERI C O N T E N T S Page Hearing held on: June 8, 2017 ...................................................................................................... 1 Appendix: June 8, 2017 ...................................................................................................... 37 WITNESSES THURSDAY, JUNE 8, 2017 Brito, Jerry, Executive Director, Coin Center ....................................................... 5 Dueweke, Scott, President, the Identity and Payments Association ................... 7 Haun, Kathryn, Lecturer, Stanford Law School, and former Assistant U.S. Attorney, U.S. Department of Justice ................................................................ 8 Levin, Jonathan, Co-Founder, Chainalysis ........................................................... 11 Wilson, Luke, Vice President, Business Development-Investigations, Elliptic .. 13 APPENDIX Prepared statements: Brito, Jerry ........................................................................................................ 38 Dueweke, Scott ................................................................................................. 42 Haun, Kathryn .................................................................................................. 50 Levin, Jonathan ................................................................................................ 63 Wilson, Luke ..................................................................................................... 70 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Lynch, Hon. Stephen: CNAS report entitled, ‘‘Terrorist Use of Virtual Currencies,’’ dated May 2017 ................................................................................................................ 71 (V) VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\28177.TXT TERI VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\28177.TXT TERI VIRTUAL CURRENCY: FINANCIAL INNOVATION AND NATIONAL SECURITY IMPLICATIONS Thursday, June 8, 2017 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TERRORISM AND ILLICIT FINANCE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. Stevan Pearce [chair- man of the subcommittee] presiding. Members present: Representatives Pearce, Pittenger, Rothfus, Messer, Tipton, Williams, Poliquin, Hill, Zeldin, Davidson, Budd, Kustoff; Perlmutter, Himes, Foster, Kildee, Sinema, Vargas, Gottheimer, Kihuen, and Lynch. Ex officio present: Representative Hensarling. Chairman PEARCE. The Subcommittee on Terrorism and Illicit Finance will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, members of the full Financial Services Committee who are not members of the Subcommittee on Ter- rorism and Illicit Finance may participate in today’s hearing. Today’s hearing is entitled, ‘‘Virtual Currency: Financial Innova- tion and National Security Implications.’’ I now recognize myself for 2 minutes to give an opening state- ment. Innovation revolutionizes and simplifies our lives on a daily basis. In the past 30 years alone we have seen the emergence of the Internet as an open-source accessible information tool, the pop- ularization of cell phones, the development and wide use of smartphones, faster and faster Internet and wireless access, and the list goes on and on. For many of us in this room, the millennials excluded—and, frankly, based on the number of them in the lines at the Apple Store, I think they are even surprised at the existence and the evo- lution of this thing which never would have seemed possible in our wildest dreams. The implications, of course, of this greater development and ex- ploration into the digital age is the inability of government and regulatory bodies to keep up with the pace of development. Tech- (1) VerDate Nov 24 2008 19:18 Apr 04, 2018 Jkt 028177 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\28177.TXT TERI 2 nology in the financial space is no exception, and that is what brings us here today. From small business lending to virtual wallets, the creation of virtual currencies, the fintech space, as it is known, is rapidly evolving. The benefits are clear. Families in underserved areas are finding more choice and options than ever before. People can pay for the goods in the store without the need for cards or cash. The possibili- ties of benefits are truly endless. The subcommittee kicked off the work in this space last week with a briefing on blockchain, one of the major innovations driving this development. Today we will continue the conversation by ex- amining how virtual currencies specifically pose a risk to our na- tional security. This will include questions such as: Does the creation of a cur- rency that is completely decentralized from a governmental struc- ture, administered through the use of peer-to-peer sharing, present a new threat to the safety and soundness of our banks and to our national security? What, if any, regulatory structure exists around these emergency forms of currency and technology? Does the notion of online peer-to-peer sharing provide an increased veil of secrecy that could be exploited by terrorists and illicit actors? I thank our witnesses for being here today and I look forward to the conversation to come. The Chair now recognizes the ranking member of the sub- committee, the gentleman from Colorado, Mr. Perlmutter, for 2 minutes for an opening statement. Mr. PERLMUTTER. Thanks, Mr. Chairman. And thanks, to our witnesses, for being here today. Obviously, there is considerable interest in virtual currencies and cryptotechnologies, not only among speculators and traders but be- cause of the promising benefits the underlying blockchain ledger technology has to offer. However, our subcommittee should remain focused on the national security implications, especially since cyber criminals and nation states are exploiting cryptocurrencies for il- licit purposes. Mr. Dueweke notes in his testimony: ‘‘Cyber criminals in Eastern Europe, North
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