U.S. Secret Service: Action Needed to Address Anonymous Cryptocurrencies
By Aaron Stanley
A top U.S. Secret Service official on Wednesday asked Congress for help in preventing cryptocurrencies like Monero and Zcash, which provide users with enhanced privacy and anonymity features, from being used for illicit purposes.
“We should … consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies,” Robert Novy, deputy assistant director in the U.S. Secret Service’s Office of Investigations, wrote in his written testimony to Congress.
He raised similar concerns about other services like tumblers and mixers that are designed to obscure transactions on blockchains.
Greg Nevano, an official in the investigations division of the Immigration and Customs Enforcement, seconded Novy’s concerns about this secretive class of cryptocurrencies.
“Some newer cryptocurrencies have features that make the tracing of them quite complicated,” he said, adding that:
“These new anonymity-enhanced cryptocurrencies are clearly ripe for illicit use in an effort to subvert legitimate law enforcement inquiries. Although it is more difficult to trace the movement of illicit proceeds using these newer anonymity-enhanced cryptocurrencies, it is not impossible.”
Novy went even further by urging lawmakers to give law enforcement agencies such as his greater ability to override businesses or entities that “impede access to digital evidence” by refusing to turn over customer data or devices.
“[C]ontinued Congressional attention is warranted to ensure law enforcement agencies maintain lawful access to critical sources of evidence, regardless of where, or in what form, that information is stored.”
The remarks came during a hearing on the use of virtual currencies for illicit purposes held by a House Financial Services subcommittee.
The event showcased that, for all of the glitz and glamour that have surrounded the cryptocurrency scene the past 12 months and the new blockchain analysis products that have hit the market recently, usage of these monies for criminal activity still remains a leading concern in the eyes of policymakers and law enforcement officials.
“One of the greatest emerging threats to US national security is illicit use of virtual or cryptocurrencies,” Rep. Robert Pittenger of North Carolina said during the hearing.
“We have seen virtual currency exploited to support billions of dollars in what we would consider suspicious activity,” said Thomas Ott, associate director of FinCEN’s enforcement division.
FinCEN has observed $1 billion in cryptocurrency-denominated ransomware payments and $1.5 billion in funds stolen in cryptocurrency exchange hacks over the last two years, and it estimates that $4 billion worth of cryptocurrencies has moved through darknet marketplaces since 2011.
However, despite the boogeyman-ish concerns surrounding potential criminal usage of cryptocurrencies, Ott noted that most financing of illegal activity still occurs by and large through more conventional means:
“While traditional financial methods remain the primary vehicle for most illicit activity, FinCEN believes virtual currency presents specific illicit finance risks and that without vigilance and action, the scale of this activity could grow.”
The global nature of cryptocurrency networks and the associated enforcement challenges were also highlighted, as was the need for coordinated international cooperation through venues such as the Financial Action Task Force.
In particular, what complicates enforcement efforts the most is the lack of consistency in anti-money laundering regulations and supervision internationally, which allows bad actors to shop around for the jurisdiction that offers the least resistance to illicit activity.
“We have seen great strides to address this regulatory gap in places like Australia, Japan, and South Korea, but most jurisdictions still do not have a regulatory framework in place or in-progress to address virtual currencies,” Ott said, adding that:
“Until jurisdictions ensure that these businesses adhere to the same international [anti-money laundering and counter-terrorism financing] standards as other financial institutions, there will be vulnerabilities that expose the U.S. to illicit finance risks.”
Nevano further singled out unregistered peer-to-peer exchanges that advertise on Craigslist and elsewhere as his agency’s main area of focus in combating crypto money laundering and other illicit activities.
“Although some P2P exchangers do register and follow compliance laws, most do not. Rather, these illicit P2P exchangers position themselves as the money launderers of the cryptocurrency world. One type of P2P exchanger illegally generates revenue by charging a premium for allowing their customers to remain anonymous,” he explained.
Nevano added that his agency had confiscated more than $25 million worth of cryptocurrency as of April 2018 through a variety of enforcement actions.
“Targeting these illicit P2P exchangers helps to open the door and pull back the veil of pseudo-anonymity provided by cryptocurrencies,” he said, concluding:
“Through interviews and suspect cooperation, along with forensic analysis of computers, mobile phones, and other seized electronics, as well as the use of advanced blockchain tracing tools, [authorities] can identify other criminals using cryptocurrency to fund and further their illicit activities.”
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