The Breakdown - The Latest Attack from Elizabeth Warren's Anti-Crypto Army

Episode Date: October 19, 2023

With extreme predictability, Senator Elizabeth Warren is using the horror of war in Israel/Gaza to bully a fairly unrelated crypto KYC bill through. NLW explores Warren's attempt and the crypto community's response. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, October 19th, and today we are talking about the latest salvo of Elizabeth Warren's anti-crypto army. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit. L.Y slash breakdown pod. Hello, friends. Today is blissfully not a Sam Bankman-Fried trial day, and instead, we're going to be talking about the other big topic that has lurked for the last couple weeks, which is, of course, crypto's role in terrorism financing. Now, as was completely expected,

Senator Elizabeth Warren has used the war in Israel to renew her calls for tighter anti-money laundering controls to be applied to the crypto industry. On Tuesday, Warren wrote letters to both the U.S. Treasury and the White House calling for officials to, quote, take strong action to thoroughly address crypto-elicit finance risks before it can be used to finance another tragedy. Alongside Warren, over 100 lawmakers co-signed the letter. These signatories were largely Democrats from both the House and the Senate, and the letter said, as Congress considers legislative proposals designated to mitigate crypto money laundering and illicit finance risks, we urge you to swiftly and categorically act to meaningfully curtail illicit crypto activity and protect our national

national security and that of our allies. The letter leaned heavily on Wall Street Journal reporting from last week, which had framed Hamas as, quote, one of the most sophisticated crypto users in the terror finance domain. Also, unsurprisingly, Warren's letter did not mention that Hamas had announced the suspension of their use of Bitcoin to receive donations in April, citing concerns that the ability to easily trace Bitcoin transactions would put supporters at risk. It did, however, acknowledge that authorities have successfully seized dozens of crypto accounts owned by terrorist groups over the past year. The letter set out a series of questions, quote, regarding Treasury's plans to address the serious national security threats posed by the use of cryptocurrency to finance

terrorism. The questions largely related to steps currently being taken and asking for the administration's estimates of the size of the problem. Wall Street Journal reporting had estimated that over 130 million in crypto had been raised by Hamas and the affiliated terrorist group Palestine Islamic Shihad since August 2021. Now, it is notable that support for this letter was much, than Warren had previously gathered for her crypto-ante money laundering efforts. For example, crypto-friendly Democrats Josh Gottheimer and Jake Oshencloths were included in the ranks of co-signatories. Republican Roger Marshall, who has provided support across the aisle for Warren's

anti-money laundering bill, also signed on to the letter. And as an indication of support within senior Democrat circles, Senate Banking Committee Chairman Sherrod Brown also signed. Brown will, of course, be a significant decision-maker on whether the Warren bill progresses through the committee stage, and he tweeted yesterday, Hamas' terrorism is fueled by cryptocurrency. We need to crack down on illicit crypto and stop terrorists from moving money around, evading sanctions, and funding their acts of evil. We must curb this emerging threat and protect our national security. Now, alongside the letter, Warren penned an

op-ed in once again the Wall Street Journal, with Roger Marshall as a co-author. The article laid out what has been reported about the use of crypto and terrorist financing to date. It claimed that, quote, crypto has become a crucial pipeline for financing terrorist organizations, and researchers agree that the publicly reported numbers are likely a small percentage of the actual total. This revenue stream demonstrates the dangerous gaps in our oversight of international money flows. Terrorists, rogue nations, drug traffickers, and other criminals are using cryptocurrency to endanger our allies and U.S. national security. It's past time to apply the same anti-money laundering rules to crypto that already apply to

banks, brokers, check cashers, and even precious metal dealers before these loopholes allow terrorists to finance more attacks. The lawmakers asserted that, quote, decentralized finance companies should be subject to the same anti-money laundering rules as banks. Now, that is essentially the proposal in the Warren Marshall bill, that Defi Protocol should have KIC requirements placed on them in line with the rules applied to banks and large financial institutions. Industry figures have called the proposal entirely unworkable for small defy startups. And of course, it's generally believed that the bill would be more likely to result in U.S. users being banned from accessing defy rather than leading to ubiquitous on-chain

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G Kim, the head of policy at the Crypto Council for Innovation, said, In the U.S., we have clear AML-CFT rules and requirements for U.S. exchanges. From there, Kim pushed back on Warren's bill, noting that the issue is largely an international one which isn't addressed by domestic laws. He said that the crypto industry wants to work with lawmakers to, quote, stamp out illicit activity, and that, quote, the industry can be a helpful partner. Then there was Norbert Michelle who wrote a piece for the Cato Institute this week called A Crackdown on Crypto Won't Stop Hamas. A key quote from the piece was,

In a perfect world, it would be out of bounds to use incidents of horrific violence against innocent people to revive an otherwise unrelated political agenda. Nonetheless, it seems that Senator Elizabeth Warren and her colleagues are going to use the recent violence in Israel to gather support for the Digital Asset Anti-Money Laundering Act, a bill Warren's been hawking for months. Now, one really important thing to note here is that this bill is not focused. on exchanges that have been caught processing Hamas transactions. It's about a seemingly unrelated issue of forcing KYC onto DFI protocols. Former CFTC Commissioner and now head of policy at A16Z crypto Brian Quintan said, no serious policymaker would take a view on crypto in illicit finance without addressing the arguments of this piece. But maybe serious policy isn't the goal of

some in D.C. when it comes to crypto. Alexander Greve, who does government affairs at Paradigm wrote, crypto opponents will continue to tie crypto to illicit finance, despite that being a small subset of a larger industry, and an order of magnitude difference relative to illicit finance in opaque tradfi in order to fit their narrative. Regardless of these opponents' motivations, however, crypto needs to play our part in pushing out any bad actors. So it is up to us to come up with policy solutions and practical technical ones where possible. Until we do, we're going to keep seeing these kinds of letters. Austin Campbell responded, the irony is that cracking down forces more of this offshore, which is where the problems are. Hamas has a nexus to offshore exchanges in tether,

not onshore. Just ban things is the tech illiterate answer. Blockchain Association wrote a long thread, basically saying that, of course, the crypto industry does not support terrorist activity, but that Warren's letter was just wrong. They write, here are the facts. Claim, crypto financing is responsible for the horrific actions of Hamas. Fact. Crypto networks are transparent, and for this reason, Hamas ceased to accept Bitcoin earlier this year, citing the success of law enforcement efforts to track down donors. Only a small fraction of Hamas's funding has come from crypto. And what portion of that small amount was directly used to fund the attacks is unclear.

Claim, Hamas evaded U.S. sanctions by raising millions of dollars in crypto. Fact. Hamas and non-U.S. entities have no obligation to follow U.S. sanctions laws. And they go on, but you get the gist. Now, one thing to note is that if you think it's just crypto folks who are making some of these arguments, Assistant Law Professor at Willamette, Rohan Gray, who's no big fan of crypto but is a big fan of privacy, wrote, it's bad that we haven't built such a perfectly surveilled financial system that oppressed groups cannot fund themselves is not the progressive angle on this issue,

in my opinion. This isn't a Hamas-specific issue. It's an architectural issue. In the 1950s, it was the NAACP getting donations and the racist governor of Alabama trying to use that process as a weak point to demand donor list and harass its supporters. In a separate tweet, Gray said, there are significant civil liberties costs and broader social risks of repressing dissent and marginalized communities by building a financial system that allows centralized actors to surveil and censor all transactions. We've been trying to make this point to the Warren Wing for a while. Unfortunately, most of them are too busy hating on crypto to realize they've taken the wrong side of the financial privacy debate. I don't have all that much to add here, other than the

things that people have already said. It is clearly on the face of it preposterous to say that these attacks happened because Hamas had access to money via crypto. It's just not true. It's not true in terms of a percentage of money that Hamas had from crypto in general, and it's certainly not true that they have some magical insight that those dollars were used to fund this attack. Using that sort of rhetoric is clear political opportunism, but it's very unlikely that a lot of people are going to call it out given the sensitivity of these issues, which is exactly why folks like Elizabeth Warren use these opportunities. Frankly, this is exactly the type of interaction that shows why people get so frustrated with American politics, but I digress. Now, speaking of sanctions, on Wednesday, the

Treasury's Office of Foreign Assets Control once again expanded the sanctions list in response to elicit crypto usage. While Hamas has already designated as a terrorist group, this update added 10 new members, operatives and financial facilitators operating in Gaza. Crypto wallet addresses were identified, including one Bitcoin address owned by a Gaza-based exchange known as Buy Cash Money and Money Transfer Company. The business, along with its owner and primary operator, were alleged to, quote, be linked to Hamas and were also added to the sanctions list. Treasury Secretary Janet Yellen said in a statement, we will continue to take all steps necessary to deny Hamas terrorists the ability to raise

and use funds to carry out atrocities and terrorize the people of Israel. That includes by imposing sanctions and coordinating with allies and partners to track, freeze, and seize any Hamas-related assets in their jurisdictions. Now, blockchain analytics firm Elliptic reported on Wednesday that several designated terrorist groups had used that particular exchange. They claimed that over 25 million in Bitcoin and Tether had been moved through it since 2015. At the same time, as some pointed out, one of the sanctioned, Wallets has around $16 worth of value in it and made its last transfer 18 months ago, bringing up the question of just how much this is for show versus an actual effective policy. Speaking of

Just for Show, on Wednesday, blockchain analytics firm Chainalysis published a blog post titled Correcting the Record, inaccurate methodologies for estimating cryptocurrency's role in terrorism financing. Chainalysis is, of course, one of the premier firms for providing statistics on illicit funding flows through crypto networks, as well as in assisting authorities to disrupt freeze and seize assets. Their blog post stated that, quote, We have seen overstated metrics and flawed analyses of these terrorist groups' use of cryptocurrency and feel compelled to address some misconceptions. Chainalysis noted that terrorism financing is, quote,

a very small portion of the already very small portion of cryptocurrency transaction volume that is illicit. They recognize that, quote, terrorist organizations have historically used and will likely continue to use traditional fiat-based methods such as financial institutions, hauolas, and shell companies as their primary funding vehicles. And yet, in spite of this, they point out. out that, quote, the unique transparency inherent in blockchain technology makes cryptocurrency particularly traceable and thus less suitable for illicit activities. Chainalysis walked through the newly sanctioned exchange by cash as a case study. They dug into specific transactions

flowing to and from the exchange and concluded that it functioned more like a street-level money changer rather than being exclusively used for terrorist financing. According to Chainalysis, 82 million had flowed through the recently sanctioned address since February. Of those flows, chain analysis found that only 450,000 worth of crypto was transferred to other addresses affiliated with terrorist financing. They noted that rather than the full amount, which has been cited in recent reporting, quote, it is much more likely that a small portion of these funds were intended for terrorist activity, and a majority of the funds processed through the suspected service provider were unrelated. Nera Jagrawal from Coin Center summed it up this way. Chainalysis explains why

recent viral estimates of Hamas's crypto use are likely inflated. It looks like those estimates assume all flows through service providers that process illicit transactions. transactions are illicit. That's probably not the case. To simplify, if there's a rogue exchange that does a billion dollars in volume, and they process one $1,000 Hamas transaction, it shouldn't be counted as $1 billion to Hamas. Nairz also poured some cold water on a statistic that's been floating around that suggests that the UN estimates that cryptocurrencies account for 20% of terrorist financing. Niaraj said, I went looking for the source. It seems to come from this interview. It's more a vibe thing than scientific. Basically, a senior legal official at the

UN Counterterrorism Committee, Svetlana Martinova, said in an interview from last year that a few years ago, 5% of terror attacks were believed to be financed using crypto, and she added that, quote, now we're thinking it may reach about 20%. Statistics here are not our best friends. We're just seeing more as we're looking more into it. In other words, this thing that is reported as fact is just a made-up source. Now, whether or not there is dubious information going into all of these things, it doesn't matter in how it's impacting crypto's place in Washington. A new research report from Berenberg Capital Markets claims that the reported use of crypto to fund Hamas may have set back crypto lobbying efforts in Washington. The report stated that efforts to pass crypto legislation could be,

quote, complicated by recent media reports that put a spotlight on Hamas's use of crypto as a means of fundraising in recent years. And that quote, we believe the recent headlines are likely to make clarity around the question of crypto's legal status even more elusive. So friends, there you have it. That's the latest. What we will be keeping an eye on is the extent to which this picks up particular momentum, or whether this was the type of thing that was a one-time flag signaling for these 100 signatories, who just wanted to be associated with the anti-terrorism team, which is how this letter tried to portray itself. To the extent that this does pick up, and this bill becomes more of a going concern, I will, of course, let you guys know here. For now, I appreciate you listening as

always. And of course, one more big thanks to today's sponsor, Cracken. Go to crackin.com slash the breakdown to see what crypto can be. Till next time, be safe and take care of each other. Peace.