Crypto Does Not Have an Illicit Finance Problem, Bad Actors Do

Deputy Treasury Secretary Wally Adeyemo’s April 9 testimony before the U.S. Senate Banking Committee is set to provide a veritable state of the union address on illicit finance, and crypto will undoubtedly feature prominently at the hearing. This is especially true, as headlines of Russia’s use of “crypto” to evade sanctions or traffic arms are making the rounds.

Notwithstanding crypto’s checkered scorecard over the last few years, which saw record losses, market manipulation, fraud and clear examples of highly traceable illicit finance (albeit comparatively small), the media’s use of the word “crypto” as a catchall is disingenuous. Most often, it is named single products, blockchains and platforms such as Tornado Cash or Terra-Luna that create a nexus of bad activity. The digital assets industry, like banking, is not monolithic.

Dante Disparte is the Chief Strategy Officer and Head of Global Policy for Circle, a leading financial technology firm and the regulated issuer of USDC.

Still, unlike banking, “crypto” writ large bears a disproportionately heavy reputational burden, despite the fact that most illicit activity accrues to named individual entities, products or other services. A recent TRM Labs report titled The Illicit Crypto Economy underscores as much. Thus, the continual use of a catchall term “crypto,” is like blaming all banks for the misdeeds of a single bank. Imagine if every bank in the world had to atone for the sins of a single bank such as Danske Banke, which, in 2022, pleaded guilty to $212 billion of Russia-linked money laundering?

While Senators weigh the merits of Adeyemo’s important testimony, they should also weigh the consequences of more than five years of U.S. policy inaction in regulating the very wayward corners of the crypto industry that pose the greatest threats to consumers, markets and, indeed, national security. U.S. policymakers and regulators, from Treasury Secretary Janet Yellen, to Federal Reserve Chairman Jerome Powell (and Deputy Secretary Adeyemo), have all made calls for Congressional action. They focus particularly on dollar-denominated stablecoins, the crypto world’s digital thrift, much of which borrow the trust of the dollar, without being accountable to U.S. financial crime compliance laws.

This critical regulatory gap can be addressed with the urgent passage of the Clarity for Payment Stablecoin Act, which has been under intense development for the past two years and has passed the House Financial Services Committee. Rather than viewing this important bill as a body of law that would legitimize the wayward actors and misdeeds of some products and services in crypto, even skeptical Senators and members of Congress should view this bill as one that asserts U.S. leadership over digital dollars everywhere, irrespective of their form factor.

Critically, the law would create a floor for all issuers to comply with U.S. anti-money laundering, countering terrorist financing and sanctions obligations. These norms should be applied to U.S. issuers of payment stablecoins, as well as their international counterparts, many of which are being licensed to issue dollar-denominated stablecoins from jurisdictions like the United Arab Emirates, Hong Kong and Singapore.

Circle, the issuer of the USDC stablecoin, follows all of these norms today under our obligations as a U.S. regulated money transmission company and as a money services business registered with the U.S. Treasury's Department’s Financial Crimes Enforcement Network (FinCEN). There is an effective deterrence in regulated stablecoins and their corresponding value chains limiting their use in illicit activity. Abiding by laws, working with peer regulated financial institutions, and holding the line on financial integrity makes a big difference. That is why, according to third-party reports, USDC is used for lawful purposes at rates of 99.95%. Because no financial system is risk-free, good crypto companies, banks and non-banks together with law enforcement, would be well-served in adopting a model of collective defense when it comes to combating illicit finance.

The crypto industry ensures broad conformity at the operating and technological levels with the Travel Rule (which sets international information-sharing standards to prevent money laundering and terrorist financing). It is also part of the TRUST Network, which Coinbase and at least 58 other crypto companies have adopted. Slow-moving policymakers would do well in looking at the example set by the world’s leading financial crime compliance bodies, which were among the very first to establish globally harmonized rules for crypto under the Financial Action Task Force (FATF) recommendation 16, imposing the Travel Rule on international crypto transactions.

With over $150 billion in circulation, stablecoins are too important to ignore. By coupling the trust of the U.S. dollar with the superpowers of the internet, they are poised to fundamentally modernize our global financial system, making it faster and fairer. As Deputy Secretary Adeyemo will undoubtedly assert, there is an array of complex threats arrayed against the U.S. economy and our leadership in the world. The passage of clear laws for novel crypto markets, as with banking before it, can preserve this leadership.