Senator Roy Blunt, Chairman
Cryptocurrency has gone from an obscure fad to a much more mainstream form of investment and finance. A handful of cryptocurrencies dominate the market, with Bitcoin accounting for 41% of the industry’s total market value. With that growth, governments around the world have become interested in regulating the industry. Several governments also have taken steps toward establishing their own digital currencies.
The market capitalization for all cryptocurrencies increased from about $19 billion in January 2017 to $2.2 trillion in January 2022. Cryptocurrency has created billionaires almost overnight, as luck or prescient early bets, depending on whom you ask, have increased the value of their holdings by astonishing amounts. According to a recent poll, one in five American adults has made an investment, traded, or used cryptocurrency. The figure is even higher – 40% – among Black Americans.
The federal government has become increasingly interested in cryptocurrency as its use has expanded. In March, President Biden issued an executive order that set policy objectives for digital asset development and directed agencies to report back with policy recommendations. These objectives included protecting consumers, investors, and businesses and ensuring privacy; maintaining financial stability; and guarding against illicit uses such as money laundering and ransomware. The order also called for the U.S. to continue leading the development of digital assets and for promoting access to affordable financial services.
The executive order directed the Treasury Department to report on implications of the U.S. developing a digital currency to be issued by the Federal Reserve, something that dozens of countries, including China, Russia, Canada, and Australia are exploring. Nigeria and eight countries in the Caribbean have already launched their own central bank digital currency. The order directed the attorney general to report on whether there is legal authority to create such a currency or if Congress would need to pass a law to provide authority. In January, the Federal Reserve issued a report on the potential benefits and challenges of an official U.S. version but did not advocate for or against the concept. The Fed said it doesn’t plan to issue a digital currency “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”
Financial institutions that conduct transactions of traditional payments must maintain large electronic networks, employ people, and charge fees to anyone who uses their system to transmit money. Some observers have touted cryptocurrency’s ability to dramatically reduce costs and the time it takes to make payments. Ukraine’s government has collected donations of more than $100 million in cryptocurrency to support its defense against Russia’s unprovoked war, which would have been more difficult through traditional means. Cryptocurrency prices can be volatile, though, a factor that some say has kept them from being more widely used to make payments.
Supporters also say that cryptocurrency could provide increased security and privacy in financial transactions. People are not personally identified on the ledgers where these digital transactions are recorded, and they have a private key that they use when sending or receiving cryptocurrency. Blockchain technology enables a permanent record of the order of the transactions, and eventually these transactions are irreversible. Some people may prefer the relative anonymity of cryptocurrency compared to sharing personal information with a traditional financial institution.
Some proponents make the case that cryptocurrencies could be useful in areas or countries where people have less trust in their government or institutions. At a Banking Committee hearing in July 2021, the head of Coin Center, a cryptocurrency research center, gave the example of Venezuela, “where individuals’ property and savings can be confiscated by authorities through law or inflation.” He argued that the government could not take away peoples’ cryptocurrency, because it would not have peoples’ private keys. He also said that cryptocurrency makes “microtransactions,” or payments that could be a few cents or less, feasible and worth the effort. Possible applications include buying a few minutes’ worth of Wi-Fi coverage, paying musicians each time a song gets played, or buying just one online article instead of purchasing an entire subscription.
Some observers compare cryptocurrency’s current state to the early days of the internet, emphasizing that we have not seen the full scope of how it can be applied. They say it is crucial to allow the industry to innovate. Senator Pat Toomey, ranking member of the Banking Committee, recently solicited proposals for legislation that would clarify the rules and laws around cryptocurrency to protect investors and to foster innovation in the industry. He also released a discussion draft of legislation that would establish a new regulatory framework for stablecoins, digital assets that are designed to have a one-to-one value relative to a reference asset such as the U.S. dollar. Senators Cynthia Lummis and Kirsten Gillibrand also are planning to propose a regulatory framework for cryptocurrency and other digital assets, including things like definitions, tax treatment, and clarifying the legal status of digital assets as securities or commodities.
The pseudonymous and decentralized nature of cryptocurrency also makes it attractive to criminals. The infamous online marketplace known as the Silk Road used Bitcoin to facilitate sales and shipment of illegal drugs. More than 100,000 illegal drug transactions had taken place on the site by the time it was shut down by the FBI in 2013. The site facilitated other criminal activity, including hacking services and sales of fake driver’s licenses, passports, and Social Security cards.
Cryptocurrency has been integral to the astonishing rise in ransomware attacks around the globe. The average ransomware demand was reportedly $2.2 million in 2021, a 144% rise from 2020. According to Chainalysis, “cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion over the course of the year, up from $7.8 billion in 2020.” However, Chainalysis also found that illicit transactions accounted for only 0.15% of total cryptocurrency volume.
The FBI has had some success tracking and even retrieving ransomware payments made via Bitcoin and other cryptocurrencies. Last June, the Department of Justice announced it had tracked and recovered 63.7 Bitcoins payed as ransom by Colonial Pipeline in response to the ransomware attack it had suffered. The Bitcoins were valued at just over $2.3 million at the time. Contrary to popular belief, cryptocurrency transactions are not totally anonymous. The ledgers in which most are recorded are public, and transactions are not as hard to track as many believe. The difficulty is matching funds in digital wallets to the real owners. For this reason all U.S. based cryptocurrency exchanges are required to have procedures in place to identify their customers. Tracking and recovering ransomware payments is a promising arrow in the FBI’s cyber quiver.
In July, the Senate Judiciary Committee held a hearing on preventing and responding to cyberattacks. A Justice Department witness testified about the efforts the department’s Ransomware and Digital Extortion Task Force is taking to “disrupt, investigate, and prosecute ransomware attacks.” On April 5, DOJ announced the seizure of Hydra Market, the world’s largest and longest-running darknet market. According to the department, “in 2021, Hydra accounted for an estimated 80% of all darknet market-related cryptocurrency transactions, and since 2015, the marketplace has received approximately $5.2 billion in cryptocurrency.”
Some governments may take a dim view of cryptocurrencies’ decentralized nature and could take steps to regulate or ban it. China is exploring creating its own digital currency. Authorities there cracked down on cryptocurrency last September, declaring all financial transactions involving cryptocurrencies illegal.
Critics also contend cryptocurrencies are bad for the environment because of the amount of electricity required to “mine” them, and that cryptocurrencies overall are nothing more than glorified scams, rife with fraud, and prone to speculation. Because cryptocurrencies are similar to but distinct from many other types of financial assets such as currencies, securities, and commodities, we are likely to see several proposals on appropriate regulatory frameworks.
Senator Roy Blunt, Chairman