Over the last month, the Wall Street Journal’s coverage of crypto fundraising by Hamas has set off a storm of letters on Capitol Hill. Even though some of the original reporting has been called into question, the debate over terrorists’ use of crypto has sparked letters from Congress to the Treasury, from Treasury to Congress, and from the House back to Treasury and the President.
But for all the strongly-worded emails landing in D.C. inboxes, policymakers may find that our economic sanctions are far less effective at cracking down on crypto bad actors than before.
After a conscious effort to push digital assets markets offshores, the U.S. has lost authority over now-foreign cryptocurrency exchanges, leaving them free to continue serving bad actors like Hamas. To continue to protect U.S. citizens and our allies, we need to rethink our stance on crypto and focus on bringing mainstream exchanges back onto U.S. soil and under our purview.
Cryptocurrency offers an easy-to-access alternative to the traditional banking system—and on the whole, that's a good thing. Since its invention, cryptocurrency exchanges have allowed historically underbanked groups to send and receive funds, which decentralizes borrowing and generates wealth.
Of course, plenty of U.S. lawmakers are skeptical of the industry. There's no denying it has its share of bad actors and financial risks. And as we're seeing now, in the hands of bad actors like Hamas, access to a largely unregulated financial market can fund violence.
But the fact remains that the industry isn't going anywhere, and lawmakers' skepticism have led the U.S. to drag its feet on regulations.
Uncertainty over the U.S. regulatory landscape has prompted huge exchanges to consider, and move forward with, moving their operations overseas. And SEC Chair Gary Gensler has also confirmed that this move is far from accidental.
Lawmakers don't have to like or trust the industry to understand that our crypto strategy is failing. In pushing crypto offshore, we've given up authority over an $800-billion-dollar financial industry that's around for the long haul. Encouraging digital asset marketplaces to set up shop elsewhere has only weakened our ability to influence global security.
Not to mention that Hamas' use of foreign crypto exchanges to fund terrorist acts is far from the first sign that our strategy isn't working. We saw these same risks when Russia attacked Ukraine last year. Shortly after Vladimir Putin ordered an invasion of Ukraine, the U.S. released economic sanctions instructing American cryptocurrency exchanges to block Russian users.
U.S.-based crypto exchanges abided, but international exchanges like Binance refused, continuing to serve Russian users and creating the potential for Russian actors to finance war operations through their markets.
Hamas' attack against Israel, Russia's attack against Ukraine, and our inability to successfully block neither Hamas' nor Russia's funding illustrates just how urgently we need crypto regulations in the U.S. Lawmakers must pass a crypto framework to establish clear regulations and encourage major exchanges to remain on American soil—or risk giving up more and more of our international authority.
Some policymakers are aware of the problem, but are looking in the wrong places for a solution. A bipartisan group of lawmakers led by Sen. Elizabeth Warren (D-Mass.) signed a letter recently urging the Biden administration to "swiftly and categorically act to meaningfully curtail illicit crypto activity and protect our national security and that of our allies."
They’re right to urge swift action on our adversaries’ access to crypto. But pushing federal agencies like Treasury to ramp up scrutiny of the dwindling exchanges–which remain under U.S. jurisdiction–isn’t going to get the job done.
Instead, Congress should be working to make our country a hospitable place for crypto exchanges by formalizing and clarifying our rules and regulations. We need a legal framework that encourages crypto platforms to stay in the U.S. and return to our shores if we want to regain control of a global financial medium being exploited by bad actors.
A handful of lawmakers, including Sen. Warren, have made it clear that, for them, crypto itself is an enemy. But as the U.S. works to combat the combined threats of terrorism, Russian expansion, and international scam networks, Congress should be keeping its friends close and its crypto exchanges closer.