The U.S. government already has the authority it needs to monitor or regulate potential terrorist financing using cryptocurrencies and other crowdfunding or alternative financing tools.

This was one of the conclusions reached by witnesses at a congressional hearing Thursday. During the “Dollars Against Democracy: Domestic Terrorist Financing in the Aftermath of Insurrection” hearing, held by members of the House Financial Services Committee, witnesses called for better online moderation and data gathering, but not new surveillance or domestic terror statutes. 

“To effectively disrupt domestic extremist groups, we need to better understand their financing,” said Rep. James Himes (D-Conn.), the chair of the National Security, International Development and Monetary Policy Subcommittee, which hosted the hearing.  “Some extremist groups are eschewing the traditional banking sector in favor of cryptocurrency, avoiding our traditional methods of disrupting extremist finance.”

For the most part, cryptocurrencies were treated as just another payment method alongside more traditional payment rails like PayPal and GoFundMe. Lawmakers largely did not single out cryptocurrencies in particular as a criminal tool.

While cryptocurrencies can be used to transfer funds outside the view of financial regulators, fiat on- and offramps allow regulators the ability to monitor these transactions, said Daniel Glaser, global head of jurisdictional services at K2 Integrity and a former assistant secretary for Terrorist Financing and Financial Crimes at the U.S. Treasury Department.

“If you want to be able to use a cryptocurrency in the real economy to any scale, at some point [the cryptocurrency] does need to be converted into actual fiat currency, into dollars,” he said. “That's the place where the Treasury Department does regulate cryptocurrencies and cryptocurrency exchanges are regarded as money service businesses, they have full customer due diligence requirements, they have full money laundering requirements, they have reporting requirements.”

Glaser also noted that cryptocurrencies are largely pseudonymous, not anonymous, later telling Rep. Stephen Lynch (D-Mass.) that cryptocurrencies make it easier for law enforcement agencies to track transactions. 

Daniel Rogers, the co-founder and chief technical officer of the Global Disinformation Index, told Rep. Madeleine Dean (D-Penn.) that alternative financing platforms are helping contribute to recruitment and radicalization efforts by domestic terror groups. 

Still, at no point during the hearing did any of the witnesses call for new statutes to more closely surveil the financial or cryptocurrency sectors. Indeed, Iman Boukadoum, senior manager at The Leadership Conference on Civil and Human Rights, said new statutes run the risk of being abused. 

However, Glaser did point to a proposed Financial Crimes Enforcement Network (FinCEN) rule on unhosted wallets as a possible regulation that could be implemented by the Treasury Department to combat potential terrorist financing. 

The proposed rule, which would require exchanges to collect counterparty information on transactions to unhosted, or private, wallets as well as add currency transaction report (CTR) requirements for large transactions, has been controversial within the crypto industry.

While the CTR component would simply bring traditional fiat reporting rules to large crypto transactions, the counterparty component could have unintended consequences, including preventing U.S.-based individuals or entities from using smart contracts and decentralized finance tools.