Deep Dive Episode 227 – Crypto Wars: Balancing Privacy versus National Security

Senior officials in the Administration have expressed concern about cryptocurrencies being used for criminal activity and undermining the dollar as the global reserve currency. These concerns have been heightened with the Russian invasion of Ukraine, evasion of sanctions including North Korean sanctions, cyberattacks, and ransomware. Others contend that blockchain transactions are easier to trace than physical cash, and that the Administration’s concerns are exaggerated and could stifle innovation. China has banned cryptocurrencies and developed its own central bank digital currency (CBDC). It appears that the digital yuan will be used by the Chinese government for surveillance purposes to closely monitor personal transactions and behavior. A number of other regimes, including Canada, have used the banking and monetary system to silence dissidents. Some say that dissidents and citizens in countries that have unstable fiat currencies have turned to bitcoin and other cryptocurrencies to escape the national currency and protect their rights; other say cryptocurrencies are used by criminals and terrorists.

This very timely panel discussed whether the US can develop policies on digital assets that both protect freedom and privacy and maintain our safety from bad actors, and what the trade-offs with the dollar’s international role might be.

Transcript

Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

Ryan Lacey:  Hello, and welcome to this Federalist Society webinar. This afternoon, June 7th, 2022, we discuss “Crypto Wars: Balancing Privacy versus National Security.” My name is Ryan Lacey, and I’m an Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinions are those of our experts on today’s program.

 

Today, we are fortunate to have an excellent panel moderated by Dina Ellis Rochkind, whom I will introduce briefly. Dina Ellis Rochkind is counsel in the Paul Hastings Government Affairs Practice in Washington D.C. Miss Rochkind represents clients and matters involving regulatory initiatives, policy making and legislation, and enforcement actions. Prior to joining Paul Hastings, she served in various capitol hill offices and committees and as Deputy Assistant Secretary of the Treasury Department in the W. Bush administration. Prior to the hill, Miss Rochkind served as Vice President of Federal Government Affairs for a leading mortgage lending company. Miss Rochkind is admitted to practice law in the District of Columbia and in Pennsylvania.

 

After our speakers give their remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen. And we will handle questions as we can toward the end of today’s program. With that, thank you for being with us today. Dina, the floor is yours.

 

Dina Ellis Rochkind:  Ryan, thank you so much for that kind introduction. I’m very happy to be here. We have an incredible panel before us. And I think we’re — it’s very timely to have this panel today. First of all, we have the Lummis-Gillibrand legislation that has been introduced today. We have hearings in both the House Homeland Security Committee as well as the Senate Homeland Security on issues related to cryptocurrency. We have the vote on the SEC commissioners and Michael Barr for Vice Chair of Supervision at the FED going on. And we continue — I’m probably missing something because with crypto, the news moves very quickly. But we also have a lot of geopolitics going on in terms of the Russian invasion of Ukraine but also in terms of what we’re seeing in Asia with Taiwan and President Biden’s visit to Asia.

 

So with that, I am going to first turn it over to each of the panelists to introduce themselves before Mick makes his introduction. All of you probably know who he is as the former Chief of Staff at the White House and head of OMB and a Congressman but the thing that maybe some of you don’t know is that he was, along with Jared Polis from Colorado, he started the Congressional Blockchain Caucus before people were really thinking about this. So he was really a visionary in this space and also, he is on the board of Astra Protocol tech, which I know he made a lot of comments about really being particular about what kind of board he would serve on. So with that, I’m going to kick it off to each of the panelists to introduce themselves.

 

Hon. Mick Mulvaney:  Hey, Dina. I guess I’ll go first. Yeah. Thanks for that introduction. I don’t know if I need to introduce myself. I’ll tell a quick story about forming the Blockchain Caucus. When Jared and I got together to do that, we were going to call it the Bitcoin Caucus but nobody besides us knew what that was. So we figured if we had a Bitcoin Caucus meeting, nobody would show up. So we ended up calling it the Blockchain Caucus. I think I’m on record as saying I founded the Bitcoin Caucus, but I don’t think that actually existed at the time. That was when I think Bitcoin was $207. No, I didn’t buy any of it. Although, I bumped into one of my staffers last night at an event here in South Carolina who did buy it, and he drives a much nicer car than I do nowadays.

 

Look, you hit the nail on the head. I think one of the reasons that this discussion is so timely is that blockchain, crypto is moving so quickly from one area to another — almost into 15 different areas simultaneously. When you asked — as we were doing prep for this, folks asked me — they said, “Well, how were you dealing with crypto and national security at the beginning of the Trump administration?” The answer is, we weren’t. People forget, when Donald Trump took office, I think Bitcoin was probably $600. A year later, it was $11,000 or something like that. So it moved so quickly. And we were focused on it mostly as its possible impact on the financial services communities, on the finance industry, on markets, on consumer protection. We didn’t even start to think about it, at least at the very highest levels — I know there was work going on behind the scenes when it comes to national security.

 

I think Ukraine — you hit the nail on the head — has dramatically sort of opened peoples’ eyes to the overlap between crypto and national security. I’ve heard rumors that there’s $50 billion dollars worth of crypto looking for a home right now in the Gulf in the GCC countries — that there’s people looking to unload this coin to get around the sanctions and so forth. So blockchain was one thing yesterday. It’s another thing today. It’ll be yet another thing tomorrow. And I look forward to the discussion about how crypto and blockchain overlap with national security today. So I don’t know if that was my whole four minutes. It probably wasn’t, but there you go.

 

Dina Ellis Rochkind: Thank you. Kathy, why don’t you go next in terms of making your introduction.

 

Hon. Kathy Kraninger:  Thank you, Dina. Fantastic to be with everybody here today and certainly my fellow panelists and former boss. At Solidus Labs, I’m the Vice President of Regulatory Affairs. And I know you all have heard from me before in my prior role as Director of the CFPB and 20 plus years working in the US government across national security, financial services, a lot of regulatory fronts. But my current job really takes a lot of that together, and I joined this industry being really a service provider in the digital asset markets. Solidus Labs provides market surveillance and risk monitoring services to anyone exposed to the risk of trading in crypto. So we’ve got clients who are exchangers, broker-dealers, market makers, liquidity providers, anything digital asset markets including DeFi across the globe. So our clients are really dealing with the massive changes that Mick just talked about and Dina mentioned too with how fast this industry moves, how fast this technology moves, and the regulators are trying to keep up with it. So certainly, my conversations are really on that front — what makes sense in terms of industry standards, best practices, really trying to build market integrity to support the growth of this industry, and that’s an exciting place to be.

 

I guess one observation I would make carrying on what Mick had said already too and what I know we’ll talk about with this topic, is that law enforcement, appropriately, was the first ones really paying attention to blockchain, which is how you got fairly developed, at least in terms of what bespoke regulations look like on digital asset markets around AML. That was a significant concern, obviously — you see FATF guidance going back almost a decade at this point — conversations again amongst law enforcement about what requirements should be in place. And so it’s really that side of the equation has been more robust. And now, moving forward, really a better focus, a deeper focus needs to be on that investor protection, consumer protection. And so it is really only the last few years that we’ve been talking about that, but it makes sense given the size of the market and then the greater adoption that keeps happening.

 

And certainly, the war in Ukraine is something we will talk a lot about, but it’s flipping on its head a lot of things about the role of government as I see it as well. So it becomes pretty interesting when you have individual contributors from across the globe donating to support national defense of a country. That is a pretty big paradigm shift for really one of the most fundamental responsibilities of government. I’ll just end on Ukraine but note too that I was a peace corps volunteer in Ukraine — formative years, 1997-1999. Amazing changes that that country has come into its own as a democracy and now, clearly is fighting for its survival and existence. So it’s a horrible thing to be talking about. But at least in terms of the dynamics of crypto, a lot of things that can be positive to help peoples’ lives across the globe and in Ukraine.

 

Dina Ellis Rochkind:  No, this is a very important discussion. I have a lot of not business ties but friendships with people from Ukraine. It has the third largest Jewish population in the world, and a friend of mine actually was able to get out of Ukraine and is having a conference this week on international government affairs that I’m going to go to. So this is — we’re really at this moment in history where this topic’s very important. Michele, I want to turn to you because you really have an incredible background in terms of law enforcement and now, you’re on the other side. So you kind of have seen that tension between national security and privacy. And I think it makes a lot of sense — you need to do your introduction, but if you could speak to that a little bit as well, that would be great.

 

Michele Korver:  Sure. Thanks, Dina and to The Federalist Society for inviting me to participate. So interestingly, I think from the very beginning, I’ve been a proponent of this technology despite the fact that my start was late 2012, 2013 as a prosecutor in a US attorney’s office looking at drug trafficking on the Silk Road and having an agent walk into my office and say, “There’s this stuff called Bitcoin that’s being used to pay for all of these illicit goods on the darknet, and are you interested?” And what was fascinating in the journey as far as my path in crypto and blockchain is that — what was said earlier is correct — is that law enforcement was actually looking at this first. And for, I would say, most of the early folks that were actually –whether it’s working on the darknet market stuff or later with ICO frauds and Ponzi schemes — never saying we need to ban this stuff or that this is bad technology, just realizing that it was a new way to kind of engage in financial activity and that we were going to see, any time you have an effective way to move value and to store value, that you are actually going to have criminal elements adopting those technologies as well and, as it has been said before, are often the early folks that actually adopt the technology.

 

But what we realized is that you can use that same technology in order to chase those folks down to get the evidence you need to prosecute bad activity because of the nature of the way it works. And I remember that in the early days, when we had to do tracing, it was before in some cases — not for long, thankfully — that we didn’t have the blockchain analytics companies up and running. And so you’re tracing transactions directly in a blockchain explorer and not being able to use all the fabulous technology that actually, I’m sure we’ll talk about, that we may take for granted now that didn’t exist in the early days of these investigations.

 

And so what happened in front of me that was interesting is that there really — I got to see policy and law being made in front of me, participating in it from the very beginning. Whether it’s the first money laundering prosecutions of folks or how does the Bank Secrecy Act apply to certain types of activities — seeing that guidance come out from treasury as one of the early regulators who put out some concrete information for the service providers to rely upon and being able to build policies, cases in order to really separate out and be able to address those national security and illicit finance concerns although they were happening in this new space. And so did that at DOJ at their Criminal Division as Digital Currency Counsel for a number of years, and then my last stop before being in private industry, I was chief digital currency advisor at FinCEN and got to see the beginnings of the executive order and the drafting and how that was thought out, and I know we’re going to talk about a little bit later —

 

Dina Ellis Rochkind:  We’re going to talk about that. Yes.

 

Michele Korver:  Yeah.

 

Dina Ellis Rochkind:  That makes sense to move on to Norbert. Norbert, I want to hear more of your background. But also obviously, I remember the DEA saying, “Hey, we can,” — a DEA agent say, “This Bitcoin is great for us. We can catch criminals.” But, on the flip side, Norbert we had proposals coming out of this administration from the IRS about reporting transactions that were over $600. My goodness, that’s my grocery bill right now with inflation with my kids. And you have what happened in Canada with peoples’ accounts being shut down. That’s just — that’s some really scary stuff. So give us some background on yourself, and then we’re going to start talking a little bit briefly about the executive order and what it means and what it doesn’t mean.

 

Norbert Michel:  Sure. Thank you, Dina. My name is Norbert Michel. I’m Vice President and Director of the Cato Institute’s Center for Monetary and Financial Alternatives. And basically, all that means is that we advocate and create — create and advocate for financial and monetary regulatory policies that would expand individual freedom throughout, and that’s kind of what we do. I’ve been here since — at Cato since September. Previously, I spent about ten years doing the same sort of thing at The Heritage Foundation. But now, I’m here at Cato.

 

Dina Ellis Rochkind:  Great. Go ahead.

 

Norbert Michel:  And okay. And so listening to Mick, Kathy, and Michele, I’m not surprised what their take is right now. And then, I’m going to go just slightly in a different way and just talk about the big picture here. I think the issue is that we should not be structuring any regulations to make it difficult to use any financial service or product because criminals might use it. And that’s what many people are trying to do right now. And I’m not saying that my fellow panelists are advocating for that. I’m saying that that’s what you see a lot of in the administration, in the different agencies. And I don’t think that’s a good approach. We’re not talking about things like plutonium and missile components and there’s no marginal difference between being able to perpetrate a crime or a terrorist act with those things if you’re using dollars, euros or cryptocurrency. If anything, it’s easier to get away with it using national currencies as we’ve been pointing out here already.

 

So the real question is whether the existing security measures that we have make us safer. And I think that, after 9/11, and then again, now that you see the invasion of Ukraine, policy makers have started lumping all this AML KYC stuff in with national security. And it really isn’t at all clear to me that doing so is wise. And I think the evidence suggests that those things are very different. I think the evidence also suggests that the AML KYC regime hasn’t really been effective, at least not as it’s advertised to be. And it’s resulted in really little more than millions of useless reports at a great expense to Americans in terms of both losing money and their constitutional rights — losing privacy. I don’t see much of a balance. I see it slanted the other way. So if we want to talk about the best approach to security, we should do that. If we want to talk about the best legal and regulatory framework for the financial industry, then we should do that. But we probably need to look at these issues through different lenses. And I think my view here is simply that terrorism or criminal activity — those are problems that law enforcement should attack at their sources. And it shouldn’t have anything to do with what method of payment someone is using in the sense that that shouldn’t dictate how they do it.

 

Even if Congress repealed the bank secrecy act in its entirety, it would still be illegal for a financial firm or anyone else to facilitate criminal activity, and no financial company wants to be responsible for helping terrorists blow up a building or helping a drug cartel set up a home base in America. So we should be asking questions like, “Is the bank secrecy act the best way to stop criminal activity? What does the evidence say?” Not just when it comes to crypto but in general. What does the BSA — what does the Bank Secrecy Act cost us in terms of both economic losses and the extent to which it has diminished our constitutional rights? And separately, what is the best regulatory framework for the payment sector? What fosters the most competition and innovation? I think that’s the lens that we should be looking at this regulatory regime through. And I’ll just stop and throw it back to you, Dina.

 

Dina Ellis Rochkind:  Sure. So Norbert, when I listen to you, I’m kind of like — when I worked in the Bush administration after 9/11, and I have very similar views to yours. I kind of wish I was at Cato versus maybe the administration because I — after 9/11, I saw a lot of proposals that went into the Patriot Act. Some made sense, but some were just very onerous and didn’t make sense. But as you know, if you fight on national security, you can do it from Cato but in the government and in the private sector, you have to do it in a more strategic way.

 

So with that, let’s talk about the executive order and what it means and what it doesn’t mean. The one take away I have from the executive order is that it is very focused on national security and the dollar as reserve currency, and it really puts treasury and the FED, which in a lot of ways are one in the same, into the driver’s seat. And I think some of the approach is kind of like, if we don’t have national security, then we may not have consumers or investors to protect. So it’s very — there’s a lot of focus on that in the report. But let’s talk about sort of what your thoughts are on the report and what’s going to happen with the report. Mick, should we start with you?

 

Hon. Mick Mulvaney:  Yeah, and maybe Kathy and I will do this together because we used to write these things. And listen, let me focus on the bad, and I’ll let everybody else focus on the good. Well, I’ll do a little bit of the good. It’s great that this comes out. It’s great because it gives you insight as to the way any administration is thinking. That’s sort of what an executive order is, is this is important to us. We want everybody to know it’s important to us. So yeah, we think treasury and the FED should be in the driver’s seat like you said. We think there’s national security interests here. We think there’s dollars reserve currency interest. It’s sort of giving you some insight into how they’re thinking.

 

What it’s not is — what it doesn’t do is change anything. It’s not an operative — an operational document. It doesn’t change any law. It doesn’t change any regulations. And it’s really not binding. We say that it is, but we wrote a lot of executive orders that you tell the secretary of state to do something, he’s like, “Well, I might get around to that. Maybe I won’t.” It’s not the be all and end all. It’s a really, really good first step, and I encourage people to understand that. And then that’s just what it is. It’s the beginning of the conversation, not the end. So in that sense, it’s great that it’s there. But I don’t want people to look at this and say, “Well, this is great. This is exactly what we wanted. This is the end of the conversation.” It is far from that. It may take years to develop the regulatory framework — certainly could take that to develop the legislative framework to back up sort of the outline that was laid out in the executive order. Kathy, what am I missing? You did this more than I did.

 

Hon. Kathy Kraninger:  No. It’s definitely a policy direction. I think that’s — and I completely agree with everything you said, Mick. And I’m going to make a play to tie it back to Norbert’s point about what exactly are the goals we’re talking about here with respect to what we’re looking to do. And the one thing too about the executive order is really bringing to bear the full weight of the government — a whole of government approach. Whether everyone picks up what the president is putting down is always an interesting question, but there are all kinds of agencies that have a little piece of this particularly as you talk about the implications of blockchain technology on every sector of the economy, not just financial services and that’s acknowledged. And then you get back to again, what are the goals? It’s not just national security and preventing illicit finance, it is financial inclusion, and consumer protection, and US competitiveness — the impact of US competitiveness in the global marketplace and protection of our own industry. All of those values being laid out there.

 

I think the one other thing that I’m trying, and now I’m probably reaching to tie back to Norbert’s point, but I’ll at least say this, the entire regime that we put in place after 9/11 I think skewed in the direction of really identity mattering more perhaps than even behavior. And I think that’s something to assess in the financial system — that’s something these reports give the agencies the opportunity to think about — look at what in traditional finance actually is working and is effective, how to apply that to digital assets — and I’m one of those advocates frankly who says, “This is not an unregulated space. It’s in fact regulated.” Again as entities are looking at what business they want to employ, they look at whether what they’re doing engages security or commodity or a currency. They’re subject to current law and same with the BSA AML requirements, they’re subject to current law.

 

So how should we change that? What kinds of dimensions should be made specific to recognize the benefits and risks that come into play with digital assets specifically? The opportunity really to look at behavior first perhaps, I offer, instead of just identity and the cost and implications of BSA KYC. I won’t go as far as Norbert did, but there is a massive cost on this. And it becomes a check the box compliance exercise in many respects that’s more about liability protection than effectiveness. And so thinking about how we do this for a new technology and take into account the transparency of blockchain transactions is really where I think there’s some opportunity again, in the reports. And the reports will be worth the paper they’re written on and who takes them from there. And I’d say, Michele, I know you have said — Michele you were so involved in writing it too. We could kick it to you —

 

Dina Ellis Rochkind:  I know. I was going to say, I think Michele probably has some different thoughts especially working that many years in law enforcement and was involved with the drafting in part of it. So I would love to hear what you have to say about it.

 

Michele Korver:  Yeah. I think that what’s interesting is that you have all these different agencies that actually, I think, jockeying for position as far as who is going to be the lead regulator on particular things and having the administration try to put everybody in the room to have cohesive goals towards the administrative’s policy objectives. I would say the pluses that I see, particularly from the perch where I am now at a16z Crypto, is that the report where the order actually says that each of these agencies as they’re putting together their reports or their frameworks, etc. and making these determinations, it says that they need to be consulting with industry on these things, that they need to be working with their private industry partners. And so that was actually a plus and encouraging.

 

We’re hoping that in fact these won’t just be book reports. I’m hopeful that the actual staff within the agencies that are doing the ground level work would actually wait for these ideas to come forward with consultation from industry prior to just pulling the trigger with an array of regulation by enforcement rule makings that don’t give sufficient time to comment. So we’re really hoping — we think it’s the spirit of the executive order to actually really talk to those entities that are running and building these technologies to have them as a part of the conversation. I think the one small kind of thing that I would add as far as the negative is that a lot of these agencies, particularly the ones tasked with law enforcement and national security issues, are really, really taxed right now. They do not have sufficient resources to do the work that they already have on their plates. Treasury hasn’t been appropriated funds to deal with all the AMLA act requirements that they have, and now, you’re asking them to basically drop everything and start writing more reports. So to the extent that there needs to be, if this is going to be taken seriously by this administration, this ecosystem, then you need to have sufficient funding for those agencies that are responsible for important national security goals.

 

Dina Ellis Rochkind:  Yeah, and I bet you we will see little pockets in the National Defense Authorization Act in terms of the DOD and those other types of intelligence agencies as well. The one thing — and then, let’s move on to sort of how the dynamics shift with the Russian invasion of Ukraine really changed the conversation. But the one thing I would say is, nothing is going to stop Gary Gensler. All of these reports that are required. He’s independent and has support from a lot of Democrats. So you’re going to see more and more enforcement actions likely and rule makings coming out of there.

 

Hon. Mick Mulvaney:  Dina you are — Dina, if I can jump in real quickly, I think that that’s one of the really the most important things I think about the Lummis-Gillibrand piece of legislation that they dropped today — was that, again I read the summary that the digital chamber put out. I’ve not read the bill yet. But what I’m reading is that it gives primacy to the SEC and the FED. So at least, yeah, you’re right, Gensler’s not going away, but one of the nice things about the proposal and the legislation is that it’s going to centralize regulation to a certain extent. Keep in mind, without guidance — when Kathy and I were at CFPB, we thought we had a piece of digital. So did the OCC. So did the CFTC. Everybody thought they had a piece of it. So it’s nice to get guidance not only through the administration as to where they think the leadership should come but also from the hill. Sorry to interrupt.

 

Dina Ellis Rochkind:  No. I think that I agree with you, the Lummis-Gillibrand bill is really important. It’s bipartisan. It does try to set who’s going to do what. It’s a good discussion piece that gets people talking about it. But I think how that continued bureaucratic infighting between SEC, CFTC, the banking agencies will continue. And to be honest, as someone who worked most of my — a big chunk of my career on House Financial Services and Senate Banking, this is sort of even a bipartisan thing. You’re never too thrilled about handing over your jurisdiction to the ag committee or to the commerce committee. So when you go up there, you can see that tension of the notion of giving 70 percent or more of the market to the ag committees. So it’ll be interesting to see, but I think it’s a very important development, for sure.

 

Let’s move on to the Russian invasion of Ukraine and how that reshaped the policy discussion and how the industry has handled that and what they have done right and what they have done — what they could have done sort of better in terms of messaging during what we’re seeing in Ukraine. I know when you go back in 2017 and before, there were some in industry who were opposing almost everything when it came to KYC and AML. Obviously, that has changed. People have realized that it’s not a winning battle. So who would like to take that question?

 

Michele Korver:  I’m happy to jump in real quick first.

 

Dina Ellis Rochkind:  Sure.

 

Michele Korver:  So one of the things that I saw was that we actually were getting very consistent messaging from both inside government for those who actually were on the ground working on these things and from industry when there were some blanket and conclusory statements kind of thrown out there that, “Oh, well, Russia’s going to use crypto to evade sanctions etc.” And I thought that was very interesting that we had the same rebuff from both senior officials at treasury as well as the folks in industry that would normally be talking on these topics to say, “No, there’s not the liquidity and the infrastructure set up. You can’t just flip a switch and convert to a total economic activity in crypto. And in fact, you still need those fiat on and off ramps. And all of those entities are going to be monitoring for sanctions and blocking the transactions.” And so in fact, this whole idea about this is actually not based in reality. And so that was, I think, interesting to see those — not that they’re opposing factions, but often, that you have government in the national security perspective taking a different view than maybe industry might. But in fact, had a consistent voice that that wasn’t the risk that was being argued. And then I’m sure some of the other panelists can talk about all of the pluses with Ukraine and actually getting in crypto for humanitarian efforts related to that. I know Kathy was talking about that in her intro.

 

Dina Ellis Rochkind:  That’d be great. Kathy, can you comment?

 

Hon. Kathy Kraninger:  Sure. In terms of taking what Michele said, I completely agree. Very encouraging to see law enforcement and national security space echoing what is the reality, frankly, in terms of whether or not crypto could be used in a more pervasive way than traditional financial mechanisms for money laundering. It’s just not — one, it’s not possible now. That doesn’t mean that you shouldn’t do all the things that were just done, as Michele noted, and industry has been doing — what is required of them on that front. I think it is exciting to see, again, the really contributions from across the globe going to humanitarian assistance to really, frankly, all kinds of causes whether that’s through payment apps across the board and FinTEC uses and wire transfers and everything. But the ability to put crypto to use immediately and the ability to really send that in, it has really been demonstrated. And certainly, the Ukrainian government has highlighted that — set that up really, pretty much right away and was able to put those funds to use. It’s pretty amazing in terms of the transition that’s happened there.

 

But I would note, it’s been an interesting lesson I suppose, and I know academics are going to do a lot — I’ll look at Norbert too. He needs to do a lot more to study everything post this, which hopefully results in a free Ukraine. But post this, in terms of the role of government, as I said, the role of private industry, the pressure exerted on private companies. I mean, I’m grappling with this. This is a classic, I suppose, Federalist Society conversation. It’s one thing, of course, to demand that financial institutions comply with sanctions law or to prosecute them when they don’t. That’s absolute. They’re required to do that. But there are a lot of other dimensions to this that are playing out in more of a reputational risk question that I think just raise a lot of interesting questions. I don’t know how I feel about them. I already started out — I know this is one those, I think, few black and white policy questions because, of course, I’m on the side of Ukraine and so is everyone on this call.

 

But the conversation of thinking about what it means and what it means to the Russian people and what responsibilities and what corporations have made in terms of their decision making about where they’ll continue to do business and why and how they explain that and what individual consumers across the globe are involved in. It is interesting. A lot of those dimensions have fueled crypto adoption too. People who are saying, “I don’t know that I want to be in the middle of this question of what role government has. I want control over my own money, so to speak, and my own ability to control that.” Which, I know there are some questions we might not get to on hosted, or I’ll call them personal wallets, but again, the ability to hold your own money is something that is the appeal I know early on in crypto.

 

Norbert Michel:  And this is —

 

Dina Ellis Rochkind:  Kathy, you’re right in terms of, a lot of these were political decisions versus legal. You comply with the sanctions and then companies like Exxon, Visa, McDonald’s — it’s political — it’s more of a government affairs decision versus a legal question about whether you move out of Russia. One thing that I thought about a lot, maybe it’s not quite there yet, but was, the humanitarian aid that we send, or other NGOs send, to the extent that smart contracts are more advanced, we can make sure that the funds get to exactly who they’re supposed to go to and that they’re spent in the way that we want them. And I kept thinking, this is really the beginning of that kind of development.

 

Norbert Michel:  And Dina, this is — I do know exactly how I feel, as Kathy might suspect, on this issue. A law-abiding citizen should be able to conduct an anonymous transaction. I have some cash in my wallet, and if I go buy something with that today, that shouldn’t be regulated. There’s no problem. I’m not doing anything illegal or illicit. And unless I am, there should be no issue. And it should be exactly the same with crypto. These are people that are trying to preserve their wealth and their money unsurveilled and unmolested by a government and that should be the default principle as far as I’m concerned. And all of this is just highlighting how political it’s been. The encouraging part that, like Michele has said, I think I agree you did have treasury officials coming out right away saying, “No, no, no, no, no, no. This is not — you’re not going to get around sanctions by selling a Russian yacht and moving crypto. That’s not going to happen.” So that’s good. You can go back though with the AML stuff, the KYC stuff years ago long before the invasion.

 

One particular problem, due to other Russian sanction type issues, is that Americans who — or Russian Americans, people living here for a long time from Russia, people who are citizens — American citizens who were formerly Russian citizens having their bank accounts — Citibank, gold cards, platinum cards shut down simply because they were Russian. And that’s where all of this has gone. So again, that’s where I keep coming back to. That’s what needs to change.

 

Dina Ellis Rochkind:  Yeah. So I think let’s talk more about privacy and also central bank digital currency because I think they dovetail with one another. So because the blockchain is transparent and you can see all sorts of different types of transactions, what’s the — I mean, there’s no correct answer to this because we have — we could have — you see this discussion in big tech. So you could start having a lot of data available about individuals in America. Or look at China with central bank digital currency. They’re purportedly using it for surveillance and control. So I mean, what is the right balance here? And I know there’s not one answer to this. And maybe some folks can talk about Web3 and digital and identity and how that plays into this. And then just lastly, when you think about unhosted wallets versus hosted wallets and the notion of maybe you would have a hosted wallet where they do KYC and then you have another one that’s unhosted where you would keep crypto. It would be an electronic dollar essentially, a digital dollar. Can you really ever get the privacy that you have when it comes to paper money? So what’s the answer. I’ve always been taught, if I put something on the internet, it’s permanent. So I know that’s — I’m sort of asking you philosophical questions. So can any of you comment —

 

Hon. Mick Mulvaney:  No, you’re not Dina. It’s the practical question. And I’ll go first and a full disclaimer because I am on the board of the Astra Protocol, but this is the reason I got involved in this company is it speaks to this point which I think is the big issue in the industry. By the way, we don’t call them unhosted wallets anymore. We call them personal wallets.

 

Dina Ellis Rochkind:  Okay. Always changing terminology.

 

Hon. Mick Mulvaney:  Exactly right. Look, Norbert said something interesting. He said, “Law abiding citizens should be able to engage in anonymous transactions if they want to.” And I wholeheartedly agree with that and most folks who are in this community would agree with that. But I don’t need it. And there are ways, and that’s one of the things that Astra actually does, to deanonymize so that you can meet KYC and AML which is what’s preventing this technology from really going mainstream. Yes. There are times when I want to be anonymous. That’s fine. There’s times when I want to use cash. There’s times when I don’t want to know people — but I don’t mind them knowing that I — someone knowing that I’m going to the grocery store to buy chicken. That’s not the type of thing that I need to be anonymous, and I might choose crypto for ease of use, for store of wealth, for reasons other than anonymity and that I think is the next level here.

 

You’re going to get to the point — you talked about Web 3.0. Yes. We can go to that sort of deregulated decentralized type of model, but you’re always going to have KYC, and you’re always going to have AML. You just are. I agree with Cato that look; it’d be really nice if it wasn’t around. It probably doesn’t do very much, but it’s going to stay. Politicians, lawmakers are going to leave it in place because, in their minds, they’re at least doing something. Keep in mind, politicians love to say they’re doing something even if it doesn’t really do anything. So the question then is, if that’s part of the environment going forward, how does blockchain mature and become mainstream. And the deanonymization — by the way, when you deanonymize something, it doesn’t mean that you have to make it public. It just means you’ve got a record of it and your bank has a record of it. And it’s private between you, but at least the bank knows who you are and can satisfy all those requirements.

 

I think that’s the next thing in the industry. It’s going to address a lot of the issues that you talked — that everybody has talked about here today in terms of, how do we get to the point where we’ve got the benefits of this without the risks? Where we don’t have to deal with politicians who say, “Oh, it’s only Russian money launderers who are using this. This is the type of stuff that use illicit behavior. This is what was used in the Colonial Pipeline hack,” even though we got more than half the money back, which we would not have gotten if it was in cash. That’s, I think, the next piece of this environment on the way to Web 3.0. Sorry for the preaching.

 

Dina Ellis Rochkind:  No. That was fantastic. I mean, I was like that — I agree with everything that you said. That was incredible. And probably almost everyone else even Norbert doesn’t agree as much because you’re right, you can’t get around the AML and the KYC but also on the privacy point right —

 

Hon. Mick Mulvaney:  But I can voluntarily choose to give that up. And I know Cato would support that. They do. I make an individual choice and say, “Look, in this particular circumstance, I want to be able to use Citi Bank. I want to be able to use crypto at the gas station. I want the benefits of this. I am willing, in those conditions, to give up a little bit of my anonymity and at least tell the bank who I am.” And now, that opens up a world of opportunity that doesn’t exist right now.

 

[CROSSTALK]

 

Dina Ellis Rochkind:  Norbert and I want to make what we get into because, when you start talking about privacy and you start talking about the topic we’re in, it leads you into the discussion about central bank digital currency and what that looks like, and how much will the government know about your activities? Obviously, the private sector can share your activities but once the government has your — go ahead, Norbert.

 

Norbert Michel:  That’s kind of the issue. If we’re — say we’re always going to have some kind of AML and KYC. Okay, fine, but it doesn’t have to be what we have now. And, if you do use the Fourth Amendment as the balancing factor here, then you could have a KYC regime, just for example, where banks and financial institutions do have that information and they do guard it as best as possible — and nothing’s flawless, but they do. And in that sense, it is private, and the government doesn’t gain access to that without a warrant. That’s very different from what we have now. But that would be private, and it would increase privacy compared to what we have now. And when you go to a central bank digital currency, then you absolutely blow through the Fourth Amendment unless you give them an exemption from all of that stuff. So they would literally have that database in some form or fashion and that’s incredibly problematic aside from the fact that they would be competing with the private sector to provide financial services and they would be doing so as the only one — the only provider that could do so without any liquidity risk and any credit risk and that is again, a terrible road to go down. I’m sorry.

 

Hon. Kathy Kraninger:  I think that gets back to the structure of what the CBDC actually looks like. And there are conversations obviously, happening here, and the president’s working group, and the federal reserve’s report, and continued study on the topic. But my hope certainly, and I can’t remember where we said this, if it was at a prep or one of Dina’s prep questions too, but it really does get to, why is the US economy the envy of the world? What are some of the features that we have? And it really is what Norbert just touched on, the role of the private sector in innovation and in really that retail level engagement and activity in our credit system and everything else that really makes us fairly unique and that the rest of the world was actually looking to us in building that. And so the role of a CBDC, if it ends up being retail, then we’re basically to the level of all the conversations that many of us have concerns about what future role of the post office could be — picking something that Mick and I spend a lot of time on but —

 

Dina Ellis Rochkind:  What do you think of the VA system, all the government, the FED being peoples’ banks. Can you imagine?

 

Hon. Kathy Kraninger:  So a wholesale CBDC, again as part of the interbank system, as part of again the extension of the federal reserve’s monetary policy and roles that it currently has, that makes more sense to me. And again, we don’t want to go down the road of the digital wan and what China is certainly implementing, which is being in the middle of everyone’s lives in China and being able to track all the things that would give, I would say, nearly all Americans much pause.

 

Dina Ellis Rochkind:  I think you get social scores. I believe you get like a social score depending on your activities. Can you imagine? They would look at — I would fail if everyone was looking at my groceries in China, I would definitely be low on the social score with the junk that we bring into this house. Anyway, I digress. So yeah, CBDC can mean different things to different people. We have Fedwire. We have FedACH. We have FedNow. But people distrust the dollar because of our government, our legal system. I know we’re litigious, but I think the point about the private sector is, is that going to get lost about the power of the payment systems and maybe more competition than the payment [inaudible 49:22]

 

Michele Korver:  That’s right. And I think that it goes to the core of the entrepreneurial and competition to create the best products here in the United States. And it’s contrary to the idea that you would push everything in one government-controlled type of system. Just to go back to one point that we discussed, I think I’m in agreement with some of the members of the panel about the fact that, regardless of how you may feel about it, that KYC ain’t going anywhere. But there are new technologies that are being developed, I think, to protect privacy but still meet those needs. For example, the concept of digital identity where maybe you’re using zero-knowledge proofs. For those in the audience that may not be familiar, it’s cryptography where you have one party is going to prove to another party a certain truth without revealing additional information or the statement. So an example of this in a very basic term might be, something that you have on your phone that proves that you’re 21 to be able to buy alcohol but it doesn’t give your date of birth. So the liquor store doesn’t need to know what your date of birth is and all your information —

 

Dina Ellis Rochkind:  They don’t need your license. They don’t need your license.

 

Michele Korver:  Exactly.

 

Dina Ellis Rochkind:  They don’t need your license.

 

Michele Korver:  Exactly.

 

Dina Ellis Rochkind:  Same thing with a hotel. They don’t need your credit card.

 

Michele Korver:  Exactly. So that’s what — that is, I think, another example of how giving industry and the builders here in America some runway to be able to actually work on these things. They’re going to come up with actually better alternatives to address what the needs are of law enforcement and national security but trying to preserve privacy in a way that’s maybe better than the current system.

 

Dina Ellis Rochkind:  So I want to make sure — there are two things I want to make sure — we’re getting towards the end. And, of course, this went very fast because we have great — it’s a broad topic. We have a great group of speakers. So I want to make sure that we sort of end on kind of where are things going. We have the legislation but then, we’ve got the agencies all over the place. We’ve got all these hearings. There’s something new every day. There are rumors about the bank regulators and capital standards and sort of — I want to make sure we end on kind of what the next steps are and how maybe some of it’s about Congress flipping or what’s going on in the court system. But I would be breaking protocol if we did not answer Bert Ely’s question. I would be considered a Federalist Society failure. So let me read it real quick. “What concerns do you have about a stable coin causing a systemic crisis? How should stable coins be regulated? And if so, by whom? Given the similarity between stable coins and money market funds, commitment not to break the book, should the SEC, the regulators of MMS,  be designated as the stable coin regulator?” That’s a very long question. We might not be able to answer all of that. Does anyone have any quick thoughts?

 

Hon. Mick Mulvaney:  Short answer. They’re too small to worry about right now. They’re going to go through some boom and bust. They’re going to work it through. I think, for example, what happened with Terra the other day just says, “Okay. Maybe algorithmic stable coins are not the right approach.” This is an evolutionary process. I personally am not concerned about this being a systemic risk to the United States financial system.

 

Dina Ellis Rochkind:  Yeah. My quick answer would be functional regulation. And the SEC created the money market fund back in the ‘70s. It was a creation. So, if it’s a payment system, treat it like a payment — it doesn’t. But right now, it’s regulated by the states but probably needs some federal involvement but not treated differently just because of the technology. But that’s a big — that’s a long question. I want all the panelists to talk about kind of next steps — looking into your — it’s a difficult landscape. We have a positive in the legislation being introduced as a discussion piece. But we also have this regulatory onslaught. We’ve got stuff going on in Europe with MiCA. So I throw it out to you. What should we do? Where do we go? Closing thoughts.

 

Hon. Kathy Kraninger:  I’ll throw one thing out because we didn’t get into US competitiveness much other than just briefly mentioning it. And I think it is — I don’t see a massive number of companies that are running away from US shores. At the same time, it’s something that really does need to be carefully considered. And as we look at really what’s going to be at least another year where all of the regulation in the US is driven by enforcement action, that we should be cautious of that. And I was certainly encouraged to see that in the EO, encouraged to see the Commerce Department really try to engage industry to look at the implications on that front. And it’s one benefit of having different agencies — I saw one question about this — different agencies that have different perspectives, and they bring that to the policy table. So hopefully there’s some balance there too and that does exert some pressure on the independent agencies.

 

Norbert Michel:  I’m a bit pessimistic —

 

Dina Ellis Rochkind:  Who wants to go next — final sort of thoughts. Where are we going?

 

Norbert Michel:  I’m just a bit pessimistic for the near term. I may be more pessimistic than everyone else on the order. I see sort of like a marketing document saying, “Let the FED do what they want. Let the SEC do what they want.” And I don’t think those things are very good. So I don’t think we should be doing more regulation. I don’t think we should be doing more bank-like regulation. I think the “it” is sort of broad. I think it’s a mistake to say “it’s” one thing because there are many different types of crypto in many different applications. And I think they need to be looked at individually. But in general, the default position needs to be, “Okay, is there a market failure? Why are we regulating this?” And then figure out what we want to do. But I don’t think that’s going to happen right now.

 

Dina Ellis Rochkind:  Yeah, the worst thing would be if we have more regulation on top of a new technology just because it’s a new technology than we have under existing law. That would be a very bad outcome. Mick, final thoughts or Michele.

 

Hon. Mick Mulvaney:  Crypto and blockchain while related — closely related — not the same thing. I think I’m extraordinarily optimistic for the future of blockchain. I think five years from now, it’ll be used in 90 percent of households. You won’t even know you’re using it. You will clear transactions with blockchain without realizing it. The technology is just too good. And moving from mostly three-party transactions to mostly two-party transactions is such an efficiency, the private industry, the private marketplace is going to figure out a way to use it as soon as they figure out a way to deal with the government oversight.

 

Dina Ellis Rochkind:  Michele, what about you?

 

Michele Korver:  Yeah. I would echo the thoughts of my managing partner, Chris Dixon, that I think we’re in the golden age. I think we’re seeing a lot of interesting projects in building. And I’m very positive about where this is going to go, similar to what Mick said. The one thing that I think we may see in the near future that we haven’t seen much of, is fighting back. I think there’s going to be litigation. That’s my —

 

[CROSSTALK]

 

Dina Ellis Rochkind:  We have two minutes left. So there’s two things. You could have Congress flip. That could change the dynamic. That would keep the SEC very busy with lots of oversight hearings versus [inaudible 57:28] writing regs. But then you also have in the courts, this movement, I mean, the courts, especially the Fifth Circuit have been saying, “The agencies are moving outside of their authority — things that are unconstitutional.” I’m a lawyer. I’m at a law firm, but I usually don’t think litigation is the answer. But what are our thoughts? What do you think about that? Should Congress or the litigation or those types of ways of fighting back? Obviously, there’s lobbying you could do.

 

Norbert Michel:  It would be great if Congress would act, but I don’t see that happening any time soon. And I think what the SEC is doing is, from a legal standpoint, it’s going to be a mess. You’re going to have challenges all over the place. So again, not pessimistic for the near term.

 

[CROSSTALK]

 

Hon. Mick Mulvaney:  I’ll finish where I started, which is that’s why the Lummis bill is so important. By the way, I misspoke. I said the Lummis bill gave the oversight to SEC and the FED.

 

[CROSSTALK]

 

Hon. Mick Mulvaney:  I think it’s CFTC. But having it in that one place is going to be better. But again that bill, again not going to be coming to law, but it is a watershed moment in the relationship between Washington D.C. and this new industry.

 

Dina Ellis Rochkind:  Great place to close, I think, from here. I want to thank everyone. I think this was a phenomenal panel, and it was an honor to work with all of you. And thank you, Ryan, for putting this together.

 

Ryan Lacey:  Yeah. Absolutely. On behalf of The Federalist Society, I would like to thank our experts for their time and expertise today. And I want to thank our audience for joining us and participating. We welcome listener feedback by email at [email protected] And as always, keep an eye on our website and your emails for announcements about upcoming webinars and other events. Thank you for joining us today. We are adjourned.

Michele Korver

Head of Regulatory

a16z Crypto


Kathy Kraninger

Vice President of Regulatory Affairs

Solidus Labs


Norbert Michel

Vice President and Director, Center for Monetary and Financial Alternatives

Cato Institute


Mick Mulvaney

Co-Chair

Actum LLC


Dina Ellis Rochkind

Counsel, Government Affairs and Strategy

Paul Hastings


Financial Services & Corporate Governance

Federalist Society’s Financial Services & E-Commerce Practice Group

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].