EPISODE SUMMARY
Welcome to a special episode of the Solana Podcast focusing on Crypto & National Security featuring Ari Redbord (Head of Legal and Government Affairs, TRM Labs) and Sigal Mandelker (former Under Secretary of the Treasury for Terrorism and Financial Intelligence). Amira Valliani (Policy Lead, Solana Foundation) guest hosts. 00:09 - Intros 02:11 - Origin Story 05:53 - Correspondent Banks 07:37 - Why crypto resonates personally 09:54 - Use cases of Crypto in humanitarian applications 12:13 - Looking at the opportunity vs the risk 16:06 - Typical Day at Treasury 17:14 - What it takes to stop bad actors in Crypto 24:53 - BitFinex Hack and Large seizures 29:05 - Compliance and self-policing 31:13 - Advice to other people in regulation
EPISODE NOTES
Welcome to a special episode of the Solana Podcast focusing on Crypto & National Security featuring Ari Redbord (Head of Legal and Government Affairs, TRM Labs) and Sigal Mandelker (former Under Secretary of the Treasury for Terrorism and Financial Intelligence). Amira Valliani (Policy Lead, Solana Foundation) guest hosts.
- 00:09 – Intros
- 02:11 – Origin Story
- 05:53 – Correspondent Banks
- 07:37 – Why crypto resonates personally
- 09:54 – Use cases of Crypto in humanitarian applications
- 12:13 – Looking at the opportunity vs the risk
- 16:06 – Typical Day at Treasury
- 17:14 – What it takes to stop bad actors in Crypto
- 24:53 – BitFinex Hack and Large seizures
- 29:05 – Compliance and self-policing
- 31:13 – Advice to other people in regulation
DISCLAIMER
The information on this podcast is provided for educational, informational, and entertainment purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose.The information contained in or provided from or through this podcast is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice.The information on this podcast is general in nature and is not specific to you, the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented on this podcast without undertaking independent due diligence and consultation with a professional broker or financial advisor.
Amira (00:09):
Hello and welcome to the Solana podcast. My name is Amira Valliani and I run public policy at the Solana Foundation. Today we’re talking about an issue that’s really been at the forefront of a lot of people’s minds since war broke out in Ukraine earlier this year. And that’s the topic of crypto and national security. We’ve brought two of the world’s foremost experts to talk about how crypto links with foreign policy and the movement of money all over the world, and they are Sigal Mandelker and Ari Redbord.
Sigal Mandelker is a general partner at Ribbit Capital where she deals with FinTech and crypto. But before this, she was Deputy Treasury Secretary and Under Secretary of Treasury for Terrorism and Financial Intelligence. She’s joined by Ari Redbord who’s the head of legal and government affairs at TRM Labs, the blockchain intelligence company. Before joining TRM, Ari was Sigal’s senior advisor when she was the Under Secretary of Treasury and worked on a range of issues, including sanctions, anti-money laundering and a bunch of other scary and really important issues. Sigal and Ari, thank you so much for being here. We’re excited to have you.
Ari (01:15):
Thank you so much for having us. I will say just to get things started, I’m a huge fan of sort of what you guys do at Solana and the team that’s building with you and a huge fan of Sigal and just an amazing honor to be on a conversation like this with someone that I worked for when she was the under secretary and just really consider a close friend and colleague in the space now. So it’s particularly cool. So thank you for having us.
Sigal (01:40):
Oh, it all goes back at both of you. I loved working with Ari then and I love being in this space with him now. It’s pretty exciting.
Amira (01:48):
I’m here for all of it. I think it’s going to be a very exciting few minutes. I think the backgrounds are really interesting and you all know that this circle of people who come from government into crypto is growing, but it’s small. And so very specific journeys I think got all of us into this space. I’m curious what got each of you interested in crypto? Why are you passionate about it? Ari, I don’t know if you want to kick us off here. I know Sigal has a particular story.
Ari (02:13):
Sure. Yeah. No, happy to. Everyone has their sort of crypto origin story. And so many times you hear about “I bought Bitcoin 15 years ago.” And for me it was really a lot different. We started to see it 2015 or so in a lot of our sort of large money laundering investigations that actually involve some of the sort of nation state actors like North Korea that we’ll be digging into today. I think we sort of realized even then the power and promise of this technology, but also that if it was going to grow and flourish and they were going to build this new economy, that we needed to stop illicit actors from doing it. And that was sort of as a prosecutor and then honestly getting an opportunity to work with Sigal and the team at Treasury on some policy related issues in the space, I think really, really also got me interested in.
At TRM labs, it’s sort of like we sit in this sort of intersection, because I think we obviously believe very firmly in the potential and the growth of this new crypto economy, but at the same time, sort of understand that trust layer, anti-money laundering national security is critical infrastructure for it. And that intersection that we’re going to be talking about today is really sort of where I see the most work that can be done.
Amira (03:19):
Yeah. I think that’s incredibly important to remember that trust is really important to make sure that the space thrives. Sigal, I’m curious about your crypto origin story. Tell us how you got into it and why you’re so excited about it.
Sigal (03:31):
When I was at Treasury, my job was very much a global job, so I would travel all over the world. In those travels, I would often meet with senior government officials from heads of state on down, central bankers, CEOs of banks, et cetera. And along the way, it became increasingly clear to me for a number of different reasons that our banks, US banks had massively de-risked all over the world. It became clear to me because in so many different countries, particularly in the developing world, in emerging markets, in so many different countries these senior officials and CEOs of banks would ask me if I could help them get access to US correspondent banking. We really studied to look at it and study it. And the trend is clear. Like if you start looking from 2012 to today, just as one example, the number of US correspondent, global correspondent relationships is very, very much on the decline.
And so when I left Treasury, this became like an issue that I was very passionate about. How do we get great financial infrastructure and companies out of the US and elsewhere to be able to provide a variety of financial services in the developing world, in emerging markets, where in my opinion, in many respects, we had left them high and dry. And I came to the conclusion personally, that the only way we were going to do that was through disruptive financial technologies. And so I decided to find a place where I could pursue that passion. Along the way, I met our founder, Micky Malka, who has founded Ribbit along with Nick Shalek and some others about 10 years ago. I very quickly understood that really the mission of Ribbit is to change the world of finance and to do so exactly in this way through disruptive financial technologies that we’re going to open up access to many, many more people in a much more efficient way all over the world.
And so a week later, Micky called me and asked if I was open to having a conversation about joining Ribbit. It was definitely a road less traveled for a former undersecretary, but it was a super exciting path to go down.
Amira (05:36):
I want to stay back on the beat that you mentioned about the drop of US correspondent banking all over the world. It would be helpful if you describe what exactly does that mean? What is a correspondent bank and why were you concerned about that as an undersecretary of Treasury? Why is that important to you?
Sigal (05:54):
For many reasons. First of all, correspondent banking, it basically allows banks all over the world in part to get access to US dollar accounts among other things. And when you don’t have that correspondent banking relationship, when you’re being de-risked, there’s just less access to the US financial infrastructure in many different ways, which means a lot of things. One of the things that it means is that if you think about our various sort of tools of financial leverage, we’re seeing that play out right now in Russia, right? Where sanctions has become a major tool of national security. But if you’re issuing a sanction in a country or a region that has very little touch points with the US financial infrastructure, then that economic leverage no longer actually really works, or it’s less likely to work. It’s more complicated than that.
Also, the US traditionally has been the exporter rate of democracy and American values. We have always prided ourselves in innovation and being like a center for ingenuity. And again, when you don’t have US capital or those kinds of relationships all over the world, I think that’s not only really to the detriment of the US, but also to the detriment of people all over the world. And then they’re just going to go to alternatives. And that’s definitely happening as well.
Amira (07:14):
One of the things that we’ve chatted about before is, it’s not just a whole for US national security, but there’s a bunch of people out there who when US banks aren’t abroad, they’re still looking for financial services. One of the interesting things about crypto is it offers that.
Amira (07:29):
Sigal, I know you have a really personal story of why crypto and access to financial services are important to you. Now I was wondering if you could tell us a bit about that and why this industry resonates personally.
Sigal (07:39):
Yeah, so it’s really in part because my parents are both Holocaust survivors. During the Holocaust, they were in hiding in a part of Poland that is now Ukraine. They were kids. So they were separate, but they happened to be relatively close to Lviv. And the only way at the time that my dad, for example, could have ate, had access to any food, was my grandfather would go out in the middle of the night and he would steal potatoes. Once he stole a pig ear and brought it to my dad and my dad said “It’s not kosher dad, I can’t eat this.” And my grandpa said, “No, it’s the only way for you to get nourishment.” So when I think about, I imagine what would’ve happened back then if this technology existed and they had access to a phone and they had relatives far away who could actually send them some value that they could use to barter for food, something like that was just totally impossible back then. You couldn’t get anything from your family members who were in another country.
Actually when I was at Treasury, there was somebody who had brought this idea to me of being able to use crypto to provide humanitarian aid, for example, to refugees in Syria. And I thought it was a really fascinating concept. And of course, it’s so prescient today because the crypto community, including very much the Solana community, has really stepped up and used crypto working with the Ukrainian government to do exactly what we couldn’t do in the forties ’40s, which is to provide aid to the government in their fight for freedom, to help people get access to food, medical supplies, and elsewhere. And for many reasons, we could, I know, get into. I don’t think banking is really necessarily set up to provide that kind of access in that way. It’s too difficult. It’s too complicated. Our banks don’t operate in those parts of the world often where people really need that assistance. But crypto is global. It’s everywhere where you can get access to it. In many other respects, it’s just like a really groundbreaking innovation.
Amira (09:31):
It’s kind of amazing, I mean, how much history repeats itself and how much access to these tools they were needed 80 years ago, they’re needed today. Ari, I remember you telling me an example of how the US government I think, maybe it wasn’t, was able to get aid into Venezuela directly using crypto. I’d love it if you could tell us a little bit more about that example.
Ari (09:51):
I think that was Sigal’s story so I’m going to give her that one.
Sigal (09:56):
Okay. Well, this actually happened after I left Treasury, but I think it’s also incredible. So when we had very heavy sanctions on Venezuela because of Maduro and what he was doing in that country, when we had the sanctions program, I made sure, or at least when I oversaw it, I made sure that in the Venezuela context we had the most forward leaning general license for humanitarian aid in particular that we had ever had before. I basically told our team like, “Everything that’s ever been on the cutting room floor, we need to put it in this program because we need to help people who were literally starving to get access to aid.” The other challenge was that it was very, very difficult for the US government to get anything resembling humanitarian aid into the country. I mean, literally, there were shiploads of stuff that the US government had sent and Maduro wouldn’t allow it in or accept it.
I will say that even though we had these very forward leaning general licenses, NGOs would come to us, to me and to Ari, I had a call that Ari will remember at the state department where these NGOs would say, “Look, we know you’ve got this general license, but the banks were all de-risking us. They won’t allow us to continue.” And I said at the time, “Well, tell them to call me. I mean, this is why we had that such a forward leaning general license>” but banks are just very risk averse in that way.
And so fast forward, actually after I left Treasury, what was the one way that the state department working with Treasury and I think with Airtm and maybe with Circle, they were able to get USDC to help something like 60,000 or 80,000 doctors and nurses who are fighting on the front lines of COVID in Venezuela. Again, it’s just like Ukraine. It’s another really amazing use case where our banks weren’t able necessarily, maybe some did, but many weren’t able to get humanitarian aid in. But boom, instantly you could send it in and you could account for it because it’s transparent, so you can audit it. You can make sure that if it lands in the wrong hands, that they can’t use it. So it’s a really incredible tool to allow access to, again, just like Solana is doing to allow access to a very fast payment system or a transfer of value for humanitarian purposes while also ensuring, helping to ensure at least, that it’s used for the right reasons.
Ari (12:14):
I think what’s so interesting is there’s this narrative that crypto with these sort of qualities, decentralized permission list, cross border value transfer at the speed of the internet, somehow it’s only used by illicit actors. But the fact is those are the qualities that allow it to sort of move outside of traditional financial systems to provide aid to people that would otherwise not have access to it. And I think this Ukraine moment in this really horrific situation is this incredible example of how communities, decentralized communities have developed in order to support a resistance movement in a government. I mean, Zelensky talks about Twitter being a tool of the resistance or a tool of Ukraine in this moment. Well, what you see happening on Twitter is communities developing to send cryptocurrency to support movements there.
Admittedly, I think Sigal and I are often talking about sort of the financial crime and the money laundering risks and the things in sort of that space, but you do have to step back and say like, “We have to stop bad actors from using it because it’s so good and there’s so much power and promise of it to do good.” I do think we’re having sort of a watershed moment in Ukraine where you’re having this sort of global event where we’re seeing hundreds of millions of dollars ultimately will flow to Ukraine in cryptocurrency and really arguably sort of the first maybe use case at scale of what the power of this technology can do. I think it’s an exciting moment. Obviously, it’s a moment you never wanted to see, but I think this will be an example that will be able to use as to why this technology has so much promise.
Sigal (13:47):
Yeah. And I would say just to add to that really quickly, what I like to talk about when I’m talking to policy makers and regulators, et cetera, is that you have to stop looking at everything through the lens of risk. Risk is important. We want to mitigate risk, but really what you need to do is start looking at the opportunity and how this technology will enable so much opportunity. Because what we have today are a bunch of developers, innovators, builders, dreamers, right? Who are literally thinking about how to build out a more efficient financial infrastructure for the future that many more people ultimately will be able to access and use.
That part of the infrastructure that deals with illicit finance and investor protection, that’s being built too. So you can do those things really in parallel and therefore really drive out. In many ways more successfully than what we have in traditional finance, the illicit part of it as what we’re seeing is like the vast, vast majority of people in crypto, they’re just builders. They want to grow new things whether it’s NFTs, games, payments, access, Ukraine, et cetera.
So if you only look at things as a regulator from the perspective of risk, then you’re never going to let anything grow. You really have to start talking about how to use this technologies as a great opportunity, including one of the reasons that I came into this space, right? Which is because I thought like this is this great opportunity to build out potentially much better financial infrastructure, which many, many more people will be able to access in the future. And if a portion of that remains in the United States, then the United States will be able to continue to be a center of financial innovation for years to come. If it doesn’t, that’s a different story.
Amira (15:29):
A lot of folks in the audience have never actually been in your shoes or anywhere close to it. I want to take a second to dig into sort of like that Carrie Mathison type stuff, which is like, let’s look behind the shroud and see what it looks like to walk into your desk at Treasury every morning and understand what’s coming past your desk from the risk perspective. Let’s help figure out why regulators might be so concerned and help listeners understand what it was like to track down bad actors when you were in Treasury. So what did that look like for traditional finance specifically? What would you see? What does the process look like? How do you start your days even?
Sigal (16:06):
I used to start my day every day with an intel briefing. Basically with a briefing, where I would learn about all the potential terrible things, terrible things around the world that were happening and potential terrible things that could happen. So when you’re in a job whose title is terrorism and financial intelligence, that’s just the way your day is going to start. You’re constantly thinking about how to protect not only Americans, but people all over the world from bad actors. So that’s how you start. Literally, the framing of your day really starts with hearing about bad stuff that could potentially happen. And then in many respects, you said about your day in part to ensure that that bad stuff doesn’t actually come into place. There are all kinds of different ways in which that happens.
Another big part of my job was also to think about how do we reform, how do we provide much more guidance to the private sector which we did really with the FinCEN guidance in 2019 and in lots of different ways through our sanctions programs, through advisories that we issued to help the private sector also work with us to better protect themselves against being abused by bad actors.
Amira (17:15):
What does it actually look like when you’re stopping bad actors? So you talk on sort of vagueness, but think about a case where maybe you had to take traditional tools of finance to stop a bad actor and what that process looks like. And then how does that actually contrast when you’re thinking about a crypto bad actor? What are the differences in that process?
Ari (17:32):
One thing that we did at Treasury and at DOJ when I was in AUSA is you put together great teams and you reached out to all kinds of different pieces of the inner agency, the executive branch. So when we were prosecuting a case, we would want to ensure that we had a team of the best IRS CI agents and HSI and FBI. It was very similar at Treasury, right? I mean, if you were going to do a sanctions’ designation on North Korea for example, you would want to ensure that you had the right policy people in the room from TFFC, and that you’d have the right intelligence from OIA, that you’d have exactly the right subject matter experts from OFAC on sanctions and FinCEN on money laundering and financial crime. And you would put them all together. And I think this is what, why Sigal was frankly so successful, is that you basically would reach out to teams of subject matter experts. And you’d put these teams together and they would inform great policy.
I think one thing that sometimes is missing is that there’s this sense that sort of like from the private sector that the government doesn’t know what it’s doing and this sense from the government that the private sector just has a certain agenda. I really do think at the end of the day, some of the best subject matter experts in the world are in both places. When you have those public-private partnerships, you’re going to have much, much more success. So to me, it really is about putting together great teams of subject matter experts. I think we’re seeing that today quite frankly. I mentioned North Korea.
For example, you have this hack of the Ronin, Axie infinity blockchain a few weeks ago. And very, very quickly, Treasury essentially identified Lazarus group, a state actor from North Korea as having engaged in that attack. I’m not there anymore. Sigal’s not there anymore. But what I imagine happened is they put together teams of experts from those different places who were using blockchain analytics tools to watch the flow of funds in that attack. And then you saw the designation, the sanction of a specific address for the first ever time associated with Lazarus group. And then you saw those funds flow to three other addresses, and immediately you saw those addresses sanctioned. And then you saw those funds flow through mixing services, which are basically exchanges on blockchains that mix funds and send them out, sort of clean the other side. And you saw those funds flow through a mixer called Blender.io that was ultimately designated sanctioned by OFAC.
So again, while we’re not there anymore, when I see these actions, I sort of picture a skiff, a secure facility within Treasury a few steps from where Sigal and I sat. I picture this group of true subject matter experts sitting around and laying out game planning, these types of actions. I think that’s as inside baseball as I could do here. But I do think that like the key is great teams, and we were always very lucky to work with great teams.
Sigal (20:22):
Speaking of which, I was also really smart to bring brilliant people to work with me in my front office. And of course, Ari was very much at the center of that. We’re in war mode all the time at Treasury, right? You’re always dealing with really bad actors.
Ari (20:40):
I picture Sigal running when I think of Sigal, in heels down.
Sigal (20:45):
Clicking.
Ari (20:45):
And I remember actually ended up buying shoes that had sort of sneaker styles soles on the bottom because you were so constantly running up and down the hallways of these marble floors, because that’s exactly what it was. You were always in a rush. It was always because the work you were doing was important.
Sigal (21:01):
I lost a lot of shoes that way. One thing I will say when Ari’s talking about Lazarus, the first time that I really understood the power of blockchain analytics and blockchain technology was actually when we had sanctioned a big network. I think it was the first time we sanctioned… I actually included wallet addresses. Literally within a day, maybe it was that same day, I don’t even remember, Chainalysis had put out a piece that literally identify all the different addresses that were linked to the ones that we had sanctioned so that people could very, very quickly know what to stay away from, like what was really bad news and actually protect themselves from interacting. Ideally, we could freeze funds.
I remember at the time saying to a different senior advisor, Leah Bressack, like, “Yes, this is what we want industry to do. We don’t ever see this kind of analysis from the banking industry.” And that was really in part because that capability doesn’t exist in the same way. I mean, sure, we saw lots of SARS and sophisticated SARS from banking, but for somebody, a Chainalysis or now TRM to go out and very quickly publish reports much more quickly than we may have been able to do that really helped immediately track, detect, and deter illicit activity was really quite extraordinary.
Ari (22:25):
Yeah. I mean, it seems so obvious to probably most of your audience and certainly to us, but the ability to follow the money to watch financial flows in cryptocurrency is extraordinary compared to the traditional financial system. I mean Sigal and I both cut our teeth as prosecutors doing bulk cast smuggling cases and networks of hawalas and shell companies and Russian real estate and London and high value art, right? There’s no TRM or Chainalysis for those things. Those are very hard. And in crypto you can follow the funds with great financial crime investigators at US law enforcement and globally can follow the funds using these kinds of tools in ways that were unimaginable before. So yes, you can certainly move money faster in larger amounts in many respects, but you have tremendous visibility. I think a lot of times that’s missing still even from the conversations around sort of fraud and financial crime in crypto.
Amira (23:22):
So let me push on both points because I think this is really textured and no one knows more about this than you two, I think. So there are two people that might push back on what you just said. One is, I would say the folks that I think are especially concerned about crypto’s usage for money laundering. Those people might say, “Yeah, but you’re seeing the rise of privacy focused chains, of blending services, these things just make it impossible to obscure the movement of money. It’s only a matter of time before we see these things succeed.” And so maybe the technology’s working for us now, but you’re the first to say that this tech is early. How are we going to be able to catch terrorists and oligarchs once stuff advances?
Ari (24:02):
Yeah. No, it is still a little bit sort of a whack-a-mole. But it always has been in sort of the cat and mouse game between law enforcement and bad actors. I will say that so many of the big crypto investigations over the last few years involve mixing services, they involve privacy coins. Law enforcement ultimately was able to make those investigations using a combination of blockchain analytics like TRM, like Chainalysis, but then just great police work, off chain police works, subpoenas and search warrants, putting together the pieces.
Amira (24:30):
Is there an example that you can go into on that front?
Ari (24:33):
Yeah. I would say the Bitfinex case is a tremendous example actually. So I mean, essentially what you had there was a 2016 hack of an exchange where the money just sat there in a wallet. And then all of a sudden you started to see it move over the course of years across blockchains.
Amira (24:49):
And for background, for folks who aren’t familiar, tell us what the broad strokes, the Bitfinex hack.
Ari (24:54):
Sure. Yeah, so really just that until recently, right? It was at the time one of the largest crypto hacks. About $70 million of Bitcoin was stolen from the Bitfinex exchange. A hacker breached these cybersecurity and stole about $70 million in Bitcoin. That money basically sat on an account for a while and then started to move in these individuals. They basically used every office station technique in the book, from mixers to privacy coins, to dark net markets and automating transactions which means you programmatically move funds across blockchains in order to obfuscate. Well, ultimately law enforcement used blockchain analytics tools to trace and track those funds through mixers and dark net markets. And ultimately, to be able to seize what grew to be about $4.2 billion, the largest seizure in US history, ultimately sees those funds.
What’s so interesting about crypto, and I think Sigal made this point earlier, is the blockchain is forever. So you don’t just have to be ready for whatever the analytics tools and whatever the investigation tools is when you do the hack and when you start to launder funds. You have to worry about what it’s going to look like five years down the road, what the technology is going to look like. Because law enforcement was able to follow those funds across years and across blockchains, ultimately actually arresting a couple in New York city a couple of months ago and charging them with laundering the largest seizure in US history. So there are definitely powerful, anonymity enhancing tools out there, but I will say that law enforcement is still making a lot of these cases.
Sigal (26:38):
Yeah, I would just add. I mean, like in this very early days, still nascent technology, the reason that some of the largest seizures of illicit assets in history has come from crypto is not because there’s more illicit activity in crypto. For all of the reasons that Ari just mentioned, it’s just in many respects easier to trace and ultimately to disrupt than what you have when people move all kinds of assets through shell companies and like all sorts of different parts of the world. That’s really important because if you just look at the headlines and you say “Bitfinex, largest money laundering seizure in history,” then you may just jump to like, “Oh, of course, because it was crypto.” But no, people are just using crypto for bad things. It’s really because law enforcement now with blockchain analytic firms, et cetera, and prosecutors have all these amazing tools at their disposal.
Silk Road was another example. I mean there was a seizure last year or the year before of a billion dollars worth of, I think it was Bitcoin, that traced all the way back to maybe the earlier days of Silk Road. And boom! All of a sudden, money moved and they were able to pounce. I mean, frankly, if you’re a bad actor, I would say as more of these cases are like coming to a fruition, stay away from crypto. There’s a very decent chance you’re going to get caught.
There’s also this narrative that I think has largely tamped down, but there was a narrative that crypto was going to be used on mass for sanctions evasion in the Russia context. And for a number of different reasons, I just don’t think that, and I think Ari would probably agree, that’s just not going to be the case. It’s not that it couldn’t be used for some, but Russia has been very good at money laundering for a very long time through things like real estate and shell companies and all kinds of different mechanisms that we’ve investigated for many, many years. With crypto, there isn’t like the liquidity to move assets at the volume or scale that they would need to do that. Plus, if they try to, boom, the TRMs and Chainalysis and law enforcement kind of actors would likely be able to, at some point, quickly detect it, plus you have all these regulated exchange who have done really a terrific job working with law enforcement to be able to help trace and track and disrupt this activity.
Ari (29:06):
The only thing I would just kind of add to that, I think Sigal makes a great point at the end there in particular around compliance. I think there’s this sort of sense that, “The wild west” is what you hear thrown around in terms of sort of the regulatory landscape. And at least on what we’re talking about today, sort of that AML national security space, look, crypto businesses that operate in the United States are treated as like any other money service business for purposes of this. When you’re looking at sort of the large exchanges where so much of the liquidity is today, they have robust compliance controls in place. They have compliance officers, they have policies and procedures. They use tools like TRM and Chainalysis in order to monitor transactions. This is not the wild west when it comes to stopping sanctions evasion when it comes to stopping bad guys.
Ari (29:51):
I mean, look, I think the reality is, there is certainly illicit activity occurring in crypto, but honestly, illicit activity occurs in any thriving financial system. Bad actors would not want to use it if it wasn’t working, that’s certainly true of cash. That’s certainly true of sort of anything else. And as we see the growth of this economy, we’re going to see more illicit activity just by the nature of it. But as an overall percentage, it’s going to remain very, very low because I think as Sigal mentioned, it’s not a great way to launder funds. It’s not a great way for illicit actors to move money because we’re watching it all the time. It’s not just blockchain analytics and law enforcement. I mean, the coolest thing is when you jump on some of these Discords or on Twitter and you watch these super sleuths and parts of these different communities develop that are in these like open source tools that are following the funds in a hack. There is a self-policing element too, in this community that has never existed before when it comes to sort of following the money, watching financial flows.
Amira (30:50):
I think the headline from this episode’s going to be advice from former Treasury officials, if you’re a terrorist financeer, don’t use blockchain.
Ari (30:57):
100%. Never use crypto. Yeah.
Amira (30:59):
This has flown by, and I feel like I have a million more things I could talk to you both about. But in our last couple minutes, maybe any advice you have for your peers who are in your shoes today, talking about sort of the growth of this new industry. What would you tell them? What do you wish you could whisper in their ear? Or maybe you’ve already whispered in their ear.
Sigal (31:14):
Look, what I say is, number one, you have to interact with the technology. You have to meet the entrepreneurs, the developers, the founders, to really understand what’s being built. I mean, I had amazing folks around me in the government, but there’s nothing to teach me to talk to me about this stuff. But there’s nothing like interacting with someone like Anatoly or what have you to really see and envision what the future can look like with this infrastructure. So if you really want to understand what’s happening, get out there, interact with the technology if you can. There’s all kinds of ethical restrictions that don’t allow enough people to be able to do that, but there should be mechanisms to allow you to interact with the technology, number one.
Sigal (31:55):
And number two, be open minded. Learn what’s happening, what can the future look like, why do we think ultimately, why are there so many of us who’ve left government who are investing so much of our time and energy in these technologies because we actually believe that it’s quite possible that this is where the future of finance lies. That’s number one. Number two, if you’re looking at how to regulate it, don’t just put your mind around all the old tools that you know that you’ve come to rely on for the last century, right? This is a fundamentally new technology. It’s transparent in a way that we haven’t seen before. It’s open source. There’s so many different attributes of the technology that can help mitigate risk. And so be open to fresh new frameworks that potentially in my opinion not only, let’s say on the AML side, can continue to drive illicit activity out, but really, really importantly can bring many more people around the world access to the financial ecosystem.
There’s 1.7 billion people, at least as of 2017, who didn’t have access to banking. We got to solve that problem. It’s not enough to go to inter agency or multilateral meetings all over the world and talk about it in five minute interventions, which is often what happens in these meetings. We got to really find the technology that can help solve those. And then US people, they need to really focus on how can they maintain that leadership. It’s not going to be by calling things wild west and it’s not going to be by only seeing things through the lens of old boxes and old frameworks that were built up when we were using the telegram. I mean, not the app Telegram, like those telegrams that they used in the ’30s. And then also, perhaps not the same frameworks that we were using when we were still using the rotary phone. I mean, this is fundamentally new technology. Let’s understand it and regulate it in a way that makes sense in light of the technology and allow it to experiment and grow so that we can build something out really together that can be truly extraordinary.
Ari (34:13):
I think that’s so beautifully said. I share a lot of those sentiments. I’ve been lucky to have really the coolest jobs that you can ever have, so don’t take this personally, Sigal. But I have the coolest job that I’ve ever had now. I think it’s because I’ve just gotten to sort of engage with this incredible community of builders and innovators. And they all understand, I think, uniquely that we’re building essentially a new financial system. I think it’s so important that regulators sort of also embrace that moment, that this doesn’t have to be the same. We don’t have to do what we’ve done before. We can work with the technology. We can work with these builders sort of build something new. I think Solana is an amazing example of this because the focus on speed and the focus on sort of that incredibly strong community of NFT builders and gaming, and really I think all the things that are starting to develop to me are like really the future not just of kind of the technology, but really also compliance and regulation.
The metaverse is not going to be a place that is entirely unregulated. It’s going to be regulated, but it needs to be done in a super smart pro innovation kind of way. I’m so hopeful that these communities that I feel like I have been lucky enough to engage with over the last year or so, that regulators and policy makers are also engaging with them. So yeah, no, it’s an incredibly exciting time. I don’t know, I get up every morning kind of feeling that. I think it’s sort of like, how do we inspire regulators and policy makers to kind of feel that same way.
Amira (35:39):
I’m revved up just hearing you about talk about this. Let’s go.
Ari (35:41):
Let’s go.
Amira (35:41):
All right.
Ari (35:45):
Sigal and Ari, thank you both so, so much for your time. We really appreciate it, and in giving us the inside view of what it’s like to be a regulator dealing with these issues. I think I’ve learned a lot and I think our listeners have too. Thanks a bunch.
Sigal (35:56):
Thank you so much. And thanks for bringing us back together.
Ari (35:59):
Thank you so much. I loved it. Thank you so much.
Sigal (36:02):
Thank you.
