Cryptocurrencies Pose National Security Threat, Mnuchin Says

WASHINGTON — Treasury Secretary Steven Mnuchin on Monday said he has “very serious concerns” about cryptocurrencies, including the one being developed by Facebook, the latest indication that Washington is preparing to exert its power over digital currencies.

In a briefing at the White House, Mr. Mnuchin said cryptocurrencies pose a national security threat since they can be used to fund illicit activities. He also said that the Trump administration is “not comfortable” with Facebook’s plans to begin a new digital payment system, called Libra.

The warnings come after similar comments by President Trump, who said in a series of tweets last week that he is “not a fan” of cryptocurrencies and that their value is volatile and “based on thin air.” Mr. Trump warned Facebook that it must seek a banking charter and follow all bank regulations if it wants to be in the digital currency business.

Despite their growing popularity, the Trump administration has said little about cryptocurrencies in the last two years. Mr. Mnuchin has largely described the new technology for creating, moving and storing money, as a potential consumer protection issue rather than a threat to the financial system. Regulators have long focused on how to minimize crime in the cryptocurrency industry, but it has tended to be a wonky issue that has not attracted much public attention.

But Facebook’s announcement of Libra has spurred Washington’s interest in cryptocurrencies.

The chair of the Federal Reserve, Jerome H. Powell said last week that the central bank has “serious concerns” about Libra and had been in contact with Facebook regarding its project.

This week, the House and Senate will hold hearings about Libra, and lawmakers plan to grill David Marcus, the Facebook executive who is overseeing the project. Facebook was asked to cease work on the project until it addresses lawmakers’ concerns.

Facebook’s crypto foray has renewed attention to the thousands of cryptocurrencies that flourished after the original digital currency, Bitcoin, which was first released in 2009 and envisioned as a new kind of money that would not be controlled by any government or central authority.

Bitcoin was presented by its mysterious creator, Satoshi Nakamoto, as a largely political project, aimed at challenging central banks and governments.

But from the early days, Bitcoin gained traction among people looking to do illegal transactions online. The Silk Road, an online market for illegal drugs, came online in 2011 and became a booming business, with every payment sent in Bitcoin.

In recent years, there have been many legitimate businesses set up around cryptocurrencies. Most of these businesses are focused on using Bitcoin and other cryptocurrencies as investment products, similar to gold.

Several large financial institutions, including Goldman Sachs and Fidelity, have begun to offer products related to Bitcoin to their customers.

This mainstream validation has helped give Bitcoin a sheen of legitimacy and pushed up the price of the digital token. But it has also led to increased volatility in the price of Bitcoin and other cryptocurrencies.

The price of a single Bitcoin soared to nearly $20,000 in early 2018. Since then, it crashed down to $3,000, but has risen swiftly again in recent months to around $12,000.

Bitcoin has also become the standard currency for ransomware operations in which victims lose control of their computer to remote hackers. Victims are only able to get back their files if they send a Bitcoin payment. Many cities have lost control of their computer networks to these kinds of attacks.

On Monday, Mr. Mnuchin cited the use of Bitcoin in terrorist financing, tax evasion and human trafficking, though so far law enforcement officials have brought few cases in those areas.

“The Treasury Department has expressed very serious concerns that Libra could be misused by money launderers and terrorist financiers,” he said, adding “we will not tolerate the use of the cryptocurrencies in support of illicit activities.”

Facebook does not intend to release the currency until next year, but the company has big ambitions for the project, which it hopes will become a new global currency and the foundation for an alternative global financial system.

Those ambitions — and Facebook’s broader reputational problems — have made the project such a lightning rod for controversy.

“We know we need to take the time to get this right,” Mr. Marcus, the Facebook executive, said in testimony released ahead of the Senate Banking Committee hearing. “And I want to be clear: Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”

Facebook has designed Libra so that it will be run by a Swiss association governed by at least a hundred companies and other partners, rather than just Facebook itself.

When Facebook announced Libra, it said it already had 27 partners, including big players like Uber, Mastercard, Visa and Spotify. But so far those partners have largely remained silent and Facebook has borne the brunt of the scrutiny facing Libra.

It is clear that Facebook will be facing a raft of new regulations and public scrutiny as it proceeds.

Mr. Mnuchin said that cryptocurrencies must comply with the Bank Secrecy Act and register with the Financial Crimes Enforcement Network. They must also meet the same anti-money laundering and counterfeiting standards as traditional financial firms.

The Treasury secretary also expressed concerns about the speculative nature of Bitcoin and about Facebook’s problems protecting the privacy of its users.

“Our overriding goal is to maintain the integrity of our financial system and protect it from abuse,” he said.

The Trump administration’s concerns about Libra appear to be bound up in the president’s broader distrust of the social networking giant. Mr. Trump sent out his tweets about Libra soon after coming from a social media summit in which he criticized Facebook and other big tech companies, accusing them of silencing conservative voices, including his.

Mr. Mnuchin insisted the administration was not trying to retaliate against Facebook. “No, we’re not going to target any one entity,” he said. “Everybody is playing by the same rules.”

Mr. Powell, the Fed chair, expressed similar concerns about Libra last week, telling lawmakers it could not go forward “without their being broad satisfaction with the way the company has addressed money laundering, all those things.” He also raised data privacy and consumer protection concerns, saying, “All of those things will need to be addressed very thoroughly, and carefully, in a deliberate process that will not be a sprint to implementation.”

Skepticism about Libra, and cryptocurrencies more broadly, represent a rare issue where the Trump administration and some Democrats are united. Last week, Senator Sherrod Brown, Democrat of Ohio, called on the Fed to protect consumers from Facebook’s “Monopoly money.”

“The largest banks and the largest tech companies do not act in the interest of working Americans, but in the interest of themselves and their investors,” Mr. Brown said. “The Fed must take a proactive role to ensure that the payments system remains accountable to the public.”

However, Republicans have tended to be more sympathetic to the cryptocurrency industry, and have positioned it as something that the government should be working to protect as a check against government and corporate power.

Just this week, Representative Kevin McCarthy, the House minority leader, argued in a New York Times Op-Ed that cryptocurrencies, and the networks they create, could provide an answer to the privacy scandals facing the internet giants.

The president’s acting chief of staff, Mick Mulvaney, has been a vocal advocate of Bitcoin in the past.

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