The US government is not backing down in its crackdown on digital coin mixers to enforce economic sanctions on Russia for its invasion of Ukraine.
On Tuesday, the US Senate Committee on Banking, Housing and Urban Affairs held a hearing on Tightening the Screws on Russia: Smart Sanctions, Economic Statecraft and Next Steps. The opening statement by committee chair Sherrod Brown (D-OH) referred to the need to “enforce economic sanctions aimed at weakening the Russian economy.”
Rankings member Pat Toomey (R-PA) added that the war that started in February “is not going as planned [Russian president Vladimir] Putin. But I say to my colleagues: Now is not the time for half measures or complacency. It is time to break the Kremlin’s will to continue this war.”
At the start of the conflict, many digital asset influencers hailed “crypto” as a means for individuals to quickly and anonymously donate to the Ukrainian cause, while also suggesting that Russia could use digital assets to bypass mainstream financial channels and so the escape Western economic sanctions.
Neither of these narratives turned out to be entirely true, as crypto brothers proved far more interested in promoting their individual projects and/or collecting airdrops promised (but never delivered) by Ukraine. And even the largest digital tokens lack the liquidity Russia needs to make up the deficit in its economy, leading the Federal Bureau of Investigation to state that Russia’s “ability to circumvent cryptocurrency sanctions is on their part.” probably greatly overestimated and others.”
Still, Russian officials continue to probe the capacity of digital assets to handle cross-border transactions. Meanwhile, the US government’s Office of Foreign Assets Control (OFAC) is cracking down on crypto “mixers” like Tornado Cash, in part to limit the chances of sanctioned Russian oligarchs playing the system. It didn’t help that the developer behind Tornado Cash reportedly had ties to a Russian company previously sanctioned by OFAC for helping “increase Russia’s offensive cyber capabilities.”
Warren calls Coinbase
Only two witnesses were called at Tuesday’s hearing: Elizabeth Rosenberg, Assistant Secretary of the Treasury Department for Terrorist Financing and Financial Crimes; and Andrew Adams, director of the Department of Justice’s KleptoCapture task force.
Rosenberg’s opening statement made no mention of crypto or mixer, but Adams hailed the DoJ’s “robust and successful” efforts to target sanctions dodgers affecting “everything from cryptocurrency to trade-based money laundering.”
However, when committee members were allowed to question the witnesses, Senator Elizabeth Warren (DMA) raised concerns about “Russian elites” potentially using crypto to circumvent sanctions, citing a historical precedent set by North Korea. Warren was among the senators who introduced the Digital Asset Sanctions Compliance Enhancement Act in March, which also sanctioned the potential use of digital currencies by Russians.
Since the introduction of this bill, Warren has claimed that the Treasury Department has “identified numerous cases of Russian companies attempting to circumvent sanctions using crypto.” Warren asked Rosenberg if digital assets “could now be used by Russian oligarchs to circumvent sanctions.” Rosenberg conceded that Warren’s scenario was “possible.”
Warren then turned to the claim that “many crypto boosters continue to claim that crypto could never be used as a means of evading sanctions…because the blockchain is transparent.” But Warren said “an entire industry has emerged to develop tools for illegal actors to confuse or hide the trail of crypto transactions,” citing “Mixer” as an example. Rosenberg responded that “anonymity-enhancing technologies like blenders … indeed pose a problem for understanding and combating the flow of illicit finance.”
Citing US enforcement actions against mixers Tornado Cash and Blender, Warren claimed that some crypto luminaries are “angry” at these actions and “fighting for a chance to continue laundering money.” Warren singled out US-based exchange Coinbase (NASDAQ: COIN) for “funding a lawsuit against the Treasury Department for its work sanctioning these mixers.”
Warren asked Rosenberg if sanctions on Mixer would help “strengthen our regime against Russia and other illegal actors.” Rosenberg called sanctions against mixers “an effective way we can use to signal that we cannot tolerate money laundering, be it for a Russian criminal actor, an Iranian, a North Korean, or wherever they may be from.”
Warren ended her allotted time by declaring, “When crypto boosters are screaming the loudest, you’re probably on to something. If crypto has nothing to hide from money laundering for oligarchs or drug lords or tax evaders, then they shouldn’t mind a little transparency.”
From Russia with sanctions
On Tuesday, the House of Representatives also approved HR 7338, also known as Russia’s Cryptocurrency Transparency Law, which was introduced in March.
HR 7338 lauds cryptocurrency as “an effective tool for cross-border payments to send millions to Ukraine,” but notes that as other sanctioned countries have used crypto to evade sanctions, “there are increasing concerns that these digital Assets could now be used to circumvent the sanctions imposed on Russia and Belarus.”
Assuming HR 7338 becomes law, the Treasury Secretary has 180 days to provide an assessment of how digital currencies impact sanction enforcement against both the Russian government and targeted Russian citizens. These include sanctions-evasion efforts that use “decentralized financial technology or other similar technologies to conduct transactions, including digital wallets, digital asset trading platforms, and digital asset exchanges.”
Looking a little further, the Treasury Department was also asked to assess how digital currencies “could undermine the national security interests of the United States and affect the effectiveness and enforcement of sanctions and the enforcement of anti-money laundering regulations.”
Finally, the Treasury Department must detail how the U.S. government is working with “private sector actors” to achieve its goals and “recommend new legislative and regulatory actions needed to strengthen government capacity,” states/ Preventing individuals from evading sanctions through digital currencies.
Another report on how blockchain technology could be used to support Ukraine’s humanitarian needs is to be submitted by the Secretary of State within 30 days of Law HR 7338 coming into force. This also includes how “corruption can be prevented by using ‘web3’ technologies”.
Pay this man his digital money
HR 7338 also includes a section that does not specifically concern Russia/Ukraine, asking the Secretary of State why the State Department “made the decision to issue rewards in cryptocurrency” for information preventing international terrorism. The secretary is asked to disclose any cryptocurrency payment the department has already made under its Rewards for Justice program and notify Congress “no later than 15 days.” before Payout of a cryptocurrency reward.” (Emphasis added.)
The Secretary of State is asked to analyze whether payments in cryptocurrency “might encourage whistleblowers to come forward” rather than being promised rewards in fiat currency. The minister is also asked to analyze whether such payments in crypto “could undermine the dollar’s status as a global reserve currency” or “could provide malicious actors with additional hard-to-trace funds that could be used for criminal or illicit purposes.”
While HR 7338 may have passed the House, it remains to be seen how urgently the bill will move through the Senate. There are only a few days that the Senate will meet before the midterm elections in November, with a few more sessions scheduled before Christmas.
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