Well, US Lawmakers and Federal Reserve Chairman Pro Tempore Jerome Powell are at it again (still?). This renewed call for regulation is a result of discussions concerning the potential use by Russia of cryptocurrencies to circumvent the imposed sanctions.
In a Hearing earlier today (March 2, 2022) of the House Financial Services Committee on 'Monetary Policy and the State of the Economy', Powell was asked if crypto could be a vehicle for Russia to utilize to conduct financial transactions after being cut off from the SWIFT Network. Powell's response stressed the need for Congress to regulate crypto quickly, adding:
there is a need for 'a framework, in particular ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist financing and just general criminal behavior, tax avoidance and the like.' He also highlighted that the current regulation is not sufficient and 'there isn’t in place the kind of regulation framework that needs to be there.'
[Zmudzinski, A. US Lawmakers Look To Tighten Grip On Crypto To Ensure Sanctions On Russia Are Effective. (Accessed March 2, 2022)].
Powell's position was echoed by Rep. Jim Himes (D-Conn.). Himes added that by the US not leading the regulatory efforts on crypto bad actors can avail themselves of the technology. Himes stated:
It is time, in fact, it is past time for all of us to lead on creating a regulatory environment in which we, rather than the world’s despots, terrorists, and money launderers, benefit from the emergence of cryptocurrency including a central bank digital currency.
[Id].
Not to be outdone, Senate Banking Committee members Elizabeth Warren (D-Mass.), Mark Warner (D-Va.), Sherrod Brown (D-Ohio) and Jack Reed (D-R.I.) penned a four page letter to Treasury Secretary Janet Yellen, wherein they raised concerns:
that Russia may use cryptocurrencies to circumvent the
broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine. This could include the use of dark web marketplaces that are powered by cryptocurrencies to move funds and conduct transactions; the use of crypto wallets and mixing services that allow sanctioned entities to transfer and hide their wealth; deployment of a digital ruble that would allow Russia to conduct foreign trade without converting their currency into dollars; and ransomware attacks that would allow Russian actors to recoup revenues lost to sanctions.
[Warren, E., Warner, M., Brown, S. and Reed, J. Letter to Yellen dated 03/02/22. (Accessed March 2, 2022)].
This letter also implied that OFAC (Office of Foreign Assets Control):
has become increasingly reliant upon voluntary self-disclosure from sanctions violators for enforcement, with one report concluding that 67% of enforcement cases during the Trump administration were prompted by self-disclosure. However, this model appears to be particularly ill-suited for enforcing sanctions compliance in the cryptocurrency industry given the prevalence of pseudonymity and the current weakness of the industry’s compliance programs.
[Id].
On March 1, 2022, OFAC's regulations became effective warning United States individuals and companies not to facilitate crypto transactions in compliance with the Biden sanctions [see, e.g. Nagoda, K. US Treasury Dept. Warns Not to Facilitate Crypto Sent to Russia. (Accessed March 2, 2022]. The four Senators questioned OFAC's enforcement of the sanctions posing the following five questions to be answered by March 23:
- How does OFAC work with foreign governments and other participants in the international banking community to ensure that cryptocurrency is not used to evade sanctions?
- What are the challenges OFAC has faced in applying the October guidance?
- Of all sanctions violations documented by OFAC in the virtual currency industry, what percentage of them were self-disclosed?
- How has the growth of DeFi arrangements and services affected malign actors’ ability to circumvent sanctions, as well as OFAC’s ability to enforce sanctions?
- What additional tools, including legal authorities or funding, might be necessary for OFAC to ensure that cryptocurrency participants are not able to help Russia or other malign actors evade U.S. and multilateral sanctions?
[Warren, et.al., supra].
The four stressed: "Strong enforcement of sanctions compliance in the cryptocurrency industry is critical, given that digital assets, which allow entities to bypass the traditional financial system, may increasingly be used as a tool for sanctions evasion." [Id].