US looks to beef up Russia sanctions via crypto mixer crackdown
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The US government is not backing down from cracking down on digital coin “mixers” to enforce economic sanctions on Russia over its invasion of Ukraine.
The US Senate Banking, Housing and Urban Affairs Committee held a hearing Tuesday on “Tightening the Screws on Russia: Smart Sanctions, Financial Management and Next Steps.” Committee Chairman Sherrod Brown (D-OH)’s opening statement referred to the need to implement “economic sanctions designed to weaken the Russian economy.”
Ranking Member Pat Toomey (R-PA) added that the war that began in February “is not going according to plan [Russian president Vladimir] Putin. But I say this to my colleagues: this is no time for half measures or complacency. It is time to crush the Kremlin’s will to continue this war.”
At the start of the conflict, many digital asset influencers hailed “crypto” as a way for people to quickly and anonymously donate to the Ukrainian cause, while suggesting that Russia could use digital assets to bypass mainstream financial channels and thus circumvent Western economic sanctions.
Neither of these narratives have proven to be entirely true, as the crypto-brothers were much more interested in promoting their individual projects and/or collecting the airdrops promised (but never delivered) by Ukraine. And even the biggest digital tokens lack the liquidity Russia needs to offset the economic shortfall, which is why the Federal Bureau of Investigation declared that Russia’s “ability to circumvent sanctions with cryptocurrencies is probably greatly overestimated by them and others.”
Nevertheless, Russian authorities continue to investigate the ability of digital assets to transact across borders. Meanwhile, the U.S. government’s Office of Foreign Assets Control (OFAC) is cracking down on crypto “mixers” like Tornado Cash, in part to limit sanctioned Russian oligarchs from gaming the system. It didn’t help that the developer behind Tornado Cash reportedly had ties to a Russian entity previously sanctioned by OFAC for helping to “increase Russia’s offensive cyber capabilities.”
Warren calls Coinbase
Only two witnesses were called to Tuesday’s hearing: Elizabeth Rosenberg, the Treasury Department’s assistant secretary for terrorist financing and financial crimes; and Andrew Adams, director of the Justice Department’s Task Force KleptoCapture.
Rosenberg’s opening remarks did not mention crypto or mixers, but Adams praised the DoJ’s “serious and successful” efforts to target sanctions evaders “in everything from cryptocurrencies to trade-based money laundering.”
However, when committee members were allowed to question witnesses, Sen. Elizabeth Warren (D-MA) expressed concern about the potential use of cryptocurrencies by “Russian elites” to evade sanctions, citing the historical precedent set by North Korea. Warren was one of the senators who introduced the Digital Asset Sanctions Compliance Enhancement Act in March, which also targeted the Russians’ potential use of digital currencies.
After the bill was introduced, Warren claimed that the Treasury Department had identified “several instances where Russian entities have attempted to circumvent sanctions through the use of crypto.” Warren asked Rosenberg if Russian oligarchs could use digital assets right now to evade sanctions. Rosenberg acknowledged that Warren’s scenario was “possible.”
Warren then turned to claims that “many crypto boosters continue to argue that crypto can never be used as a means of evading sanctions… because the blockchain is transparent.” But Warren said “an entire industry has emerged to create tools for illegal actors to obfuscate or hide the traces of crypto transactions,” citing “scramblers” as an example. Rosenberg responded that “anonymity-enhancing technologies like mixers … are really concerned with understanding and tracking the flow of illicit finance.”
Referring to US enforcement actions against Tornado Cash and Blender blenders, Warren claimed that some crypto luminaries were “outraged” by these actions and “fighting to have a chance to stay in real money laundering.” Warren highlighted US exchange Coinbase (NASDAQ: COIN )’s “banking action against the Treasury Department for its work to punish these mixers.”
Warren asked Rosenberg if blending sanctions would help “strengthen our administration against Russia and other illicit actors.” Rosenberg called blending sanctions “an effective way for us to demonstrate that we cannot tolerate money laundering, whether it’s a Russian criminal, an Iranian, a North Korean, or wherever they come from.”
Warren concluded his allotted time by declaring that “when crypto boosters cry the loudest, you’re probably on to something. If crypto has nothing to hide from oligarchs, drug lords, or tax evaders to launder money, they shouldn’t care about a little transparency.”
From Russia with sanctions
On Tuesday, the House of Representatives also approved HR 7338, the Russian Cryptocurrency Transparency Act, introduced in March.
HR 7338 lauds cryptocurrency as an “effective cross-border means of payment to send millions” to Ukraine, but notes that as other sanctioned countries have used crypto to evade sanctions, “there are growing concerns that these digital assets can be used to evade sanctions now to Russia and Belarus .”
Assuming HR 7338 becomes law, the Treasury Secretary will have 180 days to submit an assessment of how digital currencies will affect the enforcement of sanctions against both the Russian government and Russian citizens. This includes sanctions evasion efforts that use “decentralized financial technology or other similar technology to execute transactions, including digital wallets, digital asset marketplaces, and digital asset exchanges.”
Looking a little closer to home, the Treasury Department has also been asked to assess how digital currencies could “undermine US national security interests and affect the effectiveness and enforcement of sanctions and anti-money laundering regulations.”
Finally, the Treasury Department must detail how the US government is working with “private sector actors” to achieve its goals and recommend “new legislative and regulatory measures needed to strengthen” the government’s ability to prevent states/individuals from evading sanctions using digital currencies.
The Secretary of State must submit another report on how blockchain technology can be used to assist Ukraine’s humanitarian needs within 30 days of HR 7338 becoming law. This includes instructions on “preventing corruption using web3 technologies”.
Pay that man his digital money
HR 7338 also includes a section not specifically related to Russia/Ukraine, namely asking the Secretary of State why the State Department “decided to pay rewards in cryptocurrencies” for information that prevents international terrorism. The secretary is asked to disclose every cryptocurrency payment the department has already made under its Rewards for Justice program and to notify Congress “within the last 15 days before pays the reward in cryptocurrencies.” (Emphasis added.)
The Secretary of State is being asked to analyze whether cryptocurrency payments could make whistleblowers “more likely to come forward” than if they were promised rewards in fiat currency. The secretary is also asked to analyze whether making such payments in crypto could “undermine the dollar’s status as a global reserve currency” or “provide bad 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 be dealt with in the Senate. There are only a handful of days the Senate will be in session before the November midterm elections, with a few more sessions scheduled before Christmas.
See: BSV Global Blockchain Convention presentation, Trust But Verify: Everything
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