The US looks set to increase sanctions against Russia through the criminalization of crypto mixes

The US looks set to increase sanctions against Russia through the criminalization of crypto mixes
The US looks set to increase sanctions against Russia through the criminalization of crypto mixes

The US government is not backing down in its attack on digital coin ‘mixers’ to enforce economic sanctions against 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 Chairman Sherrod Brown (D-OH) referred to the need to enforce “the economic sanctions designed to weaken Russia’s economy.”

Ranking Member Pat Toomey (R-PA) added that the war that began in February “is not going as planned for [Russian president Vladimir] Putin. But I say this 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.”

Early in the conflict, many digital asset influencers hailed “crypto” as a means for individuals to quickly and anonymously donate to the Ukrainian cause, while suggesting that Russia could use digital assets to bypass mainstream financial channels and thus avoid Western economic sanctions .

Neither of these narratives have proven to be entirely accurate, as cryptobros proved to be far more interested in promoting their individual projects and/or collecting on airdrops promised (but never delivered) by Ukraine. And even the largest digital tokens lack the liquidity necessary for Russia to cover the deficit in the economy, which led the Federal Bureau of Investigation to declare that Russia’s “ability to circumvent the sanctions with cryptocurrency is probably greatly overestimated by perhaps them and others .”

Nevertheless, Russian officials continue to explore the capacity of digital assets to settle 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 likelihood of sanctioned Russian oligarchs gaming the system. It didn’t help that the developer behind Tornado Cash allegedly had ties to a Russian entity previously sanctioned by OFAC for helping to “enhance Russia’s offensive cyber capabilities.”

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Warren calls out Coinbase

Tuesday’s hearing called only two witnesses: Elizabeth Rosenberg, the Treasury Department’s Assistant Secretary for Terrorist Financing and Financial Crimes; and Andrew Adams, the Justice Department’s Director of Task Force KleptoCapture.

Rosenberg’s opening statement did not mention crypto or mixers, but Adams praised the DoJ’s “robust and successful” efforts to target sanctions evaders involving “everything from cryptocurrency to trade-based money laundering.”

But when committee members were allowed to question the witnesses, Sen. Elizabeth Warren (D-MA) expressed concern about “Russian elites” potentially using crypto to avoid sanctions, citing historical precedent set by North Korea. Warren was among the senators who introduced the Digital Asset Sanctions Compliance Enhancement Act in March, which also targeted sanctioned Russians’ potential use of digital currencies.

Since the bill was introduced, Warren claimed the Treasury Department had identified “many instances of Russian entities attempting to evade sanctions with crypto.” Warren asked Rosenberg if digital assets “could be used right now by Russian oligarchs to avoid sanctions.” Rosenberg admitted that Warren’s scenario was “possible.”

Warren then pivoted to claims that “many crypto boosters continue to argue that crypto could never be used as a way to avoid sanctions … because the blockchain is transparent.” But Warren said “an entire industry has emerged to create tools for illegal actors to entangle or hide the trail of crypto transactions,” citing “mixers” as an example. Rosenberg responded that “anonymity-enhancing technologies like mixers … are really a concern for understanding the flow of illicit finance and getting after it.”

Referring to US enforcement actions against the Tornado Cash and Blender mixers, Warren claimed that some crypto luminaries were “outraged” by these actions and “fighting to have the ability to continue to launder money.” Warren pointed to the US-based Coinbase (NASDAQ: COIN ) exchange for “bankrolling a lawsuit against the Treasury for its work in sanctioning these mixers.”

Warren asked Rosenberg if sanctions against mixers would help “strengthen our regime against Russia and other illegal actors.” Rosenberg called sanctions on mixers “an effective avenue we can use to signal that we cannot tolerate money laundering, whether it’s for a Russian criminal actor, an Iranian, a North Korean, or wherever they come from.”

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Warren ended his allotted time by declaring that “when crypto boosters cry loudest, you’re probably on to something. If crypto has nothing to hide when it comes to money laundering for oligarchs or drug lords or tax evaders, they shouldn’t care about a little transparency .”

From Russia with sanctions

Tuesday also saw the House of Representatives approve HR 7338, aka the Russia Cryptocurrency Transparency Act, which was introduced in March.

HR 7338 praises cryptocurrency as “an effective cross-border payment tool to send millions” to Ukraine, but notes that since other sanctioned countries have used crypto to evade sanctions, “there is growing concern that these digital assets could be used to circumvent the sanctions now imposed on Russia and Belarus.”

Assuming HR 7338 becomes law, the Treasury Secretary will have 180 days to submit an assessment of how digital currencies affect the enforcement of sanctions against both the Russian government and targeted Russian citizens. This includes attempts to avoid sanctions that use “decentralized financial technology or other similar technology to conduct transactions, including digital wallets, digital asset trading platforms and digital asset exchanges.”

Looking a little closer to home, the Treasury has also been asked to consider how digital currencies could “undermine US national security interests and affect the effectiveness and enforcement of sanctions, and the enforcement of anti-money laundering regulations.”

Finally, Treasury must detail how the US government works 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 through digital currencies.

Another report on how blockchain technology can be used to help Ukraine’s humanitarian needs is to be submitted by the Secretary of State within 30 days of HR 7338 becoming law. This includes how to “prevent corruption through the use of ‘web3’ technologies.”

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Pay that man his digital money

HR 7338 also includes a section not specifically involving Russia/Ukraine, namely asking the Secretary of State why the State Department “decided to pay out cryptocurrency rewards” for information preventing international terrorism. The secretary will be required to disclose every cryptocurrency payment the department has already made under its Rewards for Justice program and to notify Congress “no later than 15 days for pays out a reward in cryptocurrency.” (Emphasis added.)

The Secretary of State is being asked to analyze whether cryptocurrency payments might be “more likely to get whistleblowers 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 the global reserve currency” or “make it even more difficult for bad actors to trace funds that could be used for criminal or illegal purposes.”

While HR 7338 may have passed the House, it remains to be seen how quickly the bill will be dealt with in the Senate. There are only a handful of days in which the Senate will sit before the midterm elections in November, with a few more sessions scheduled before Christmas.

See: The presentation of the BSV Global Blockchain Convention, Trust But Verify: Everything

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