US Treasury Deputy says department seeks more authority to fight digital asset crime

The U.S. Treasury Department seeks expanded authority to continue its crackdown on illicit activity in the digital asset space, particularly sanctions violations and terrorist financing.

Speaking at the 2023 Blockchain Association’s Policy Summit, Deputy Secretary of the U.S. Treasury Wally Adeyemo highlighted “the importance of industry proactively taking steps to prevent digital assets from being used by transnational criminal organizations, terrorists, and rogue states.”

In his prepared remarks, Adeyemo told summit attendees that the Treasury Department had sent recommendations to lawmakers this week on how to better combat illicit activities in the digital asset space, notably terrorist financing.

Terrorist financing at the forefront

Terrorist financing has been high on the agenda in the digital asset space, particularly in light of Binance‘s historically huge settlement and admission of guilt this month, which included findings that digital asset wallets at Binance had interacted with Bitcoin wallets
associated with U.S.-recognized terrorist groups, namely the Islamic State of Iraq and Syria (ISIS), the armed wing of Hamas, al Qaeda, and the Palestine Islamic Jihad (PIJ)—a fact Adeyemo noted in his speech.

“I want to directly address those within the digital asset industry who believe they are above the law, those that willfully turn a blind eye to the law, and those that promote assets and services that aid criminals, terrorists, and rogue states,” said Adeyemo. “My message is simple: We will find you and hold you accountable…This is exactly what happened to Binance.”

He also mentioned the Treasury’s sanctioning of digital currency mixer Sinbad.io, which “processed millions of dollars’ worth of virtual currency from cyber hacks and enabled cybercriminals to mask illicit transactions.”

Mixers, or tumblers as they’re sometimes referred to, combine and distribute digital assets to make transactions harder to trace. One of the most prominent examples is the Ethereum-based digital currency mixer Tornado Cash, which the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned in August 2022 for laundering the proceeds of cybercrimes.

Last month, the Treasury’s financial crimes arm proposed labeling digital asset mixers as a “primary money laundering concern” in its effort to combat their illicit use, highlighting the terrorist groups that have benefited from anonymous funds.

Adeyemo referred to this as “a set of rulemakings intended to increase the transparency of mixers, making it harder for criminals and terrorists to use them to hide the source, destination, and amount of transactions.”

Expanded authority

To further boost its efforts to combat digital asset crime, Adeyemo said that the Treasury had this week provided Congress “a set of common-sense recommendations to expand our authorities and broaden our tools and resources to go after illicit actors in the digital asset space.”

This approach will be two-pronged, the first being the creation of new sanctions tools targeted towards actors in the digital asset ecosystem that allow terrorist groups and other illicit actors to move their assets; the second involves updating illicit finance authorities, including not relying on statutory definitions that are decades old, and not allowing “dollar-backed stablecoin providers” outside the U.S. to use the U.S. dollar without putting in place procedures to prevent terrorists financing.

This latter measure could have huge implications for the likes of Tether, the largest so-called stablecoin by circulation, which is owned by the Hong Kong-based company iFinex Inc. (also owners of the Bitfinex exchange).

“We cannot permit offshore financial services providers to use jurisdiction-evasion tactics to avoid complying with our laws,” said Adeyemo. “We are working to close these gaps and others.”

This provides further evidence of an increased crackdown from U.S. authorities on bad actors in the digital asset space, following in the wake of high-profile scandals of 2023 such as FTX and Binance, and given extra urgency by the evolving crisis in the Middle East, with groups such as Hamas known to have financed some of their operations via the digital asset space.

Watch Callahan, MaGruder, Lee, and Reinhardt: Probing criminal acts