US looks to beef up Russia sanctions via crypto mixer crackdown

The U.S. government isn’t backing down in its crackdown on digital coin ‘mixers’ to enforce economic sanctions on Russia for its invasion of Ukraine.

On Tuesday, the U.S. 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 from committee chair Sherrod Brown (D-OH) referenced 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 crush the Kremlin’s will to continue this war.”

Early on in the conflict, many digital asset influencers hailed ‘crypto’ as a means for individuals to swiftly and anonymously donate to the Ukrainian cause while also suggesting that Russia could use digital assets to bypass mainstream financial channels and thus evade the West’s economic sanctions.

Neither of these narratives has proven entirely accurate, as crypto bros proved far more interested in promoting their individual projects and/or collecting on airdrops promised (but never delivered) by Ukraine. And even the biggest digital tokens lack the liquidity necessary for Russia to make up the shortfall in its economy, leading the Federal Bureau of Investigation to declare that Russia’s “ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others.”

Nevertheless, Russian officials continue to explore digital assets’ capacity for settling cross-border transactions. Meanwhile, the U.S. government’s Office of Foreign Assets Control (OFAC) is cracking down on crypto ‘mixers’ such as 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 reportedly had ties to a Russian entity previously sanctioned by OFAC for helping to “increase Russia’s offensive cyber capabilities.”

Warren calls out Coinbase

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

Rosenberg’s opening statement made no mention of crypto nor mixers, but Adams hailed the DoJ’s “robust and successful” efforts in targeting sanction evaders involving “everything from cryptocurrency to trade-based money laundering.”

However, when Committee members were allowed to question the witnesses, Sen. Elizabeth Warren (D-MA) expressed concerns over “Russian elites” potentially using crypto to evade sanctions, citing historical precedent established 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 that bill’s introduction, Warren claimed that the Treasury department had identified “numerous cases of Russian entities attempting to evade sanctions with crypto.” Warren asked Rosenberg if digital assets “could be used right now by Russian oligarchs to evade sanctions.” Rosenberg conceded that Warren’s scenario was “possible.”

Warren then pivoted to claims that “many crypto boosters continue to claim that crypto could never be used as a way to evade sanctions … because blockchain is transparent.” But Warren said “a whole industry has popped up to create tools for illicit actors to tangle or hide the trail of crypto transactions,” citing ‘mixers’ as an example. Rosenberg replied that “anonymity-enhancing technologies such as mixers … are indeed a concern for understanding the flow of illicit finance and getting after it.”

Citing U.S. enforcement actions against the Tornado Cash and Blender mixers, Warren claimed that some crypto luminaries were “furious” at these actions and were “fighting to have the chance to keep right on laundering money.” Warren singled out the U.S.-based Coinbase (NASDAQ: COIN) exchange for “bankrolling a lawsuit against Treasury for its work to sanction these mixers.”

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

Warren concluded her allotted time by declaring that “when crypto boosters cry the loudest, you’re probably on to something. If crypto has nothing to hide on money laundering for oligarchs or drug lords or tax evaders, then they shouldn’t mind 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 are increasing concerns that these digital assets may 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 are affecting the enforcement of sanctions against both the Russian government and targeted Russian citizens. This includes sanction-dodging efforts that employ “decentralized finance technology or other similar technology to effect transactions, including digital wallets, digital asset trading platforms, and digital asset exchanges.”

Looking a little closer to home, the Treasury has also been asked with assessing how digital currencies might “undermine the national security interests of the United States and impact the efficacy and enforcement of sanctions, and the enforcement of anti-money laundering provisions.”

Finally, the Treasury must detail how the U.S. government is working with “private sector actors” to accomplish its aims, and recommend “new legislative and regulatory measures needed to strengthen” the government’s ability to prevent states/individuals from dodging sanctions through digital currencies.

Another report on how blockchain technology might be used to assist Ukraine’s humanitarian needs is to be filed 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.”

Pay that man his digital money

HR 7338 also contains a section that doesn’t specifically involve Russia/Ukraine, namely, asking the Secretary of State why the Department of State “made the determination to pay out rewards in cryptocurrency” for information that prevents international terrorism. The Secretary will be asked to reveal each cryptocurrency payment that the Department has already provided under its Rewards for Justice Program and to alert Congress “not later than 15 days before paying out a reward in cryptocurrency.” (Emphasis added.)

The Secretary of State is asked to analyze whether cryptocurrency payments might be “more likely to induce 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 “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 handled in the Senate. There are only a handful of days in which the Senate will sit prior to the November mid-term election, with a few more sessions scheduled before Christmas.

Watch: The BSV Global Blockchain Convention presentation, Trust But Verify: Everything

https://www.youtube.com/watch?v=UDcBacjXq4Q