Lawmakers on both sides of the aisle are worried about the potential of cryptocurrency to serve as an escape hatch for sanctioned Russian money, with some saying the risk hastens the need for legislation.
The anonymity provided by bitcoin and other cryptocurrencies could undermine the effectiveness of sanctions against Russia after its invasion of Ukraine, the lawmakers say. Industry advocates, however, say the technology provides greater transparency for law enforcement and warn against an overreaction by Congress and regulators.
“Right now, we’re putting sanctions in place through the formal legal system, and those sanctions are historic. They’re very powerful,” said Sen. Elizabeth Warren, D-Mass. “But Russia has backdoor access to finance.”
The U.S. and allies last month imposed sanctions tailored to hit 80 percent of Russia’s banking assets, including two of the country’s biggest banks, according to the Treasury Department. They froze the assets of Russia’s central bank and cut off some banks from SWIFT, the messaging system that allows for smooth cross-border transactions. The U.S. and allies also sanctioned wealthy businesspeople with ties to the Kremlin, along with Russian President Vladimir Putin and Foreign Minister Sergey Lavrov.
The Treasury Department warned this month that cryptocurrencies are increasingly used to launder proceeds from drug trafficking, fraud and cybercrime and for sanctions evasion, though it’s still less common than the use of traditional fiat currency. Iran, North Korea and Venezuela have used cryptocurrencies to evade sanctions by mining bitcoin, robbing crypto exchanges and creating a sovereign cryptocurrency, respectively, according to a June memo from the House Financial Services Committee.
Cybercriminals in Russia have launched ransomware attacks and received payment in cryptocurrency to bypass the traditional financial system. Cybercriminals “highly likely to be affiliated with Russia” collected almost three-quarters of payments made in ransomware attacks last year, totaling more than $400 million in cryptocurrencies, according to the blockchain-tracking firm Chainalysis.
“Russia is the No. 1 ransomware actor in the world, so they clearly have the capacity to use cryptocurrencies outside the legal system,” Warren said in an interview. “That means we are at risk for watching Russia undercut the effectiveness of sanctions through the legal system by doing an end run through the crypto world.”
Senate Intelligence Chairman Mark Warner, D-Va., agreed cryptocurrencies are a potential weakness.
“There’s a lot of opaqueness. I’ve been briefed on this. I’ve heard this on the intel side,” Warner said in an interview. “The last thing we want to have is these unprecedented sanctions and then the oligarchs really getting away from it.”
Warren, Warner and Senate Banking Committee members, including Chairman Sherrod Brown, D-Ohio, and Sen. Jack Reed, D-R.I., sent a letter this month pressing Treasury for details on how it planned to tackle the threat.
‘There’s a fight coming’
Lawmakers, including Warren, say the risk increases pressure for comprehensive legislation to govern the industry.
Rep. Jim Himes, D-Conn., chairman of the House Financial Services subcommittee on national security, said the anonymity provided by cryptocurrencies sets the sector on a collision path with lawmakers.
“Make no mistake. There’s a fight coming, because there’s a strong impulse in the cryptocurrency community for anonymity,” Himes said. “I’m not sure that that’s a circle you’re going to be able to square. Congress is going to want to have mechanisms to get at the beneficial ownership of wallets, and that will be opposed.”
Himes wrote a provision in a House China competition bill that would extend to cryptocurrency exchanges the Treasury Department’s Financial Crimes Enforcement Network’s ability to require banks to surveil or cut off contact with entities suspected of money laundering. Even Republicans in favor of a light-touch approach to regulating cryptocurrencies say they’re concerned the assets could be used to evade sanctions.
“As the sanctions bite, Russia is going to be looking for alternative ways to transact,” said Rep. Andy Barr of Kentucky. Barr, the ranking Republican on Himes’ subcommittee, has warned that too much regulation of cryptocurrency could undermine U.S. competitiveness.
“I’ve always been concerned about an overreaction that would stifle innovation in the crypto digital asset space,” Barr said. “But clearly, Treasury needs some tools to be able to track crypto transactions to make sure that our sanctions regime is effective.”
The easiest place to unmask suspicious users in the crypto ecosystem is at exchanges where they buy in and cash out digital assets. Western exchanges are typically subject to anti-money-laundering and know-your-customer regulations, making it possible for law enforcement to subpoena information that can connect accounts to their owners.
“Some of that needs to be kind of explored in a classified setting, to be candid. But we are asking those questions,” Barr said. “At this point, I think they’re [Treasury] so focused on getting the primary sanctions in place, they haven’t gotten to the crypto exchanges yet. But that needs to happen relatively soon, as the war progresses.”
The White House supplemental spending request for Ukraine included $40.2 million for cyber, counterintelligence and cryptocurrency tools for the FBI, including software to help the agency track and seize digital assets used for illicit purposes.
Sen. Cynthia Lummis, R-Wyo., a member of the Senate Banking Committee, said the sanctions have led her to look again at legislation she’s drafting that would put forward a comprehensive framework to govern the cryptocurrency ecosystem.
Lummis, sometimes called the crypto queen of the Senate, owns between $150,000 and $350,000 in bitcoin, according to her personal financial disclosures.
“This whole scenario with Russia is forcing me to address issues I hadn’t previously thought about with regard to sanctions and bitcoin and other cryptocurrencies,” she said. “The existence of bitcoin and cryptocurrency is a reality. There’s no way to stop it, nor should there be. We have to learn to live with it and incorporate it into it the calculus we make when we consider our policy towards bitcoin and other cryptocurrencies.”
‘Cuts both ways’
Crypto supporters, including Jake Chervinsky, head of policy at the Blockchain Association, say fears that Russians could sidestep sanctions using the digital assets are “unfounded.”
“Crypto markets are too small, costly, & transparent to be useful for the Russian economy,” Chervinsky said on Twitter. “With Russia cut off from the world’s crypto industry, they can’t source nearly enough liquidity to matter.”
Salman Banaei, co-head of policy for the blockchain-tracking firm Chainalysis, said cryptocurrencies help law enforcement because they provide far more transparency than the traditional financial system. Cryptocurrencies, such as bitcoin, transact on blockchains — digital public ledgers — leaving a record of every transaction.
Identities are private, but digital tokens can be tracked as they change hands across the blockchain. Firms like Chainalysis can help law enforcement and crypto service providers by flagging accounts tied to suspected crimes, such as ransomware schemes or sanction evasion, or when a string of transactions started at an unregulated or sanctioned exchange not subject to anti-money-laundering regulations, Banaei said.
“Crypto is like any other electronic technology or internet-based technology. It’s faster, it’s easier, it’s more accessible, but that cuts both ways,” Banaei said. “It’s easier for criminals to get on board and start moving money around, but it’s also easier to track them down.”
Lawmakers interested in closing off cryptocurrencies to sanctions evaders should invest in the government’s investigative capacity, rather than overhauling the regulations governing the industry, Banaei said.
“One way you could do that is by investing in the resources to understand which wallet addresses are being used to evade sanctions,” he said. “Identify which wallet addresses are potentially being associated with sanctions evaders. Then, once you’re able to track them, then you can trace them, and you can cut them off from on-ramps and exit ramps very, very, very quickly.”
‘An enormous task’
But Mark Basa, global brand and business manager at crypto finance company HOKK Finance, said law enforcement lacks the expertise or resources to stop sanctioned Russians from obscuring and moving money through the blockchain.
“It’s such an enormous task that I don’t think that really any government will be able to take on that much workload on tracking certain people, because then you can just disperse the wallets against more addresses or give it to other people to make the transactions for you,” Basa said.
Himes said figuring out the identity behind a cryptocurrency wallet is a “challenge.” Warren said money launderers and sanctions evaders can obscure their identities before their assets even hit the blockchain.
“Finding out who put the value in at the front end or who took it out the back end is hidden through layers of concealment. There are not adequate regulations in place to make that public,” Warren said. “There’s a reason that drug dealers, cybercriminals and tax cheats use crypto, because they know that they can hide their identities before a transaction shows up in the blockchain.”