US lawmakers and Fed chair push for crypto regulation in wake of Russia sanctions

Federal Reserve Chair Pro Tempore Jerome Powell and some members of the U.S. House of Representatives called for congressional action on crypto in response to discussions about Russia potentially evading sanctions.

In a Wednesday hearing of the House Financial Services Committee on “Monetary Policy and the State of the Economy”, California Representative Juan Vargas asked Powell if cryptocurrency could be a "way out" for Russia looking for financial transactions in the wake of the U.S. and European Union cutting the country off from the SWIFT payments network. The Fed chair said that the situation with Russia "underscores the need for really congressional action on digital finance, including cryptocurrencies," adding:

"There isn’t in place the kind of regulation framework that needs to be there [...] What’s needed is a framework, in particular ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist financing and just general criminal behavior, tax avoidance, and the like."

Connecticut Representative Jim Himes echoed Powell’s sentiment at the hearing, lauding the effectiveness of the sanctions against Russia. However, he added that the U.S. not leading the world in regulatory clarity of cryptocurrencies left the door open to foreign nations that may not always have the best intentions.

“It is time, in fact it is past time for all of us to lead on creating a regulatory environment in which we rather than the world’s despots, terrorists, and money launderers benefit from the emergence of cryptocurrency including a central bank digital currency,” said Himes. “It is time for all of us to act.”

On the other side of the hill, Senate Banking Committee members Elizabeth Warren, Mark Warner, Sherrod Brown, and Jack Reed penned a letter to Treasury Secretary Janet Yellen on Wednesday expressing concerns that Russia and other nations could use crypto to “hide cross-border transactions for nefarious purposes” including undermining sanctions. The lawmakers cited North Korea using “stolen cryptocurrency” to fund its nuclear weapons program, and Iran promoting Bitcoin (BTC) mining while under U.S. sanctions.

“There are growing concerns that Russia may use cryptocurrencies to circumvent the broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine,” said the four senators. “This could include the use of dark web marketplaces that are powered by cryptocurrencies to move funds and conduct transactions; the use of crypto wallets and mixing services that allow sanctioned entities to transfer and hide their wealth; deployment of a digital ruble that would allow Russia to conduct foreign trade without converting their currency into dollars.”

Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain. U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets. https://t.co/4lCUNcUC29

— Elizabeth Warren (@SenWarren) February 28, 2022

The lawmakers requested information on the steps the Treasury Department was taking to “enforce sanctions compliance by the cryptocurrency industry.” The letter also implied that the department’s Office of Foreign Assets Control, or OFAC, was becoming increasingly reliant on “voluntary self-disclosure from sanctions violators for enforcement,” an approach “ill-suited” for the crypto space.

Related: Crypto could bypass President Biden's 'devastating' sanctions on Russian banks and elites: Report

The OFAC issued regulations effective on Tuesday warning U.S.-based companies and individuals not to facilitate crypto transactions sent to certain Russian nationals and banks, in compliance with sanctions ordered by the Biden administration. However, Senators Warren, Warner, Brown, and Reed are seeking additional clarification from the Treasury Department on OFAC’s tools, coordination with foreign governments, and other challenges enforcing sanctions when dealing with cryptocurrencies by March 23.

“Strong enforcement of sanctions compliance in the cryptocurrency industry is critical given that digital assets, which allow entities to bypass the traditional financial system, may increasingly be used as a tool for sanctions evasion,” said the four senators.