Digital asset

US Treasury plea for anti-‘crypto’ tools gets mixed reception from Senate committee

The U.S. Treasury Department continues to press Congress for additional tools to go after rogue ‘crypto’ outfits, most notably the Tether (USDT) stablecoin that facilitates terrorist financing and the evasion of economic sanctions by countries such as Iran and Russia.

On April 9, Treasury’s Deputy Secretary Adewale Adeyemo made a solo appearance before the Senate Committee on Banking, Housing and Urban Affairs. Adeyemo was there to provide an update on the department’s efforts in Countering Illicit Finance, Terrorism, and Sanctions Evasion.

Late last year, Adeyemo called out “dollar-backed stablecoin providers” based in foreign jurisdictions for having “the privilege of using our currency” without the responsibility to observe U.S. law. In February, the Treasury’s strategies for combating illicit financing cited multiple concerns regarding digital asset involvement in everything from terrorism to sanctions evasion to Mexican cartel drug trafficking.

Adeyemo’s prepared remarks for the Senate hearing focused almost entirely on digital assets. Adeyemo noted that as the Treasury targets criminals’ and terror groups’ traditional finance channels, “they look for innovative ways to move resources,” including taking “advantage of innovations in cryptocurrencies … The more effective our targeting has been, the more reason there is for these terrorist groups to look into virtual assets.”

Meanwhile, rogue states like North Korea continue to make bank from hacking ‘crypto’ operators/individuals, while “we’ve seen Russia increasingly turning to alternative payment mechanisms—including the stablecoin Tether—to try to circumvent our sanctions and continue to finance its war machine.”

A recent Wall Street Journal report detailed how Russian arms dealers are using Tether to bypass U.S. economic sanctions and purchase weapons—including drone technology—from countries such as China and Iran. The article stated the situation plainly: “For Vladimir Putin’s war machine, Tether has become indispensable.”

Russian importers “make transfers in rubles into Russian bank accounts operated by middlemen who convert the rubles into Tether and pay out local currency to their foreign suppliers in places like China and the Middle East.” According to one individual who dealt extensively in this game of fiscal cat-and-mouse, “USDT is a key step in the chain.”

One of these importers noted that Tether was preferable because the company behind Tether “rarely froze digital wallets” regardless of how much ‘dirty money’ may be flowing through them. Tether recently began freezing a handful of wallets in an apparent bid to shake off its criminal-adjacent stigma, but many of these wallets were frozen long after the funds they once held had flown the coop.

Tether’s market cap currently stands at just over $107 billion, around $2.5 billion higher than the week prior and roughly $12 billion higher than three months ago. Tether’s latest minting spree temporarily breathed new life into the struggling BTC token, which keeps retreating from each new record-high fiat price once people realize you still can’t do a damn thing with it beyond scream ‘higher, dammit!’ once its upward momentum fades.

What Treasury wants

Adeyemo’s written testimony proposed three additional tools for enhancing the Treasury’s ability to combat illicit financing, including “a secondary sanctions tool targeted at foreign digital asset providers that facilitate illicit finance … unlike banks, foreign cryptocurrency exchanges and some money services businesses do not have or depend on correspondent accounts for all of their transactions.”

The Treasury is also keen on “modernizing and closing gaps in existing authorities by expanding their reach to explicitly cover the key players and core activities of the digital assets ecosystem. Entities such as virtual asset service providers (VASPs) and cryptocurrency exchanges … play a major role in how currency moves digitally and should be regulated as such.”

Finally, the Treasury wants to “address jurisdictional risk from offshore cryptocurrency platforms” by clarifying that “our authorities can reach extraterritorially when digital asset entities harm our national security while taking advantage of our financial system. This will also promote a level playing field for U.S.-based VASPs.”

The hearing

Before Adeyemo delivered his prepared remarks, Committee chair Sen. Sherrod Brown (D-OH) issued his opening statement, noting bad actors’ growing reliance on digital assets. Brown cited the Journal report on Russia’s interest in Tether and North Korea’s ongoing theft of digital assets. Brown said these countries were turning to ‘crypto’ because “it’s easier to move money in the shadows without safeguards like ‘know your customer’ rules or suspicious transaction reporting.”

Brown suggested that when crooks innovate, legislation must do likewise. Brown urged his colleagues to “work together to close these loopholes and protect our national security” while warning that crypto platforms must “play by the same rules as other financial institutions.”

Ranking member Sen. Tim Scott (R-SC) agreed that the U.S. needed to “leverage our toolkit to tackle international threats” but seemed less interested in expanding the Treasury’s powers than getting in digs at President Joe Biden. Scott called digital assets “the scapegoat of the Biden administration,” adding that most of Iran’s illicit activities were firmly rooted in traditional finance.

In one of the day’s more ironic moments, Sen. Robert Menendez (D-NJ), who is currently
facing charges related to his own illicit financial dealings, suggested that digital asset service providers shouldn’t be exempt from following the law.

Sen. Mark Warner (D-VA) was on board with adding more arrows to Treasury’s enforcement quiver, saying such tools would “discourage other actors from assisting crypto movement.” Last year, Warner was one of the sponsors of the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act, which focused on money laundering and sanctions evasion related to decentralized finance (DeFi).

Pushback came from Sen. Thom Tillis (R-NC), who suggested that the Treasury’s proposals wouldn’t be all that effective in a distributed ledger environment. Tillis also expressed concern that the U.S. was “losing ground” in the digital asset space and thus advised a “lean regimen” for enforcement.

Not so coincidentally, Tillis and Sen. Bill Hagerty (R-TN) released a discussion draft of their
Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems (ENFORCE) Act the day before the hearing. Tillis claimed his Act would “stop bad actors who launder with cryptocurrency” without providing “a license for heavy-handed, regulatory-obsessed lawmakers to regulate an entire industry into oblivion.”

Tillis said his ‘crypto’ focus was on Mexican cartels laundering drug trafficking proceeds “in the billions,” citing a recent Drug Enforcement Agency briefing. Tillis suggested to Adeyemo that a future joint DEA/Treasury briefing would be one he’d attend.

Sen. Elizabeth Warren (D-MA) lived up to her anti-crypto reputation by claiming that you could basically “name your bad guy and crypto is the way they move money around.” But Warren went further, targeting “validators” for “processing transactions for North Korea” and other bad actors while “pocketing fees from those transactions.”

Warren claimed that Iran was a major source of validators, earning “millions” from processing innocuous transactions. Warren asked Adeyemo if Iran would earn even more via these methods as the crypto market expands, to which Adeyemo replied that “we should expect this to happen.”

Following some more Biden-bashing by GOP senators, Sen. Catherine Cortez Masto (D-NV) brought the subject back to digital assets by noting the Treasury’s Office of Foreign Assets Control (OFAC) having identified the “pervasive and deep” involvement of crypto in drug trafficking.

Adeyemo used this opportunity to reiterate the need to target “dollar-backed” crypto entities while emphasizing the need to communicate to tradfi institutions “not to engage with noncompliant crypto operators.”

Circle’s ears are burning

The night before the hearing, Paul Grewal, chief legal officer at the Coinbase (NASDAQ: COIN) digital asset exchange, tweeted his reaction to Adeyemo’s written testimony. Grewal claimed that “U.S. security interests are served by centering dollar-denominated stablecoins in the home of the dollar.” It’s worth noting that Coinbase is a partner in the USDC stablecoin issued by U.S.-based Circle, Tether’s closest rival.

During a February hearing of the House of Representatives Financial Service Committee (FSC), Circle’s senior director of global policy and regulatory strategy, Caroline Hill, all but demanded that the federal government target the alleged custodian of Tether’s alleged billions in Treasury bills, Wall Street giant Cantor Fitzgerald (NASDAQ: ZCFITX). Hill claimed the government should “ensure it’s using its authority when there are those U.S. touchpoints.”

Also on Monday, Circle boss Jeremy Allaire tweeted a link to an op-ed by Circle’s chief strategy officer Dante Disparte that sought to distinguish between bad actors and the (alleged) ‘crypto’ good guys. Disparte urged the House to pass the Clarity for Payment Stablecoins Act that would require all stablecoin issuers to comply with U.S. anti-money laundering (AML), countering terrorist financing (CTF) and sanctions obligations.

It’s a long way to the top if you wanna pass a bill

As the Senate hearing was underway, Clarity Act sponsor Rep. Patrick McHenry (R-NC) told a Washington audience that he was optimistic that “we can get our stablecoin policy sent through and signed into law” in the current legislative session.

But Sen. Warren appears intent on strangling the Act in its crib, at least, based on a letter
she just sent McHenry and Rep. Maxine Waters (D-CA), the ranking member of the House committee that McHenry chairs. Waters is far less enthusiastic about the wonders of so-called ‘Payment Stablecoins,’ likely because she knows it’s an artificial construct designed to promote Circle while kicking Tether.

Warren’s letter gets straight to the point, noting the threats that stablecoins pose to “consumer protection and the safety and soundness of the banking system.” Warren claims efforts “to fold stablecoins deeper into the banking sector could amplify and entrench these risks rather than mitigate them.”

Warren illustrated this point by citing stablecoins’ popularity with terrorists,
romance/investment scammers and sanctions evaders. But Warren also slammed Circle, the primary beneficiaries of McHenry’s Act, for the $3.3 billion bailout that Circle required from the federal government following the March 2023 failure of Silicon Valley Bank. (Circle had made the ill-advised decision to store the sum in a single uninsured SVB account.)

The gist of Warren’s letter is that no stablecoin should be integrated into the traditional finance sector, nor should Congress “extend any of the concomitant safety net protections to stablecoin issuers” unless they’re subject to the same regulations that govern banks and other tradfi institutions.

This deeply dysfunctional Congress has found it difficult to pass any contentious legislation, and that hill only gets steeper in a presidential election year. The current plan is to take off nearly the entire month of August, reconvene for a few weeks in September, and then take off all of October.

The post-election lame-duck session that starts mid-November and ends before Christmas appears the best shot any crypto bill will get this year, given the traditional (and shameful) practice of tacking unrelated bills onto must-pass legislation. And with many legislators having already indicated their plans to retire and others likely going down to defeat in November, it may prove a particularly good time to make legislative sausage.

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