Digital currencies could undermine the impact of sanctions imposed by the United States, a report by the Treasury Department has stated. As per the report, targets of U.S. sanctions are turning to digital currencies to circumvent the U.S. dollar-dominated global financial system, eroding the effectiveness of the U.S. sanctions.
The United States has relied on financial sanctions to influence global policy for decades, leveraging the ubiquitous use of the USD as a global reserve currency. These sanctions are seen as a more effective and less costly tool compared to military intervention.
According to The New York Times, there are now about 9,000 economic sanctions in place by the U.S. to punish countries like North Korea, Venezuela, Russia and Iran for terrorism, human rights violations and other activities the U.S. deems to be going against international law or its national interests.
In the Trump era, the U.S. was issuing about 1,000 sanctions a year, a record high. His successor President Joe Biden is on track to impose about 900 sanctions this year, following in the steps of Trump.
Digital currencies pose one of the biggest challenges to such sanctions, the report noted. Wally Adeyemo, the deputy secretary of the Treasury commented, “In order for sanctions to remain effective, we need to address several critical issues.”
Adeyemo, who is expected to testify before the Senate Banking Committee about the report, added, “Rising risks from new payment systems, the advent of digital assets, cyber criminals, strategic economic competitors and situations where careful calibration is needed to ensure sanctions do not inhibit the flow of legitimate humanitarian aid to those in need.”
Digital currencies, CBDCs and leadership vacuum
Aside from digital currencies, the U.S. sanctions also face danger from the rise of central bank digital currencies, especially by its economic rivals. China’s digital yuan is in an advanced stage of development and it could offer countries like Iran and Russia an alternative to the U.S. dollar for global trade, experts warn.
Iran has proven that countries facing sanctions from the U.S. can still thrive in global trade. The Middle Eastern country reportedly saw its oil production shoot up in recent years, with China being its biggest market. This is despite the U.S. government tightening its sanctions against the country.
“We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions,” the report stated.
The U.S. Treasury didn’t disclose in detail how it intends to increase the impact of its sanctions at the face of rising threats.
On digital currencies, it called for modernizing its technology, infrastructure and workforce.
“Treasury should invest in building its technological capabilities and deepening its institutional knowledge, especially in the evolving digital assets and services space, to support the full sanctions lifecycle of activities,” it stated.
The U.S. government’s challenges are compounded by a leadership vacuum at key divisions in the Treasury Department. Republican Senators have blocked Biden’s two nominees, Brian Nelson and Elizabeth Rosenberg who had been tapped to lead the Terrorism and Financial Intelligence and Terrorism Financing divisions respectively.
The Terrorism and Financial Intelligence division, in particular, has not had a leader since late 2019 when Sigal Mandelker stepped down from his role. Speaking to the NYT, one top official at Treasury claimed the department has been unable to operate properly since then and is in dire need of a leader to play its role in promoting national security.
Under Janet Yellen, Treasury has focused more on digital currencies, especially in regards to their use in ransomware. As CoinGeek reported, the department imposed sanctions on Suex exchange in Russia for processing a huge amount of illicit funds. This was the first time that sanctions had been imposed on a digital currency exchange.
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