A group of U.S. senators are asking the Treasury Department if it is capable of ensuring sanctions against Russian entities and individuals are enforced in the crypto markets as the invasion of Ukraine continues.
In a letter to Treasury Secretary Janet Yellen sent on Wednesday, Democratic Sens. Elizabeth Warren, Mark Warner, Sherrod Brown, and Jack Reed expressed concern over the possibility that Russia could use crypto to evade sanctions and inquired what the Treasury's capabilities in the space are and if it needs more tools, funding, or authority.
“We write to inquire about the Treasury Department’s progress in monitoring and enforcing sanctions compliance by the cryptocurrency industry and to express our concern that criminals, rogue states, and other actors may use digital assets and alternative payment platforms as a new means to hide cross-border transactions for nefarious purposes,” the letter states. “Given the need to ensure the efficacy and integrity of our sanctions program against Russia and other adversaries, we are seeking information on the steps Treasury is taking to enforce sanctions compliance by the cryptocurrency industry.”
That Russia could use cryptocurrency to evade sanctions is a fear that has been raised in the media and by Warren previously. However, cryptocurrency advocates and the Treasury itself have expressed that the risk of this happening at a meaningful scale is low.
"The scale of what they have to move, and where they have to move things from, [crypto’s] not necessarily going to be that concerning,” Todd Conklin, counselor to the deputy Treasury secretary, told Politico last week. Moving that much money through exchanges would cause “a bit more of a spike in the crypto market, in my view, than has been observed lately," he told the outlet.
In a tweet, Jerry Brito, director of D.C.-based cryptocurrency think tank Coin Center, highlighted this apparent "disconnect" and pointed to a Treasury report on money laundering that was released on Monday. That report stated that "the use of virtual assets for money laundering remains far below that of fiat currency and more traditional methods," although law enforcement has seen an uptick in crypto usage in various crimes including ransomware.
Popular blockchains such as Bitcoin and Ethereum are public, which means that funds are easily tracked by law enforcement, blockchain analysis firms, exchanges, and anyone with enough time on their hands. Spikes in trade volume on many exchanges are also easily discoverable by the public; this data already revealed this week that both Russians and Ukranians have been buying more crypto as their respective currencies lose value. If billions of dollars in rubles suddenly started flooding exchanges, observers would certainly see it. Even off exchanges, when it comes to a centrally-controlled stablecoin like Tether (USDT), the firm analyzes currency movements and has the ability to freeze funds if they run afoul of the law.
Indeed, American law enforcement appears to be very capable when it comes to tracking cryptocurrencies. For example, authorities recently arrested a U.S.-based couple for conspiracy to launder billions of dollars in Bitcoin that was stolen from an exchange in 2016 after tracking the funds; a crime that many assumed would never come to any sort of conclusion.
The picture isn't so rosy everywhere, however. The Senators' letter highlights DeFi, or Decentralized Finance, an emerging corner of the cryptocurrency industry characterized by complex investing mechanics, a YOLO attitude, and scams. Lots and lots of scams. "Unlike traditional financial institutions, or even the larger, centralized cryptocurrency exchanges, DeFi protocols rarely apply Know Your Customer/Anti-Money Laundering screenings to the activity occurring on their platforms," the Senators' letter says.
It's hard to imagine Russia laundering a meaningful amount of money through protocols with names like Magic Internet Money, however, and many DeFi projects run on top of public blockchains like Ethereum.
While sanctions cover the Russian government, its functionaries, and other important entities in the country like banks, average Russians are not being directly sanctioned as a whole right now. The sanctions also come with carve-outs that give Russia a continuing financial lifeline via its substantial energy exports.
Major crypto exchanges like Binance and Coinbase say they are enforcing all existing sanctions, and they have so far declined a request from the Ukrainian government to block all Russian users, citing the possible harm to average citizens seeking escape from the crashing ruble.