(Kitco News) – The growth of the crypto industry over the past few years has excited investors and energized the cryptocurrency community, but it has also given bad actors a way to work around sanctions and other protective measures, according to U.S. Treasury Deputy Secretary Adewale Adeyemo.
Adeyemo appeared before the Senate Banking, Housing and Urban Affairs Committee on Tuesday, where he laid out the steps needed to help protect the American public from the downsides of decentralized currencies and finance.
“As we take steps to cut terrorist groups and other malign actors off from the traditional financial system, they look for innovative ways to move resources,” he said. “Over the past several years, we have seen terrorist groups trying to take advantage of innovations in cryptocurrencies.”
He said the main problem is that the use of cryptocurrencies and decentralized finance (DeFi) allows bad actors to “hide their identities and move resources using virtual currency.” Despite the Treasury’s best efforts, “malign actors” continue to “seek new ways to move their resources in light of the actions we are taking to cut them off from accessing the traditional financial system.”
While efforts to cut these groups off from the traditional financial system have been successful, “The more effective our targeting has been, the more reason there is for these terrorist groups to look into virtual assets,” Adeyemo said. “And, to be clear, it’s not only terrorist groups, but state actors like the DPRK and Russia as well.”
He noted that the Democratic People's Republic of Korea (DPRK) dedicates extensive resources to “acquire, launder, and store illicit revenue” through the use of “anonymity-enhancing technologies like mixers to hide the sources of its funds,” and said the country “leverages over-the-counter digital assets traders to acquire fiat currency.”
“In addition, 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,” Adeyemo said.
For these reasons, he called for the creation of “an enforcement regime that is capable of preventing this activity as more terrorists, transnational criminals, and rogue states turn to digital assets.”
Adeyemo put forward three proposals intended to help strengthen counter-terrorist financing authorities.
“The first is the introduction of a secondary sanctions tool targeted at foreign digital asset providers that facilitate illicit finance,” he said. Unlike banks, which the Treasury holds some sway over due to correspondent accounts, “foreign cryptocurrency exchanges and some money services businesses do not have or depend on correspondent accounts for all of their transactions.”
“A new secondary sanctions tool would help Treasury to evolve its targeting capabilities and would account for the technological changes that have rendered highly effective tools in traditional payments contexts less effective against virtual currencies,” he said.
The second reform focuses 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,” Adeyemo said. “Entities such as virtual asset service providers (VASPs) and cryptocurrency exchanges didn’t exist when the BSA and IEEPA were enacted, but we know that today, they play a major role in how currency moves digitally and should be regulated as such.”
The third reform addresses jurisdictional risk from offshore cryptocurrency platforms, “which is a key challenge,” he said. “By reforming existing authorities, we can clarify 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.”
Adeyemo said there is a “clear overlap between these proposals and the bills coming out of this Committee,” and the “use of these emerging technologies by illicit actors can have impacts on the national security, foreign policy, and economy of the United States.”
“That’s why the United States has a strong interest in ensuring that our tools and authorities are available and ready to mitigate the risks in this quickly evolving ecosystem, including for dollar-based digital assets in particular,” he said. “My team has been actively involved in providing technical assistance on these topics and we are working to find solutions that balance the threat, our current capabilities, and where we may require additional authorities.”
“We all share the common aim of ensuring that in the pursuit of technological innovation, we do not disregard the safeguards that instill trust and reliability in the U.S. financial sector,” Adeyemo concluded. “While we continue to assess that terrorists prefer to use traditional financial products and services, we fear that without Congressional action to provide us with the necessary tools, the use of virtual assets by these actors will only grow.”
