The US Senate has expressed grave concerns that the cryptocurrency market could hinder efforts to stifle Russia’s economy in the wake of its invasion of Ukraine, in an open letter to the Treasury.
“Russia may use cryptocurrencies to circumvent the broad new sanctions it faces from the Biden administration and foreign governments,” senators Elizabeth Warren and Mark Warner said in the letter published this week, as it emerged that virtual currency exchanges Binance and Coinbase will not impose blanket bans on Russian citizens.
“This could include the use of dark web marketplaces powered by cryptocurrencies to move funds and conduct transactions, 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 its currency into dollars, and ransomware attacks that would allow Russian actors to recoup revenues lost to sanctions.”
Furthermore, the letter expressed fears that the cryptocurrency industry is pushing back against sanctions, with Treasury regulator the Office of Foreign Assets Control (OFAC) stating in October: “Members of the virtual currency industry implement OFAC sanctions procedures months, or even years, after commencing operations…expos[ing] virtual currency companies to a wide variety of potential sanctions risks.”
OFAC itself did not escape criticism, with the senate noting that during the Trump administration, it had relied on voluntary self-disclosure in two-thirds of detected cases of sanctions evasion. The Senate has asked the Treasury to disclose specific figures for self-disclosure among sanctions violators in the virtual currency industry.
While it described in-house checks on clients conducted by crypto platforms as “bare-bones,” the Senate suggested that those that used third-party banking institutions for better security might be less problematic.
“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,” it said.
A growth industry for bad actors
The DeFi industry had “received nearly $1bn in value from illicit wallets” last year – which the Senate said was a staggering twenty times more than the previous year – further evidence of the crypto industry’s strengthening ties with cybercriminals, despite many recently expressing doubts about virtual currencies in the wake of the new sanctions against Russia.
The letter also warned that other pariah states had already proven the efficacy of using cryptocurrency to dodge sanctions, pointing to a UN report published last month that found North Korea had used up to $400m in stolen cryptocurrency to develop its nuclear weapons program.
Another report published by blockchain analytics firm Elliptic in 2021 found that Iran had also used “hundreds of millions of dollars in cryptocurrencies [...] to buy imports and lessen the impact of sanctions.”
The Senate in its letter is seeking clarity from the Treasury on what “additional tools, including legal authorities or funding, might be necessary for OFAC to ensure that cryptocurrency participants are not able to help Russia or other malign actors evade US and multilateral sanctions.”
The cryptocurrency market was valued at the end of last year at $3trn worldwide, according to a report by Bloomberg – although due to its extreme volatility, this figure is likely to fluctuate wildly.
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