On March 17, 2022, Sen. Elizabeth Warren (D-MA) and other Democrats introduced the Digital Asset Sanctions Compliance Enhancement Act of 2022. Also that day, the U.S. Senate Committee on Banking, Housing and Urban Affairs (“Senate Banking Committee”) hosted a hearing entitled “Understanding the Role of Digital Assets in Illicit Finance.”
I. Digital Asset Sanctions Compliance Enhancement Act of 2022
Sens. Warren, Jack Reed (D-RI), Mark Warner (D-VA) and Jon Tester (D-MT) introduced the Digital Asset Sanctions Compliance Enhancement Act of 2022, which is co-sponsored by eight other Democratic senators, including Senate Majority Whip and Judiciary Committee Chairman Dick Durbin (D-IL). The bill is intended to address concerns that illicit actors may use digital assets to evade recent sanctions imposed in response to Russian military action in Ukraine.
Specifically, the bill would:
- require President Biden to identify foreign digital asset actors that are facilitating the evasion of sanctions imposed against Russia and authorize the President to satnction such actors;
- authorize the Secretary of the U.S. Department of the Treasury (“Treasury”) to prohibit digital asset platforms from transacting with cryptocurrency addresses in Russia;
- require the filing of Financial Crimes Enforcement Network (“FinCEN”) Form 114 (FBAR) by U.S. taxpayers engaging in offshore cryptocurrency transactions of over $10,000; and
- require Treasury to report on its progress in implementing the bill, as well as issue a public report identifying foreign digital asset trading platforms that pose a high risk for sanctions evasion and other illicit activities.
The bill follows a March 2022 letter to Treasury Secretary Janet Yellen from Sens. Warren, Warner and Reed, and Senate Banking Committee Chairman Sherrod Brown (D-OH), expressing their concerns about the potential for digital assets to be used for nefarious purposes. In addition, FinCEN issued an alert regarding potential Russian sanctions evasion earlier this month.
We note that the bill appears to still be in its early stages, as it does not currently have any Republican co-sponsors and faces some Republican opposition. Notably, during the recent Senate Banking Committee hearing (see section II of this post), Senate Banking Committee Ranking Member Pat Toomey (R-PA) raised concerns that the bill would have a “hugely negative impact on anybody in Russia engaged in any kind of crypto transactions.” However, we anticipate that the bill will inform discussions of future legislation, as well as potential oversight by the Senate Banking Committee, the U.S. House of Representatives Committee on Financial Services and/or individual legislators of actions taken by market participants and federal government agencies to address the use of digital assets to evade sanctions.
II. Senate Banking Committee Hearing on “Understanding the Role of Digital Assets in Illicit Finance”
The March 17 Senate Banking Committee hearing touched on a number of topics, with particular focus from Committee members on Ukraine’s use of cryptocurrency to support its efforts against Russia and Russia’s potential use of cryptocurrency to avoid sanctions. The witnesses included three representatives from industry and one university professor: Jonathan Levin (Chainalysis, Inc.), Michael Mosier (Oliver Wyman Group; Former Acting Director, FinCEN); Michael Chobanian (KUNA Exchange, Blockchain Association of Ukraine), and Shane Stansbury (Duke University School of Law).
In his opening statement, Chairman Brown called attention to offshore cryptocurrency companies not being subject to U.S. laws and the “fundamental” risks posed by cryptocurrency (for example, noting that Russian actors could use cryptocurrency to avoid sanctions). He advocated for a “whole-of-government approach” to ensuring that cryptocurrency does not endanger consumers and U.S. national security, praising President Biden’s recent Executive Order on Ensuring Responsible Development of Digital Assets. In contrast, Ranking Member Toomey asked that the Senate Banking Committee consider both the “risks” as well as the “incredible potential” that cryptocurrencies present, emphasizing the need to provide “much-needed [regulatory] clarity” in order to protect “America’s longstanding tradition of fostering technological innovation.”
The hearing focused on the following topics:
- Illicit Finance and Sanctions Evasion. Chairman Brown and other Democrats raised concerns about the use of digital assets to perpetrate financial crime and evade U.S. and international sanctions. Warner noted his support of Sen. Warren’s bill, citing his belief that the lack of transparency around cryptocurrency has allowed Russian oligarchs to convert currency and avoid sanctions. Sens. Warren and Bob Menendez (D-NJ) asked about potential links between Russian cryptocurrency miners and the Russian government, but Sen. Steve Daines (R-MT) and several witnesses stated that they currently had no knowledge of Russian President Vladimir Putin or Russian oligarchs using cryptocurrency to evade sanctions in a meaningful way.
- Use of Cryptocurrency to Distribute Foreign Aid. One witness mentioned that, because some cryptocurrency transfers are relatively inexpensive and can be processed more quickly than traditional bank transfers, cryptocurrency could be an effective method of distributing aid to Ukraine.
- Cryptocurrency Tax Reporting Requirements. Ranking Member Toomey expressed concerns regarding the U.S. Internal Revenue Service (“IRS”) requirement that financial institutions (or other persons or entities) that receive more than $10,000 in cash in a single transaction or in related transactions must file IRS Form 8300. In Ranking Member Toomey’s view, the majority of such large transactions are legitimate, and the system is an unnecessarily “expensive, inefficient mechanism.”
- Ransomware. Sen. Menendez expressed interest in helping victims of ransomware who make payments in cryptocurrency avoid inadvertently committing sanctions violations.
- Use of Blockchain Technology for Law Enforcement. Bill Hagerty (R-TN) and Chris Van Hollen (D-MD) noted that blockchain can be traced to identify illicit actors; for example, the Federal Bureau of Investigations was able to gain access to the blockchain wallet key in the Colonial Pipeline ransomware case.
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