On April 9, the Senate Banking Committee held a hearing entitled “An Update from the Treasury Department: Countering Illicit Finance, Terrorism and Sanctions Evasion.” The witness in the hearing was:
- The Honorable Adewale O. Adeyemo, Deputy Secretary, Department of the Treasury.
Below is a summary of the hearing prepared by Delta Strategy Group. It contains several high-level takeaways from the hearing, followed by opening statements and witness testimony, and a summary of the Q&A portion.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Today’s hearing discussed the regulation of digital assets and cryptocurrency platforms, particularly in the context of combating illicit finance and terrorist financing.
- Republicans largely expressed concerns about digital assets being unfairly targeted in regulatory efforts to address illicit financing activity, raised questions about the application of existing regulations to Distributed Ledger Technology (DLT), and inquired about Treasury’s ability to address crypto’s role in illicit drug trafficking.
- Democrats largely stressed the importance of ensuring that crypto platforms adhere to the same rules as traditional financial institutions, inquired about Treasury’s efforts to step up enforcement of existing laws, and the need for additional tools to address terrorist financing, and asked about the risks associated with crypto mixers and the necessity of updating definitions in regulatory frameworks.
SUMMARY
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
- Congress must ensure that crypto platforms play by the same rules as other financial institutions. Congress needs the tools to crack down on illicit finance with digital assets, just as we would with any other asset. There are gaps in illicit finance authorities over digital assets, and it is critical Congress works to close any loopholes and protect our national security. Given the range of threats we face, it is clear that the administration needs to do more to use its illicit finance tools to stop terrorism.
Ranking Member Tim Scott (R-SC)
- Congress must leverage our international toolkit to stop bad actors, curb illicit activity, and protect American families. Agencies like Treasury already have robust toolkits available to stop the flow of illicit money and drugs across our border, and Congress is willing to provide additional direction.
The Honorable Adewale Adeyemo, Deputy Secretary, Department of the Treasury
- Over the past several years, terrorist groups have been trying to take advantage of innovations in cryptocurrencies. While Treasury has had some success in rooting out illicit finance in the digital asset ecosystem, Treasury needs to build an enforcement regime that can prevent this activity as more terrorists, transnational criminals, and rogue states turn to digital assets. The use of virtual assets by bad actors will only grow without Congressional action to provide Treasury with the necessary tools to prevent illicit finance.
- Treasury proposes three reforms for Congress to make to improve security: (1) including the introduction of secondary sanctions targeting foreign digital asset providers aiding illicit finance, to adapt to technological changes, (2) modernizing existing authorities to regulate emerging entities like virtual asset service providers and cryptocurrency exchanges, and (3) addressing jurisdictional risks by clarifying authorities to reach offshore cryptocurrency platforms impacting national security and ensuring fairness for U.S.-based entities.
Discussion
Brown (D-OH): Can you elaborate on potential gaps in digital asset regulation as observed by Treasury? Adeyemo: Crypto facilitates illicit activity as it makes it easier for bad actors to obtain financial resources.
Scott (R-PA): The White House has reduced barriers to engage in illicit finance activity through electricity waivers with expanded currency access to euros, licenses, and further billion-dollar payouts. I have concerns that digital assets have become a scapegoat of this administration.
Menendez (D-NJ): While Congress works on an updated digital asset framework, what is Treasury doing to step up enforcement of existing law? Adeyemo: Treasury has used Section 311 of the U.S. PATRIOT Act, which provides the agency with a range of options that can be adapted to target specific money laundering and terrorist financing risks most effectively. We have particular concerns with what we saw with Hamas utilizing digital assets, and we are focusing attention on crypto mixers.
Warner (D-VA): What additional tools does Treasury need to address terrorist’s access to funds regardless of their origin? Adeyemo: Terrorist organizations use cryptocurrencies, and it would be helpful if Treasury could target foreign digital asset providers with secondary sanctions.
Tillis (R-NC): Congress should implement regulation for digital assets that will allow the industry to thrive. Do you agree that the Banking Secreary Act (BSA), Know Your Customer (KYC), and Anti-Money Laundering (AML) regulations should apply to DLT? Adeyemo: Treasury would have to take a different approach to regulation depending on the mode of financing, and the agency is committed to using tools in a risk-based manner.
Warren (D-MA): Stablecoins facilitate the conversion of dollars into crypto and crypto into dollars, serving as an on-ramp into the crypto world. If Congress is going to create new on-ramps, increasing crypto traffic, through the current House Stablecoin bill, then it is crucial to have a regulatory framework that establishes anti-money laundering regulations, so terrorist organizations do not have the opportunity to profit.
Cortez Masto (D-NV): Does Treasury have the tools it needs to address the use of crypto as a facilitator of illicit drug trafficking activity? Adeyemo: Treasury needs the ability to go after cryptocurrencies that claim to be backed by the dollar but are trying to escape U.S. jurisdiction. Treasury also needs to update the definitions in BSA/AML/KYC rules to include the crypto ecosystem. Treasury needs to have a secondary sanctions regime to prevent traditional financial institutions from engaging with parts of the crypto ecosystem that are doing illicit transactions.
Cortez Masto (D-NV): Can you explain the risks that mixers pose? Adeyemo: Mixers help entities hide their identity and facilitate the movement of money illicitly through the crypto ecosystem. Without the tools Treasury has requested from Congress, Treasury will not be able to go after these parts of the virtual currency ecosystem.