It probably isn’t a surprise that today’s (March 17) Senate Banking Committee hearing on the role of crypto in supporting illicit activities focused heavily on sanctions busting — particularly with the addition of Michael Chobanian, founder of the KUNA crypto exchange and president of Blockchain Association of Ukraine, to the witness list.
However, it may come as a bit of a surprise that the witnesses were strongly of the opinion that bitcoin wasn’t a way for Russian oligarchs to spirit their money away more effectively than their megayachts. The strongest example of that came from Chobanian.
“I’m the person who is behind all the numbers,” he said. “I know how this happens, and it’s impossible, physically impossible, to transfer large amounts of money from fiat into crypto.”
Michael Mosier, a former acting director of the Treasury Department’s Financial Crimes Enforcement Unit (FinCEN) said much the same, arguing that sanctioned regimes “can’t flip a switch overnight and run a G20 economy on cryptocurrency without anyone noticing.”
For one thing, in order to buy cryptocurrency for rubles, someone has to want those rubles in the first place — and since they’ve lost almost half of their value lately, the liquidity just isn’t there, Mosier said.
Which is true when you’re talking about on- or off-ramping millions of dollars in fiat at once, but not necessarily when you’re bouncing it around the crypto industry. The Whale Alert website routinely reports — and tracks — crypto transaction in the tens of millions of dollars.
While agreeing that evading sanctions “at scale” is unlikely, Shane Stansbury — a former federal prosecutor and the Robinson Everett Distinguished Fellow in the Center on Law, Ethics, and National Security at Duke University School of Law — pointed to Iran and North Korea’s use of crypto to fund their regimes. It is, he said, “a huge problem.”
Which matches up with what a senior Biden administration official told reporters last week. While making clear that it would “aggressively combat the misuse of cryptocurrency, including the use of it to evade U.S. sanctions,” an official said, “We do not think [cryptocurrency] is a viable workaround to the set of financial sanctions we’ve imposed across the entire Russian economy and, in particular, to its central bank.”
For Better or Worse
Of course, that assumes that oligarchs haven’t amassed crypto fortunes over time — something Sen. Elizabeth Warren (D-Mass.) pointed out, giving the example of an oligarch who has amassed $1 billion in crypto.
In an increasingly testy exchange with blockchain intelligence firm Chainalysis’s co-founder and Chief Strategy Officer Jonathan Levin, Warren pointed to the use of crypto-specific techniques like coin mixing services and moving it into wallet on exchanges — such a DeFi’s decentralized exchanges, known as DEXs — without anti-money laundering (AML) requirements in evading sanctions.
Levin countered that the liquidity did not exist to do that at the billion-dollar scale for a variety of reasons, such as that the daily transaction volume of mixing services is about $30 million.
None of this impressed Sen. Warren, a frequent crypto critic, who pointed to a recent FinCEN warning that Russians “may attempt to use crypto and anonymizing tools to evade U.S. sanctions and protect their assets around the globe.”
She took the opportunity to announce the Digital Assets Sanctions Compliance Enhancement Act, a bill she wrote with 11 co-sponsors that is designed to shut down sanctions loopholes. This includes targeting cryptocurrency exchanges that are at high risk for sanctions evasion and strengthening FinCEN’s AML reporting requirements.
Levin argued, “The transparency of blockchains enhances the ability of policymakers and law enforcement to detect, disrupt and, ultimately, deter illicit activity.”
It is, he claimed, faster than traditional financial investigations, although more regulation of crypto — and more funding for law enforcement agencies training personnel in the techniques — is needed.
Stansbury disagreed, saying that while tracking movement can be faster, connecting the funds to actual people is far harder.
Stansbury added, “Some of cryptocurrency’s features — such as decentralized operation and control, and opportunities for anonymity — make it particularly enticing as a money laundering instrument.”
He also pointed to the small but growing number of merchants who accept crypto in payment, warning that, “as cryptocurrencies become more common and accepted, criminals could choose to keep their profits in cryptocurrency for use in other illicit activities.”
Fighting the Power
The flip side of sanctions evasion is getting funds where they need to go, Chobanian testified.
“For my country, which is fighting right now with bare hands, time is vital,” he said, pointing out that the official Ukrainian crypto fund has raised $50 million (and other channels have raised another $50 million, according to reports). “Crypto, which works 24/7, we receive the money instantly and we can spend the money instantly.”
While calling for cryptocurrency exchanges to step up enforcement of sanctions, he departed from the government’s call for exchanges to ban all Russian clients.
“Crypto remains a viable option for Russians who oppose the war and wish to stand up against Putin’s regime,” Chobanian argued.
Pointing to the ruble’s collapse, he said that “purchasing digital assets is an effective means by which ordinary Russian citizens can demonstrate their opposition to Putin’s regime by moving their savings out of the financial system of the Russian ruble.”
That’s something Mosier returned to in his prepared testimony, arguing, “When we speak of ‘illicit finance,’ we must not forget defenders of democracy whose financing might be considered ‘illicit’ to the autocrats and invading armies they resist.”
Mosier also noted that a U.S. program used cryptocurrency to transfer direct financial aid to 60,000 healthcare workers in Venezuela.
“The best way to send Office of Foreign Assets Control (OFAC)-authorized aid that would not be intercepted by the Venezuelan regime was to do it outside of their domestic banking system, through USDC cryptocurrency, and using Virtual Private Networks,” Mosier said. “No doubt the Venezuelan regime considered the use of those previously frozen assets ‘illicit finance,’ but to us, they were cryptographically-secure humanitarian aid.”
Mosier added that crypto payments are also more efficient.
“In the past few weeks, tens of millions of dollars worth of cryptocurrency were donated by the public to Ukraine — faster and more aid than the UN provided,” he said.
Which doesn’t really make the argument that bad actors can use crypto for illicit purposes any stronger.