A month ago, the argument about how to regulate cryptocurrencies was solidifying as one that cast the need for strong consumer protection against the need for rules that encourage innovation.
In just seven days, that has been upended by the Russian invasion of Ukraine.
After strong growth and mainstreaming of cryptocurrencies took place over the course of 2021, the conversation had started shifting away from crypto as a tool of money laundering, terrorist financing and — thanks in large part to North Korea funding its nuclear program with crypto hacks — skirting sanctions.
It isn’t that House and Senate Republicans and Democrats didn’t agree that anti-money laundering (AML) regulations and other tools to prevent to use of cryptocurrency by bad actors wasn’t important. But before the Feb. 24 invasion, the legislative discussion had focused mostly on issues like whether dollar-pegged stablecoins should be issued only by banks, how to tax crypto transactions, and the question of whether almost all cryptocurrencies should be considered securities.
Crypto was also becoming a partisan issue, with elected officials like Sen. Cynthia Lummis of Wyoming advocating a loose hand while Sen. Elizabeth Warren of Massachusetts called for the strongest possible consumer protections and oversight of the industry.
That’s no longer the case. Or at least it has disappeared under the crypto-as-sanction-buster talk.
Getting Tough, Again
At a hearing Wednesday (March 2), Federal Reserve Chair Jerome Powell said the Russian sanctions issue “underscores the need for really congressional action” on cryptocurrencies.
“There isn’t in place the kind of regulation framework that needs to be there,” he said. “What’s needed is a framework, in particular ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist financing and just general criminal behavior, tax avoidance and the like.”
Compare that to December, when Powell and Treasury Secretary Janet Yellen clashed over whether banks should be the only stablecoin issuers. Yellen supported the toughening of rules while Powell — appointed by President Donald Trump and retained by President Joe Biden — supported Lummis’ opposition to the move, calling it “perplexing.”
Read more: Powell, Yellen Clash Over Stablecoin Regulation at Senate Hearing
Warren has been a leading proponent of far stricter regulation of the crypto industry and hasn’t changed her tone. But the topic has shifted from issues like consumer protection — she called decentralized finance (DeFi) “the most dangerous part of crypto” in December — to the industry’s willingness to help enforce sanctions
See more: Sen. Warren Calls DeFi the ‘Most Dangerous’ Part of Crypto at Senate Hearing
A letter Warren and three other senators sent Yellen Wednesday said there were strong signs “that the cryptocurrency industry may not be fulfilling its responsibility to comply with U.S. sanctions.”
Pointing to an October report by the Office of Foreign Assets Control (OFAC) the senators noted that its guidance said “many ‘members of the virtual currency industry implement OFAC sanctions policies and procedures months, or even years, after commencing operations … expos[ing] virtual currency companies to a wide variety of potential sanctions risks.’”
Crypto Was Being Heard
The clearest examples of the changing tone of crypto regulation came in three instances.
The first was the attempt by 99 senators to change a small provision in the $1 trillion infrastructure bill that could have caused big trouble for crypto miners and stakers. The move failed because changing a bill after it’s been passed required unanimous support, and one senator was miffed that the body’s rarely used action was directed at crypto rather than defense funding.
It was a moment that showed that the crypto community had more influence on Capitol Hill than it — or anyone else — understood.
Read more: Crypto’s Influence Shows as Treasury Promises Protection for Miners, Stakers
The second was at the end of January, when House members agreed to amend a section of the America Competes Act of 2022, removing a clause that would have given the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) more authority to unilaterally impose surveillance and prohibit some crypto transactions after a fight by industry lobbying group Coin Center.
“The Treasury Department should not have unilateral authority to make sweeping economic decisions without providing full due process of rulemaking,” said Rep. Ted Budd of North Carolina in statement at the time. “This draconian provision would not help America compete with China; it would employ China’s heavy-handed playbook to snuff out financial innovation in our own country.”
With all eyes focused on Eastern Europe — and the financial system moving to cut off Russia while mitigating the broader macroeconomic shocks that could follow — it isn’t likely to be an argument that will be heard anytime soon.
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