The Unnoticed OFAC Budget Ask in Last Week’s Crypto Congressional Hearing


U.S. Sen. Elizabeth Warren wants to task the Biden administration and Treasury Department with monitoring crypto transactions for fear of sanctions violations. The two Treasury agencies that would do so might already have the authority they need – but not the money.

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The narrative

U.S. Sen. Elizabeth Warren’s (D-Mass.) new bill announced during a recent congressional hearing drew the ire of the crypto industry. What seems to have garnered less attention are some of the statements made by the hearing’s witnesses.

Why it matters

Federal agencies are already tasked with monitoring illicit transactions, including crypto-related ones. What they might still need is a budget promised but yet to be delivered.

Breaking it down

Last week, Warren introduced the “Digital Asset Sanctions Compliance Enhancement Act of 2022,” a bill that would authorize the U.S. government to identify and sanction crypto companies that are not based in the U.S. but which facilitate transactions on behalf of individuals on the U.S. sanctions list.

Warren introduced the bill during a Senate Banking Committee hearing titled “Understanding the Role of Digital Assets in Illicit Finance,” which by and large seemed fairly substantive.

A lot has been written about this bill in the four days since its introduction. Rather than retread questions about the bill’s constitutionality, whether it has sufficient support to pass or whether it solves an existing issue, I want to focus on another aspect.

I’ll let Michael Mosier, currently at Espresso Systems and formerly of the Financial Crimes Enforcement Network (FinCEN) and Chainalysis, explain:

“Fifteen months after the passage of landmark [anti-money laundering] modernization legislation, none of the tens of millions of dollars needed to implement it has been appropriated.”

Mosier was one of the four witnesses in last week’s panel. In his pre-written testimony, which he read as his opening statement, he recommended Congress pass a proper budget, the one “that was due last October.”

He went on to explain that FinCEN and the Office of Foreign Assets Control – the Treasury Department wing that oversees sanctions – have not received $74 million ($64 million for FinCEN, $10 million for OFAC) they should have after the Anti-Money Laundering Act of 2020 was passed as part of the broader National Defense Authorization Act.

Congress has passed continuing resolutions rather than a proper budget for 2021. Under these CRs, funding levels basically remain frozen at their 2020 levels. The new funds the agencies should have received would go to boosting their personnel and technology support, Mosier said in his testimony.

“Empower FinCEN to use the data already coming to them before burdening them – and industry – with additional data collection for which they will be asked what good use they made of it,” Mosier said. “They are being set up for failure by unfunded mandates.”

Which brings us back to Warren’s bill. I emailed two press aides asking if Warren would include a funding provision (among other things).

The bill itself would:

  • Have the U.S. President (guessing this means Treasury) write a report identifying non-U.S.-based crypto exchanges that engage with sanctioned Russian individuals
  • Have the President (Treasury?) sanction these individuals and exchanges
  • Allow the U.S. Treasury Secretary to block U.S. crypto exchanges or exchanges operating in the U.S. from operating in Russia or facilitating transactions for Russia-based individuals
  • Have FinCEN file currency transaction reports for individuals who transact more than $10,000 in crypto through at least one offshore account
  • Have the Treasury Secretary identify any resources that Treasury needs 120 days after the bill is signed into law
  • Have the Treasury Secretary identify any exchanges that are “high risk” for sanctions evasion and other crimes

Point 4 above strongly resembles a provision in the unhosted wallet rule the industry was intensely focused on at the end of 2020 (albeit the less-unpopular provision – on the face of it this would bring crypto reporting in line with existing rules for cash).

The rest of it seems more focused on this theoretical issue that crypto is being used to evade sanctions.

In my email to Warren’s press folks, I asked:

  • If there was any data or evidence that suggests crypto is being used to evade sanctions
  • How the FinCEN proposal (reporting individuals who transact with more than $10,000 per day) ties into the Russia-specific provisions
  • What authorities the bill provides for that FinCEN/OFAC don’t already have
  • Whether Sen. Warren will include a funding provision for these new tasks

I did not receive a response to my email.

Now, to be clear, Warren’s concerns are not unwarranted. Her stated concern, which she has reiterated time and again, is that Russian oligarchs or the Russian government might turn to crypto as a tool to evade sanctions resulting from Russia’s invasion of Ukraine. Which is certainly possible.

It seems incredibly unlikely at this point the Russian government will use crypto as a sanctions evasion tool for a variety of reasons, which I’ve discussed in past editions of this newsletter.

Individuals, on the other hand, may be better able to take advantage of crypto. Even here, however, it seems unlikely there will be any crypto-for-sanctions-evasion at scale. Several Treasury officials, on the record, have said they’re not concerned about this issue.

Nellie Liang, the undersecretary for domestic finance at the Treasury Department, told Reuters the U.S. government has seen an increase in digital asset usage for illicit finance, but it’s a “fairly small” amount of transactions.

“Of course, we recognize we may not see everything, but there is a fair amount of oversight. At this point, we just don’t see that it could be used in a large-scale way to evade sanctions,” she told the news service.

During the hearing, Warren asked Jonathan Levin of Chainalysis whether oligarchs could break their fortunes into chunks of $100 million, convert that into crypto and use that to evade sanctions.

Chainalysis has software that can track these funds, even if mixers or chain hopping tools are used, Levin said.

Shane Stansbury, a former cyber crimes prosecutor and current fellow at Duke University, would only go so far as to say crypto for sanctions evasion is “theoretically possible.”

“Obviously, it’s hard but at least if [an oligarch] is able to go to a friendly jurisdiction and use cryptocurrency exchanges or some other platform that’s not in compliance with internationally recognized anti-money laundering standards as you’ve suggested, that is possible,” he said.

Changing of the guard

Federal Reserve Vice Chair for Supervision nominee Sarah Bloom Raskin withdrew her name from consideration last week. Almost immediately after, the Senate Banking Committee voted to advance the nominations of Fed Chair Pro Tempore and Chair nominee Jerome Powell, Fed Vice Chair nominee Lael Brainard (currently a Fed governor) and Fed board nominees Philip Jefferson and Lisa Cook.

  • (Bleeping Computer) “Microsoft is testing ads in the Windows 11 File Explorer.” Microsoft, stahp.
  • (Rest of World) Rest of World visited El Salvador to check in on its bitcoin-as-legal-tender experiment six months in. The people RoW spoke to expressed concerns about the rollout of El Salvador’s bitcoin (BTC) wallet Chivo and several other aspects of the law’s implementation.
  • (The Washington Post) The Post spoke to the residents of Limestone, a town in Tennessee that is now home to a bitcoin mining firm. Locals believed they were welcoming a data center but don’t seem to have realized just what a crypto mining firm came with, namely a massive noise issue locals do not welcome.
  • (BuzzFeed News) According to BuzzFeed reporter Paul McLeod, the U.S. Senate passed a bill to make daylight savings time permanent by a voice vote because several lawmakers had no idea the vote was happening to begin with.
  • (The Washington Post) Post reporter Greg Jaffe spoke to Khalid Payenda, who was Afghanistan’s finance minister a year ago and – as of last week anyway – an Uber driver in Washington, D.C.

put the entire country on UTC you cowards

— Matt Hodges (@hodgesmr) March 15, 2022

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

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See ya’ll next week!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





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