Lawmakers are concerned that Russian oligarchs might use crypto to evade sanctions, but these concerns may be more theoretical than practical.
U.S. Senators Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio), Mark Warner (D-Va.) and Jack Reed (D-R.I.) and New York Governor Kathy Hochul addressed this concern in separate public statements Wednesday.
The senators said in their letter that they wanted to "express our concern that criminals, rogue states, and other actors may use digital assets and alternative payment platforms as a new means to hide cross-border transactions for nefarious purposes."
However, it is unclear whether Russia has any actual plans to use crypto to evade sanctions.
Andrew Jacobson, an attorney with law firm Seward & Kissel, told CoinDesk last week he saw it as unlikely that Russia would be able to turn to decentralized digital assets to evade sanctions. A central bank–issued digital currency also seems unlikely to circumvent sanctions.
"Venezuela tried to do it, Venezuela issued their own token [and] that token was largely a failure, because of the U.S. sanctions that were issued," he said.
The senators directly cited Russia's invasion of Ukraine and a New York Times article that suggested Russian banks or oligarchs could use cryptocurrencies to avoid sanctions imposed on them by the U.S., EU and several other nations. A loose coalition of nations are seizing Russian central bank assets, seizing Russian oligarchs' assets and blocking both these individuals and several of Russia's largest banks from accessing the global financial system.
"There are growing concerns that Russia may use cryptocurrencies to circumvent the broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine," the letter said.
Read more: No, Crypto Won't 'Fix This' for Russia
In Europe, finance regulators are similarly eyeing cryptocurrencies as a potential issue of concern.
French Finance Minister Bruno Le Maire said EU regulators have reached a consensus that they should ensure cryptocurrencies are included in their sanctions regime.
German Finance Minister Christian Lindner echoed Le Maire's comments in a press conference Wednesday, saying sanctioned individuals and entities should be prevented from tapping cryptocurrencies to bypass their sanctions.
"I would also confirm what I've already said in my introduction, this is one of the most important elements of the sanctions which we have decided to apply against Russia. We have detected and frozen a significant amount of the reserves or assets of the Russian Central Bank. This has led to a devaluation of the ruble," Le Maire said.
Another New York Times article noted Russia has spent years trying to "sanctions-proof" its economy, including by building a currency reserve of over $630 billion (though the U.S. and other nations announced they would freeze any assets held outside Russia). It did not list any crypto tools.
Treasury officials have said crypto may not be a feasible tool to launder funds at scale.
Todd Conklin, a counselor to Deputy Treasury Secretary Adewale Adeyemo, told Politico last week that the department was monitoring any potential spikes in crypto usage.
"The scale of what they have to move, and where they have to move things from, [crypto's] not necessarily going to be that concerning," Conklin said.
Still, lawmakers want assurances from Yellen that the Office of Foreign Assets Control (OFAC), which enforces U.S. sanctions rules, will be able to maintain the blocks against Russian banks and oligarchs. Wednesday's letter asked Yellen and OFAC to provide responses to five questions about the agency's work, including whether decentralized finance (DeFi) arrangements could help malicious actors bypass sanctions.
The letter also asked what tools OFAC might need to prevent sanctions evasion using crypto.
NYDFS is similarly looking to ensure it has the appropriate tooling it needs to monitor crypto transactions.
In a statement, NYDFS Superintendent Adrienne Harris said her agency is working with other state and federal regulators to "ensure the full weight of our regulatory regime is brought to bear in the fight to protect Ukraine."
"We know that bad actors will try to evade sanctions through the transmission of virtual currency, which is why it is imperative that we have the ability to monitor transactions and exposure in real time," she said.
Read more about
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.