With the “script” written in the previous 24 hours by prepared testimony, a Congressional letter and a draft of new anti-money laundering (AML) legislation for crypto, the Senate Banking Committee hearing titled, “An Update from the Treasury Department: Countering Illicit Finance, Terrorism and Sanctions Evasion,” with Deputy Treasury Secretary Wally Adeyemo and chaired by Senator Sherrod Brown (D, OH) got underway at 10 a.m. today.
See:
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- The on-demand hearing broadcast here
- Deputy Secretary Wally Adeyemo’s prepared testimony. Download.
- Senators Thom Tillis (R, NC) and Bill Hagerty’s (R, TN) crypto illicit finance draft. Press release.
- Monday’s Congressional letter from Senator Elizabeth Warren (D, MA) to House Financial Services Committee leaders regarding the stablecoin bill. Via Politico.
Takeaways from the hearing:
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- This was a brisk 90-minute hearing.
- Not every member of Senate Banking chose to participate such as Sen. Jack Reed (D, RI) of CANSEE, Sen. Cynthia Lummis (D, WY) or Sen. Bill Hagerty (R, TN).
- Chair Brown did not given any inkling about whether he had his own bill addressing digital assets and illicit finance.
- Ranking Member Tim Scott (R, SC) gave an impassioned defense of digital assets saying that they had become a “scapegoat” of the Biden Administration especially given how traditional finance methods were far larger than crypto when it came to illicit finance.
- Democrats were fairly united behind Democratic leadership positioning that crypto assets need to be addressed more aggressively by Treasury.
- Deputy Secretary Adeyemo seemed to suggest that more “tools” for Treasury as it related to crypto assets was about taking preventative measures even though he admitted a larger illicit finance problem currently exists through traditional finance means.
- The tools were initially shared in a term sheet last November and were re-emphasized – at a high-level – in Adeyemo’s prepared testimony beginning with sanctions of “foreign digital asset providers.”
- During her Q&A time, Senator Warren chose to emphasize the House stablecoin bill versus her own anti-money laundering bill. Her criticism of the House stablecoin effort makes sense in that it’s potential passage is more imminent than any crypto AML bill currently percolating across Congress. The stablecoin bill is seen as a potential threat to Dem leadership’s views about keeping crypto out of the U.S. financial system.
- At the hearing, the only Senate AML legislation focused on crypto that was discussed in any depth was by Sen. Tillis and his new bill – available as a discussion draft – co-sponsored by Sen. Hagerty.
- Coming out of this hearing, the next step perhaps lies with Treasury and its rulemaking capabilities. Treasury (and the Biden Administration) has “checked the box” and asked Congress for “tools” to address a crypto asset anti-money laundering threat. Now, it may do what it can with its own rulemaking which is outside of a Congress bogged down by a general election and politics.
- Nevertheless, Politico’s Eleanor Mueller reported on X that after the hearing, Chair Brown “says he is ‘hopeful’ he can introduce a bill soon that would give Treasury officials the new powers they asked for to prosecute illicit finance in crypto.”
Sen. Warren’s letter
With stories of stablecoins, sanctions evasion and illicit finance swirling in the media, the timing of Senator Warren’s letter seemed appropriate.
The missive to House Financial Services Chair Patrick McHenry (R, NC) and Ranking Member Maxine Waters (D, CA) was similar in tone to her Digital Asset Anti-Money Laundering Act [S.2669] and essentially aims at promoting Senator Warren’s view that anything crypto-related needs to stay out of the U.S. financial system.
Her anti-crypto argument is three-fold: investor protections, insuring financial stability and (therefore) preserving national security – that last one has, potentially, bipartisan appeal. Ultimately, post-FTX blow-up, Senator Warren and Democratic leadership have consistently believed this is winning positioning with voters especially in the lead up to the 2024 general election in November.
opening statements
The Chair and the Ranking Member both emphasized the FEND Off Fentanyl act [S.1271] in their opening statements at the hearing.
Chair Brown spent time discussing the bipartisan FEND Off Fentanyl act for which he is a co-sponsor. He also suggested that criminals will “innovate” as it relates to digital assets and the United States needs to keep up citing the use of Tether and recently reported (such as this one from the WSJ) sanctions evasion by Russian entities.
Ranking Member Tim Scott used his opening statement to talk about the FEND Off Fentanyl Act, which he introduced, and about the troubling use of U.S. dollars across the globe by criminal regimes such as the Maduro regime in Venezuela.
Deputy Secretary Adeyemo emphasized that national security was at stake in the use of cryptocurrencies to circumvent U.S. sanctions. Terrorist groups, North Korea and Russian were all identified as uses of crypto. Adeyemo expressed the opinion that the tools need for crypto are more preventative at this stage, but he added the example of the fentanyl trade as something that needs to be stopped today. He asked for three tools – see his prepared testimony.
Q&A
In the first question from Chair Brown, Adeyemo again admitted that tools for digital assets is preventative and today’s terrorist financing use traditional means “by hand and by courier.” Deputy Secretary Adeyemo claimed that Treasury is worried about the future potential of digital assets. Brown tried to tie in Fentanyl as a part of the discussion and that crypto was to blame.
Ranking Member Tim Scott said that digital assets had become a “scapegoat” of the Biden Administration. He pointed to the enormous oil business that creates billions of dollars in revenue for the Iranian government – none of it having anything to do with digital assets – and this allowance for Iran is creating geo-political instability at the least.
Senator Robert Menendez (D, NJ) pointed out that Iran’s oil exports grew 50% and was concerned that current sanctions capabilities of U.S. Treasury were not being used effectively. Menendez seemed open to digital assets tools for Treasury but not necessarily the priority that Adeyemo was promoting. Later, Menendez said current virtual asset service providers need to do a better job at complying to existing law while Congress pursues a regulatory framework.
Senator John Kennedy (R, LA) said that the Biden Administration has acted as “Iran’s best friend.” Predictably, Adeyemo disagreed. The two argued over wavers and sanctions regarding Iran as the discussion strayed far from digital assets oversight.
Senator Mark Warner (D, VA) initially took his time to clarify with Deputy Secretary Adeyemo and dispute Senator Kennedy’s accusations about the enablement of Iran’s government. The Deputy Secretary Adeyemo said Hamas is “attempting to move money” into Gaza and new tools for digital assets in service to Treasury would help prevent future movement of funds via digital assets.
Democrats are making the case that these digital asset tools for Treasury are about being pro-active with digital assets versus addressing a problem that exists today.
Senator Thom Tillis (R, NC) in his time mentioned that in a classified brieing he asked for and got a punch list on what Treasury needs. Tillis said the ENFORCE Act which he and Senator Hagerty had just introduced as a discussion draft addresses that Treasury punch list. The Senator added the view that some in industry think everything is fine “as is” and Tillis disagreed. Later, Adeyemo said the regulatory process would ultimately be helpful to industry by providing certainty. Senator Tillis closed saying that he wanted a Treasury and Drug Enforcement Agency (DEA) classified briefing which could look at shutting down the use of digital assets by cartels.
Senator Elizabeth Warren (D, MA) asked Deputy Secretary Adeyemo about the source of his interest in getting tools for Treasury to go after illicit finance entities. “Bad guys can use crypto right now… but I think it’s worse than that,” said Senator Warren. She said Iran is making millions of dollars through crypto because there are not the proper regulations in place. She then reiterated her objection to the stablecoin bill in the House (see her letter from Monday) as it would enable drug traffickers etc. to make more money.
Senator J.D. Vance (R, OH) said that he worries that the “war footing” of Russia saying that it needs to be addressed since it enables the Russian agreement. In general, Vance wanted to talk Russia and the sanctions strategy especially as it related to the REPO for Ukrainians Act (Rebuilding Economic Prosperity and Opportunity for Ukrainians Act.).
Senator Raphael Warnock (D, GA) asked about the effectiveness of sanctions. Deputy Secretary Adeyemo answered and discussed humanitarian “carve-outs”.
Senator Katie Britt (R, AL) asked more about sanctions particularly as it related to steel. She brought up the new registration required for small business to register their company with Treasury… an AML rule for business.
Senator Cathering Cortez-Mastro (D, NV) asked about whether Treasury had the tools to fight digital asset transactions related to fentanyl. Adeyemo said Treasury wanted to be able to go after dollar-backed crypto and any parts of the crypto ecosystem enabling drug trafficking. Sen. Cortez-Mastro brought up “mixers” and chose to describe them as “anonymizing for illicit actions” versus “the private and therefore protected transaction” capabilities. Adeyemo wanted more tools to address mixers.