As prepared for delivery
Hello, everyone. Thank you to the Institute of International Finance for inviting me to speak with you all today. This discussion couldn’t come at a more apt moment—we’re living through a period of intense market and government interest in digital assets, as well as a major geopolitical crisis in Russia’s brutal and unprovoked invasion of Ukraine. Today I’d like to share with you how Treasury considers the nexus of these two — the use of digital assets, including cryptocurrencies, in times of geopolitical crisis.
I’d like to begin by mentioning a key financial development associated with the Russia/Ukraine geopolitical crisis. Over 30 partner countries, including the United States, have imposed unprecedented sanctions and financial measures to cut Russia off from the international financial system. Russia is increasingly isolated in this extraordinary effort to deny Vladimir Putin, his cronies, and their key commercial institutions access to or use of funds to enable the ongoing aggression in Ukraine and to the inputs needed to power their war machine.
Simultaneously, in a second contemporary development, we are witnessing exponential growth in new assets, financial technologies, and forms of financial services and intermediation that do not necessarily rely on the traditional financial system and its well-established institutions. The user community is different as well—in some ways more inclusive, in others dependent on access to resources and technologies that advantage some over others.
In certain ways, the intersection of these two trends has been a boon during this crisis. Digital assets have facilitated the flow of financial assistance to Ukraine. More than $100 million worth of cryptocurrencies poured into the country within a few weeks of Russia’s brutal invasion, with Ukraine moving swiftly to put in place legislation to regulate the cryptocurrency sector.
While this represents a small part of the overall humanitarian assistance sent to the Ukraine, this accomplished a meaningful, laudable goal: supporting Ukraine through the rapid transfer of funds across international borders. Even more significant, this occurred with relative ease at a time of enormous uncertainty and disruption. This is, to my mind, at least a partial vindication of one of cryptocurrency’s longstanding promises.
But that, of course, is just one half of the story. Immediately after the imposition of international sanctions against Russia, stories circulated about the potential for cryptocurrencies to enable sanctions evasion, allow the corrupt Kremlin-linked elite to hide their wealth, and further finance Russian aggression. We take this reporting seriously, but with a grain of salt as we do not expect this will be a primary method of sanctions evasion for designated Russians. Nonetheless, this is a real risk, and we must be vigilant anytime we see even the possibility for exploitation of digital assets by transnational criminal networks, terrorist financers, and rogue states.
In general terms we should be realistic about how much digital assets can fundamentally change the nature of geopolitical or economic conflicts, or how useful they are in such contexts.
I remain skeptical that digital assets will radically change the way the overall global financial system operates or transfers funds in a crisis, at least as they stand today. Importantly, digital assets do not necessarily have an advantage over cash – or dollars – in many crisis scenarios. In fact, some people may even consider trading out of digital assets into traditional fiat if they assess elevated cyber risks that could threaten their digital holdings.
Further, if you’re a G20 economy and you’re under Russia-like sanctions, it’s impossible to flip a switch and run on cryptocurrencies overnight. There simply isn’t enough liquidity in the cryptocurrency market to enable this nor is there any guarantee that the critical nodes in your economy’s supply chains will suddenly accept the digital asset du jour as payment let alone incur the reputational harm associated with supporting pariah states and their leaders.
We should also be realistic about the limits of digital assets and their utility for humanitarian efforts. When it comes to less developed nations like Afghanistan, which is experiencing a very different geopolitical and economic crisis, it is hard to envision widespread use of digital assets to meet humanitarian needs. Afghanistan lacks the infrastructure, reliable internet connectivity, power, and universal device access, as well as access to an economic ecosystem capable of processing cryptocurrency into necessary goods and services. The same limitations hold true for other crisis areas like Yemen, the Tigray region of Ethiopia, and Sudan where humanitarian assistance is so badly needed.
Still, the appeal of digital assets to hundreds of millions around the world is undeniable--they are perceived to be flexible, fast, and subject to less burdensome regulations.
The salient question, as the IIF identified in preparing this event, is how can we ensure that we are on the right side of history?
This is a question we grapple with in my office in many forms. How do we best balance the need for financial security and stability with the disruptions that come with any technological innovation? How do we properly account for this balance in the face of geopolitical crisis?
We at Treasury are working to support what I call safe digital asset practices. This process starts with properly understanding risks. Practices that are particularly important in a geopolitical or economic crisis scenarios because of the risks involved. Once we understand the risk, we then focus on developing the right regulatory environment and an approach to enforce its rules. Finally, we seek to foster a virtuous transparency-accountability cycle between service providers and users of digital assets.
Let’s turn to the first piece—how we understand risk when it comes to digital assets.
In a geopolitical and economic crisis, there are always profiteers, opportunistic fraudsters, or criminal networks that will leave no stone unturned to generate revenue, including to further their destabilizing activity. Other threat actors who are subject to capital controls or punitive measure such as sanctions may also turn to digital assets to try and evade these measures.
It is imperative that governments and the private sector fully assess these digital asset-related risks. In fact, the first recommendation from the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and countering terrorist financing issues, is for governments and the private sector to assess risk because it is the foundation on which effective regulatory measures are built.
The leaders in this forum should all work to ensure that global governments are taking this responsibility seriously and dedicating necessary resources, particularly during the present moment of major geopolitical crisis in Russia/Ukraine. To reiterate what I mentioned earlier, illicit finance risks can rise during times of uncertainty and conflict and create opportunities for malicious opportunists to prey on the most vulnerable.
For those looking for a model of what a risk assessment looks like, I encourage you to examine the U.S. Department of the Treasury’s National Risk Assessments on Money Laundering, Terrorist Financing, and Proliferation Finance. The latest iteration was published in March 2022 and addresses risks posed by digital assets specifically.
The Financial Crimes Enforcement Network (FinCEN) also regularly provides public guidance on possible indicators for heightened risk and potentially suspicious activity. A FinCEN alert published on March 7, 2022 addresses the potential use of cryptocurrencies in the current Russia context.
Once there is a robust understanding of risk, we must all work together to develop proper regulatory and supervisory systems, and ensure the systems’ rules are effectively enforced. We cannot push these requirements aside under the guise of innovation. It is not innovative to ignore risk—it is irresponsible.
For example, as Ukraine is accepting donations in cryptocurrencies to buy critically needed supplies, it must also ensure that digital assets transferred into its jurisdiction aren’t used for fraud or laundering the proceeds of corruption or kleptocracy, problems that have plagued Ukraine in the past. I’d like to acknowledge, however, that financial supervision may be quite difficult in war.
In the United States, including within my office, we are hard at work building out the regulatory framework for digital assets in line with President Biden’s recent executive order. This order emphasizes that effective controls on illicit finance must be balanced alongside the benefits of technological innovation.
We know the mere existence of rules and regulation on paper does not result in compliance nor does it guarantee effective supervision and enforcement in peace, much less in war. So, Treasury has stepped up its efforts, including sanctions and enforcement actions, on matters related to digital assets, particularly as they pertain to the current geopolitical crisis and Russian illicit financial activity.
Earlier this month, Treasury’s Office of Foreign Asset Control designated Russia-related Hydra Market and Garantex, both of which posed significant illicit finance risks to the global economy. Of note, both actions were taken in coordination with our foreign partners in Germany and Estonia. And just this week Treasury took action against companies in Russia’s cryptocurrency mining industry.
To more generally expose and address non-compliant digital asset service providers the United States has taken other unilateral action. In August 2021, FinCEN and the CFTC announced a $100 million civil money penalty against Bitcoin Mercantile Exchange (BitMEX) for failing to implement effective anti-money laundering and customer identification programs, and failing to file suspicious activity reports. Earlier in the same year, OFAC reached a settlement with a more than half-million dollar fine with the company Bitpay for sanctions violations.
I’ll close with a word about the virtuous cycle we at Treasury seek to facilitate. Governments cannot function without partners. They need all stakeholders, including digital asset users and service providers, to feature transparency and accountability, and to share information.
I encourage all users of digital assets to do their own due diligence and demand transparency of the platforms and systems they use.
Likewise, I encourage service providers and other actors in the private sector to conduct the appropriate customer due diligence to ensure they are not facilitating crimes or financially supporting geopolitical crises. Exchanges that do not conduct the necessary screening undermine credibility and trust in digital asset-enabled finance.
Russian actors, as well as others like North Korea, are particularly adept at masking their identities to hide and move their wealth. The private sector must maintain vigilance to ensure they do not have a hand in funding the next atrocity or stoking a geopolitical crisis.
Now, digital asset users and service providers have an immense opportunity to raise the bar for the next generation of financial services. In partnership with governments—policy makers and financial regulators—we can collectively facilitate a higher industry standard in transparency, accountability, and utility in digital assets when the next geopolitical crisis arises. This will take creativity to manage transformative innovation through relatively high-risk crisis environments, but it is creativity that can beget meaningful breakthroughs in the digital economy. The innovation cycle we are working toward is one in which responsibility begets adoption, and that in turn takes us step by step forward toward powerful, resilient transformation at scale.