Senate Democrats Demand an Emergency Act to Target Cryptocurrency and Sanctions

President Biden's executive order on cryptocurrency used the word "illicit" 24 times, so it's no surprise that the Senate held a hearing last week titled "Understanding the Role of Digital Assets in Illicit Finance." Similarly, it was unsurprising that Senator Elizabeth Warren (DMA) utilized that hearing, along with numerous cosponsors, to introduce new cryptocurrency legislation––legislation that may have been better if expert witnesses had been given the opportunity to weigh in before its introduction.

Throughout the hearing, the experts reiterated that there is no proof that Russia or its billionaires are using cryptocurrency to circumvent sanctions. Indeed, as Cato's Matthew Feeney has demonstrated, bitcoins would be an ineffective instrument for dodging sanctions. And, while one would be tempted to believe that legislation aimed at something nonexistent would be harmless, Senator Warren's measure would cause far too much collateral damage.

 

Consequences (Unintended)

Warren's measure, the "Digital Asset Sanctions Compliance Enhancement Act of 2022," is meant to address the possibility that those on the sanctions list may utilize cryptocurrencies to circumvent the law, but it extends far beyond Russian billionaires and banks. The measure initially requires the President to submit a report "listing any foreign person" who has, according to the bill,

significantly and materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any person with respect to which sanctions have been imposed by the United States relating to the Russian Federation, including by facilitating transactions that evade such sanctions…

To be clear, two quite different categories of people are being depicted here. The first category includes individuals who "significantly and materially" aid in sanction evasion. And, while officials from the FBI, Treasury, and White House have all acknowledged that cryptocurrencies cannot be effectively utilized by Russia to dodge sanctions, the language in the bill is still correct in stating that active sanctions evasion is illegal.

The second group, on the other hand, is significantly broader, encompassing anyone who "offered financial, material, or technological support for, or goods or services to or in support of" anyone sanctioned. In effect, this means that someone could be held accountable for assisting with sanctions evasion just by developing open source software. Taking the concept outside of crypto, this would be analogous to Microsoft being held liable for someone plagiarizing an article in a Word document or Gucci being held liable for someone carrying stolen cash in their pocketbook. This level of liability is clearly overly broad. As Jerry Brito and Peter van Valkenburgh warned, “The mere fact that a stranger is using your software or network throughput to do something illegal without your knowledge cannot be a trigger for the crushing penalties that are sanctions.”

Unexpected Consequences

Although the bill itself was not surprising given Senator Warren's ongoing anti-cryptocurrency campaign, the bill's call on the president to use powers granted under the International Emergency Economic Powers Act to "block and prohibit all transactions [and interests] of a foreign person identified in a report [described above.]" If this sounds familiar, it's because Prime Minister Justin Trudeau used a similar Canadian law, known as the Emergencies Act, only last month to block and prevent demonstrators' transactions.

Worse, Warren's bill would not only require the president to use this authority to prohibit transactions, but it would also give the Treasury secretary complete authority to prohibit US-based exchanges, software developers, and miners from engaging with anyone in Russia––not just those on the sanctions list.

As a result, under the pretext of targeting a specific set of evil actors, the bill attempts to target even individuals who may have been participating inadvertently. And, by targeting all of these people, it would imply that the president and Treasury Secretary would be given unchecked power. This is straight out of Putin's or the Chinese government's playbook, not the US'.

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