Both Republicans and Democrats call for changes to tackle crypto-related illicit financing during Senate hearing

A Senate Banking Committee hearing focused on illicit finance and terrorism gave a window into how lawmakers plan to shape potential legislation focused on digital assets.

In a hearing on Tuesday titled "An Update from the Treasury Department: Countering Illicit Finance, Terrorism and Sanctions Evasion," senators aired concerns over bad actors' use of digital assets, which has been a point of contention over the past year.

"All these bad actors — North Korea, Russia, terrorist groups like Hamas — are turning to crypto because they've seen the ads and bought the hype," said Senate Banking Committee Chair Sherrod Brown, D-Ohio, on Tuesday. "They're using it because they know it's a workaround. They know it's easier to move money in the shadows without safeguards like Know Your Customer rules or suspicious transaction reporting."

Brown, who would be instrumental in advancing crypto bills, has said he is in talks about a bill that would target the use of digital assets for money laundering, according to past reporting from Politico. Both Democrats and Republicans in the House and Senate have been honing in on illicit finance provisions and bills over the past year, though differ in approaches.

The crypto industry has argued that digital assets' role in illicit finance is a small percentage of the overall pie, citing research from blockchain forensics firm Chainalysis.

"We must make sure that crypto platforms play by the same rules as other financial institutions," Brown added. "We need to make sure we have the tools to crack down on illicit finance with digital assets, just as we would with any other asset."

Treasury's asks

US Treasury Deputy Secretary Wally Adeyemo, who was testifying at the hearing, has asked lawmakers for certain reforms, including the introduction of a secondary sanctions tool, modernizing and closing gaps in existing authorities, and addressing jurisdictional risk from offshore crypto platforms.

Terrorist groups are trying to take advantage of cryptocurrencies as groups such as al-Qaeda and Hamas use virtual currencies to solicit donations, Adeyemo said in a prepared testimony.  Other countries, such North Korea and Russia have tapped into crypto, with Russia specifically turning to stablecoins like Tether to "finance its war machine," Adeyemo said.

Adeyemo told lawmakers Tuesday that as the Treasury continues to place sanctions on terrorist groups such as Hamas, those groups will move towards less traditional means, including crypto.

Lawmakers ask questions

Lawmakers asked Adeyemo detailed questions about what crypto-specific tools the Treasury needs and how the department planned to bring digital assets into compliance.

"I think we can all agree that more work needs to be done to update and clarify our digital asset regulatory regime," said Sen. Robert Menendez, D-N.J. "However that does not and should not exempt service providers from complying with existing laws." 

Menendez's comments come after crypto exchange Binance and its former CEO Changpeng Zhao admitted to breaking anti-money laundering laws. The New Jersey Democrat asked Adeyemo what the Treasury plans to do to "step up enforcement."

Sen. Thom Tillis, who released a crypto illicit finance discussion draft on Monday, argued that regulations need to be implemented to rein in digital assets.

"The one thing that I will tell people in the crypto or digital assets space that say 'nothing to see here, everything's fine' — they're wrong," the North Carolina Republican said. "There needs to be some light regulatory regimen put into place."

Tillis called for "a hospitable environment" for digital assets and asked Adeyemo about the problems that could arise from applying "the old sort of banking construct" of KYC and AML to digital assets.

"I do think, that to your point, we have to take a differentiated approach depending on the type of tool and that's why we would use this, even under our proposal, in a risk-based manner," Adeyemo said in response.