The Treasury Department is stepping up efforts to stamp out bad actors in the crypto space.
On Wednesday, Deputy Secretary Wally Adeyemo addressed a crowd of industry insiders at a D.C. policy summit thrown by the Blockchain Association, one of the sector’s leading trade groups.
“You have the capacity to build new tools that help prevent money laundering while continuing to provide legitimate protections to individuals,” he told the gathered crowd. “You also have the capacity to cut off firms from your ecosystem that are failing to take steps to prevent illicit finance.”
Expansion of powers
Through its Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN), the Treasury Department is one of the nation’s most powerful financial institutions, wielding tools like economic sanctions and know-your-customer provisions to force global actors to comply with U.S. law.
The crypto industry, with its novel system of financial transactions facilitated by ostensibly decentralized services from wallet providers and blockchain validators, has presented a challenge to Treasury’s standard approach to working with institutions such as banks. In one controversial episode, OFAC imposed sanctions on the crypto mixer Tornado Cash for facilitating transactions by groups like North Korean hackers, despite the fact that it operated as an autonomous open-source software protocol.
With Congress still dragging its feet on digital asset legislation, Treasury has found different ways to regulate the industry. On Nov. 21, Treasury worked with the Department of Justice and the Commodity Futures Trading Commission on a joint enforcement action against Binance, the leading crypto exchange, for violating the Bank Secrecy Act and sanctions laws, including the largest settlements to date by both OFAC and FinCEN. On Wednesday, Treasury also announced new sanctions against a crypto mixer used by the North Korean-linked hacker group Lazarus.
On Tuesday, Adeyemo sent a proposal to the Senate Banking Committee that proposed a vast expansion of the department’s regulatory powers over the crypto industry, which he spoke about at length on Wednesday. He said the lack of action by crypto firms to prevent illicit activity “represents a clear and present danger for national security.”
In one example, Treasury is seeking to create a new crypto-related category of financial institution that would include certain service providers, including blockchain validator nodes and wallet providers. As Congress continues to debate legislation to regulate stablecoins, Treasury is also seeking to expand its jurisdiction over any dollar-backed stablecoins—even if they exist outside the U.S. and without U.S. customers.
In a tweet on Tuesday, the crypto consultant and former Paxos chief risk officer Austin Campbell described the proposal as “the broadest expansions of powers since the Patriot Act.”
I have in my grubby little paws the latest proposal, dated from today, that Treasury has sent to the Senate Banking committee, and boy, do I have thoughts.
To summarize for the crowd, Treasury is asking for an unprecedented level of expansion of their powers in order to combat…
— Austin Campbell (@CampbellJAustin) November 29, 2023
In a statement shared with Fortune, Jerry Britto, the executive director of the crypto think tank Coin Center, said the proposal was “high-level” but warned that it contained “some very concerning parts that if implemented would be counter to U.S. interests.”
“We understand Treasury’s desire for tools to limit the abuse of crypto systems by enemies of the United States like Hamas, and we support efforts to appropriately fill legitimate gaps in law,” he added.
Adeyemo is a rising star in the Democratic Party, serving as the first chief of staff at the Consumer Financial Protection Bureau, whose creation was spearheaded by Sen. Elizabeth Warren (D-Mass). He also served as the first president of the Obama Foundation.
Following his prepared remarks, Adeyemo was interviewed onstage by TuongVy Le, a former SEC enforcement lawyer who currently leads regulatory and policy efforts at Bain Capital Crypto.
Le argued that innovation within the crypto industry to develop privacy-focused technology requires careful regulation that doesn’t push activity offshores. Adeyemo disagreed, saying the duty of Treasury is to prevent risk that often accompanies innovation.
“When the largest crypto exchange has over 100,000 transactions that were being done by groups like Hamas and other illicit actors,” he added, “clearly what is happening now doesn’t work.”