Treasury Warns That Digital Currencies Could Weaken U.S. Sanctions

A review found that the sanctions program must be modernized to maintain its effectiveness.,

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WASHINGTON — The Biden administration warned on Monday that digital currencies posed a threat to America’s sanctions program and said in a new report that the United States needed to modernize how sanctions were deployed so that they remained an effective national security tool.

The warning was included in a six-month Treasury Department review of the nation’s sanctions program, which has been used more aggressively in recent years as a lever in international diplomacy. The focus on digital currencies coincides with an administration-wide effort to determine how to regulate new financial technology without stifling innovation.

“Technological innovations such as digital currencies, alternative payment platforms and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions,” the Treasury report said. “These technologies offer malign actors opportunities to hold and transfer funds outside the traditional dollar-based financial system.”

The Treasury Department also raised concern that America’s adversaries have been taking steps to reduce their reliance on the U.S. dollar and said new digital payments systems could exacerbate this trend and could erode the power of American sanctions.

The United States has more than 9,000 sanctions in place, largely to punish countries such as North Korea, Iran and Venezuela for facilitating terrorism, violating human rights or committing other illicit behavior. The strength of the U.S. dollar and its role as the world’s reserve currency means that the United States can cut off countries, groups or individuals from much of the global financial system at its discretion. That has intensified efforts to find new ways to evade America’s sanctions, including by using digital currencies that do not flow through the traditional banking system.

The use of sanctions surged to record levels during the Trump administration, which averaged more than 1,000 new designations per year, according to the law firm Gibson, Dunn & Crutcher. This year, the Biden administration is on a pace to impose 900 sanctions, which would tie for the third-highest total on record.

The seven-page report offered little detail about how the Treasury plans to adapt to the new digital financial architecture that is spreading around the world. The recommendations included investing in new technology and hiring staff with expertise in digital assets.

A senior Treasury official told reporters on Monday that one important measure to prevent the evasion of sanctions was greater coordination with other countries to make it more difficult for cryptocurrencies to be converted into government-issued money.

Last month, the Biden administration cracked down on the growing problem of ransomware attacks, expanding its use of sanctions to cut off digital payment systems that have allowed such criminal activity to flourish and threaten national security.

The President’s Working Group on Financial Markets is expected to release a separate report this year with regulatory recommendations for stablecoins, which are asset-backed digital currencies that have been growing in popularity.

The sanctions review was led by Wally Adeyemo, the deputy Treasury secretary. The report avoided making assessments of specific sanctions on countries or individuals. Instead, it offered broad guidelines for improving the program, which Treasury operates in coordination with the State Department and the National Security Council.

Other recommendations included creating a more systematic approach to sanctions designations that could eventually remove some. The Treasury Department also said sanctions needed to be more targeted so that “potential negative impact on others is minimized.”

The Treasury Department has been assessing the sanctions it has imposed on the Taliban since the group toppled the government of Afghanistan this summer and working to ensure that humanitarian aid can still get into the country.

The agency currently has a leadership vacuum, as Senate Republicans have blocked the confirmations of two of President Biden’s nominees — Brian E. Nelson and Elizabeth Rosenberg — to be its top sanctions officials. The Treasury Department has not had an under secretary for terrorism and financial intelligence since Sigal Mandelker resigned from the job in late 2019.

A senior Treasury official said on Monday that the department needed Mr. Biden’s nominees to be confirmed so the department could properly carry out its job protecting national security.

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