U.S. Treasury Says Crypto, Rival Currencies Risk Eroding Sanctions
(Bloomberg) -- The rise of digital currencies and a decline in the use of the dollar by U.S. adversaries are driving calls for a more multilateral approach to sanctions policy at the Treasury Department as the U.S. tries to keep up with changes in the global financial system.
In a report published Monday, Treasury said that U.S. adversaries have increasingly turned away from the U.S. dollar to facilitate their transactions as American sanctions seek to target everything from Iranian oil sales to individuals accused of human rights abuses.
Nations including China are also exploring greater use of digital currencies and other new payment systems, a move that also serves to undermine U.S. efforts to punish what it considers rogue behavior.
“In order for sanctions to remain effective, we need to address several critical issues,” Wally Adeyemo, the deputy secretary of the Treasury, said on a call with reporters. “Rising risks from new payment systems, the advent of digital assets, cyber criminals, strategic economic competitors and situations where careful calibration is needed to ensure sanctions do not inhibit the flow of legitimate humanitarian aid to those in need.”
The Treasury report was ordered earlier this year after the frenzied pace of sanctions designations during the Trump administration -- roughly 1,000 a year at one point. But the heavy use of sanctions as a tool for nearly every aspect of national security policy has raised questions about their effectiveness and the ability of Treasury or any agency to fully enforce them.
“We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions,” Treasury said in the report.
Among American rivals, China has been developing a digital version of its currency, the yuan, for several years. In 2021, it accelerated the project, announcing in July that 10 million people were eligible to participate in an ongoing trial.
Another chief target of U.S. sanctions policy, Iran, has managed to boost oil exports to almost one million barrels per day, largely to China, despite its energy sector being under punishing American restrictions since 2018.
While the dollar is still the world’s reserve currency, technology is making it easier for people to look outside the U.S. financial system. This trend means the department needs to update and modernize its operations and develop a workforce and technical infrastructure capable of dealing with growing financial complexity, a person familiar with the matter said.
One advantage the U.S. still has is that many adversaries eventually want to turn their assets into U.S. dollars, which means that the U.S. needs more help from other countries in tracking illicit transactions and imposing sanctions that will cut across multiple geographic locations.
Adeyemo began an evaluation of the Treasury Department’s sanctions operations earlier this year to look at all current programs, staffing and budgets.
The report found that in the 20 years since the Sept. 11, 2001, attacks, there has been a 933% increase in the number of sanctions designations. The increase is in part a reflection of a country on a war-footing as the U.S. carried out military operations across the globe in the war on terrorism, and of a country increasingly seeking to avoid military action, as sanctions are viewed as a coercive economic tool that stops short of violence.
The increased level of scrutiny has resulted in a surging burden on financial institutions in some cases, as banks and other entities have to ensure they aren’t lending or investing money gathered by adversaries carrying out illicit activities.
LexisNexis Risk Solutions estimated in an October 2020 report that financial institutions in the U.S. and Canada together would spend $42 billion in 2020 on financial crime compliance -- which includes sanctions and anti-money laundering efforts -- an increase of a third from the year before.
Adeyemo is expected to testify about the report before the Senate Banking Committee Tuesday.
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