“We will find you and hold you accountable”: Treasury’s warning to digital asset bad actors

Deputy Secretary of the Treasury Wally Adeyemo, speaking last week at a virtual currency summit in Washington, DC, made an urgent call to action to the digital asset industry to partner with the US Government to cut off illicit actors’ access to virtual currency exchanges. Pointing to regulatory partnerships forged over decades with traditional financial institutions, Adeyemo called on digital asset players in blunt terms to work with Treasury “to prevent terrorists, transnational criminals and rogue states” from using virtual currencies to move and shield their assets while recognizing the great potential the still relevant infant technology holds.

“I want to directly address those within the digital asset industry who believe they are above the law, those that willfully turn a blind eye to the law and those that promote assets and services that aid criminals, terrorists and rogue states,” he admonished the crowd. “My message is simple: We will find you and hold you accountable.”

Adeyemo’s plea continued with further stern words of caution. “Without action by your industry, increased movement of illicit proceeds into the digital asset ecosystem will force us to restrict, restrain and cut off elements of the digital asset ecosystem from the broader economy.” He warned that Treasury’s “actions over the last year send a clear message: we will not hesitate to bring to bear tools across government to protect our national security.”

Adeyemo’s appeal for action

Adeyemo’s appeal for action is a result of the digital asset industry’s explosive growth. He noted that in 2021, virtual currency exchanges reported more than two billion transactions totaling US$1.4t, approximately four times as many transactions and seven times the volume recorded in 2020.

To implement Treasury’s partnership vision, Adeyemo outlined the approach implemented by other industries facing similar risks in the past:

• Be proactive in identifying risks;
• Establish standards and protocols to mitigate those risks;
• Build new tools to ferret out and isolate bad actors and protect those operating lawfully; and
• Work hand in hand with government to identify firms failing to implement new regulatory measures and cut off their access to the digital asset ecosystem.

Why sound the virtual currency alarm now?

Adeyemo argued that risk migrates to places where regulation and enforcement are underdeveloped, with the result that bad actors exploit new technologies still growing into their regulatory landscape or not yet subject to regulations. He cited ISIS as having successfully manipulated security weaknesses in social media platforms—technologies in their infancy at the time—to “revolutionize jihadist recruitment” and “spread its hate faster than social media companies or governments could impose appropriate safeguards.”

Adeyemo also cited North Korean activity in “stealing virtual currency” and that its “preferred means of moving its ill-gotten gains is through the digital asset ecosystem rather than the traditional financial system.” He expressed concern that “as Hamas is dislodged from Gaza and no longer able to extort and tax innocent Palestinians, it will increasingly use the digital asset ecosystem.”

This is just the beginning

Focusing on recent high-profile Treasury enforcement actions that have resulted in multibillion dollar settlements, Adeyemo painted a sobering picture of illicit activities like “child sexual abuse, illegal narcotics trafficking and terrorism” supported by transactions conducted by “[g]roups like Hamas, Al Qaeda and ISIS” operating in the digital asset ecosystem. Treasury seeks to help “build an innovative industry that is on the right side of the law” and therefore will continue to work to target and eliminate the means by which bad actors can “hide the source, destination and amount of [their] transactions” in the digital asset ecosystem.

Key takeaways

Adeyemo stated that Treasury will continue to aggressively seek out and pursue digital asset industry players that Treasury believes continue to provide safe financial harbor for bad actors. Indeed, Treasury has petitioned Congress for more authority and broader resources to accomplish this goal, specifically:

• “the creation of new sanctions tools targeted towards actors in the digital asset ecosystem that allow terrorist groups and other illicit actors to move their assets” through “a secondary sanction regime that will not only cut off a firm from the US financial system, but will also expose any firm that continues to do business with the sanctioned entity to being cut off from the US financial system,” and
• “updat[ing] our illicit finance authorities to match the challenges we face today, including those presented by the evolving digital asset ecosystem,” such as no longer “rely[ing] on statutory definitions that are decades-old to address the illicit finance risks we face in 2023,” or “allow[ing] dollar-backed stable coin providers outside the United States to have the privilege of using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform,” or “permit[ting] offshore financial services providers to use jurisdiction-evasion tactics to avoid complying with our laws.”

In evaluating the Deputy Secretary’s remarks, it is clear that virtual currency exchanges and financial technology firms should, like traditional financial institutions, ensure adoption of firm-wide compliance initiatives. Firms should take heed of guidance issued by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) and other agencies to help navigate the evolving challenges of the digital asset ecosystem. Further, regularly-evaluated risk-assessment programs and controls should be integrated into existing platforms and emerging technology along with the implementation of policies that address the now-common interagency expectations of financial institutions operating in the virtual currency industry.

Special thanks to law clerk Peter Capozzi (New York) for assisting in the preparation of this content.