Russia’s invasion of Ukraine exposes the risks the U.S. faces without a “whole of government” approach to crypto policy or regulation, says V. Gerard Comizio, director of the business law program at American University Washington College of Law. He offers recommendations for federal legislation and asserts the U.S. must move with urgency.
Until now, debates about Bitcoin, Ethereum, and other cryptocurrencies centered on their nature: Are they actual currencies or speculative vehicles? Are they the future of money, a fad, or a new way to launder money and evade sanctions?
But as the U.S. and its allies aim to punish Russia with an unprecedented wave of financial sanctions, our leaders must recognize that these virtual currencies are a national security risk in need of comprehensive federal regulation. This new imperative should shape how federal agencies respond to the Biden administration’s executive order requesting regulation recommendations.
Well-designed regulation would allow the market for these virtual currencies to grow while safeguarding average users and ensuring Vladimir Putin and other bad actors can’t use digital money to sidestep the international order.
How the War in Ukraine Changes the Focus
The war in Ukraine has brought a few facts into focus.
Crypto is here to stay. Its growing global market cap is approaching three trillion dollars and virtual currency transactions are becoming a standardized feature of the global economy.
It’s an open question if the Russian government, its state-run companies, and influential oligarchs will be able to use crypto reserves to outlast sanctions, but former Secretary of State Hillary Clinton has already flagged “leaky crypto trading exchanges” as a potential weak point in the allied strategy.
Crucially, as the western world has moved against Russia, many of these crypto exchanges have shown a preference for libertarian ideals instead of security and stability. For example, Binance, the largest global crypto trading exchange, has rejected pleas by the Ukrainian government to block all Russian crypto transactions, stating that “there is no legal requirement to do so,” other than specific accounts targeted by sanctions. Notably, U.S. crypto exchanges have taken similar positions.
Regulators have been aware of some of these problems and there has been an emerging legal and regulatory framework governing crypto activities by various federal and state agencies.
But Russia’s war exposes the risks we have without a “whole of government” approach to crypto policy or regulation. The lack of such a cross-government policy, collaboration, and communication approach proved to be key elements leading to the intelligence failures of 9/11, and the financial crisis of 2008. We cannot make the same mistake here.
Recommendations for Federal Legislation
What should be done? The following are recommendations for needed legislation to adopt national crypto policy.
One federal agency should be charged with consolidated federal regulation and policy regarding all crypto activities. This agency should be a member of the National Security Council in order to integrate national security and regulatory policy. We should formally state that crypto is a matter of national security.
Since the Treasury Department already is currently charged with overseeing the implementation of sanctions policy, it may be the logical agency to oversee consolidated regulation and policy governing crypto regulation, and a new office within Treasury should be created to focus on this responsibility. Among other things, newly created cryptocurrencies would be required to be registered with the Treasury.
The Federal Stability Oversight Council (FSOC) should be given specific authority to coordinate national policy on crypto regulation. Currently chaired by the Treasury and composed of the major federal financial agencies, FSOC’s current mission is to provide collective accountability for identifying risks and responding to emerging threats to financial stability. This would be expanded to address crypto risks.
The numerous federal agencies currently involved in various aspects of crypto regulation should be given the statutory authority they need to regulate crypto activities that fall within their respective oversight.
All U.S. financial institutions and publicly held companies should be required to fully disclose all crypto activities in their regulatory and securities reports so that regulators and investors will have a full understanding of these activities and any potential risks.
The U.S. intelligence community needs to implement a 21st-century crypto threat info sharing database with regulators and financial institutions, and all US companies and regulators must be required by law to share any identified crypto-threats and hack attempts in a common database.
To date, there are no federal registration or licensing requirements to operate a crypto trading exchange. A federal scheme should be adopted with standards similar to those in place for federally regulated securities and commodities dealers, and self-regulatory organizations with enforcement powers to sanction regulatory violations.
Global Effort Needed
The U.S. should work with its allies and global organizations to adopt effective global policies for regulation of crypto trading exchanges, including to combat money laundering and enforce compliance with U.S. sanctions.
This is not a small list of recommendations. As with anything requiring approval of a partisan Congress, creating a new regulatory framework will likely not be easy.
But we must move with urgency, much like the U.S. and its allies have in response to Russia’s invasion. This crisis has given the U.S. fair warning that as crypto continues to grow and embed itself in the global economy, our preferred foreign policy strategies may be thwarted in the near future.
V. Gerard Comizio is an adjunct professor of law and director of the business law program at American University Washington College of Law. He teaches courses on U.S. and international banking law, virtual currency law, and regulation of financial institutions. He is a former Big Law partner and deputy general counsel with the Treasury Department.
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