New crypto sanctions bill targets publishing code, facilitating transactions

Bill would place sweeping restrictions on persons who build, operate, and use cryptocurrency networks even if they have no knowledge or intent to help evade sanctions though the Administration’s own experts have repeatedly said cryptocurrency evasion is not serious

Senator Warren and a raft of Democratic co-sponsors today introduced a bill [PDF] titled the Digital Asset Sanctions Compliance Enhancement Act, which would place sweeping restrictions on the cryptocurrency ecosystem under the guise of bolstering sanctions against Russia for its unjustified invasion of Ukraine. She has done this despite the fact that there is no data suggesting that cryptocurrency has been used–or can meaningfully be used–by sanctioned parties to evade sanctions, and despite the fact that frontline officials from the White House, Treasury, and the Department of Justice have all stated that cryptocurrency is a poor tool for sanctions evasion and one that they have well under control.

For example, FBI Director Christopher Wray said last Thursday at a Senate Intelligence Committee hearing:

The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others. We are, as a community and with our partners overseas, far more effective on that than I think sometimes they appreciate.

We have built up significant expertise both at the FBI and with some of our partners, and there have been some very significant seizures and other efforts that I think have exposed the vulnerability of cryptocurrency as a way to get around sanctions.

Here’s the White House:

“The scale that the Russian state would need to successfully circumvent all U.S. and partners’ financial sanctions would almost certainly render cryptocurrency as an ineffective primary tool for the state,” said Carol House, the director of cybersecurity for the National Security Council, during a webinar on Wednesday.

Here’s the Treasury Department:

“The scale of what they have to move, and where they have to move things from, [crypto’s] not necessarily going to be that concerning,” said Todd Conklin, counselor to the deputy Treasury secretary. Any attempt to move that much money through exchanges would contribute to “a bit more of a spike in the crypto market, in my view, than has been observed lately.”

Nevertheless, the bill would place sweeping restrictions on persons who build, operate, and use cryptocurrency networks even if they have no knowledge or intent to help anyone evade sanctions. It calls for sanctioning technologists and users merely for the act of publishing open source software or facilitating communication among network participants. This is unnecessary, overbroad, and unconstitutional.

Potential for Sanctions on Software Developers, Node Operators, and Miners

Section 3 of the bill goes beyond merely calling for secondary sanctions on noncompliant foreign cryptocurrency exchanges. It additionally calls for sanctions on anyone who “significantly and materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any [sanctioned] person.” Let’s look at each of these in turn.

Exchanges. Placing sanctions on noncompliant overseas cryptocurrency exchanges is, at least, a calibrated response. Treasury officials have repeatedly identified non-compliant overseas cryptocurrency exchanges as the most meaningful remaining gap in effective AML/CFT controls, and have suggested that this, rather than unwarranted alarm over so-called decentralized exchanges or unhosted wallets, should be the priority for policymakers. Nonetheless, the President already has the authority necessary to create these secondary sanctions on exchanges regardless of this proposed legislation.

Persons providing “material” or “technical support.” While the President already has the power to sanction these parties should he determine its necessity, this bill would direct the President to use those powers in an irresponsibly vague and overinclusive manner. There are an uncountable number of persons who can be said to provide “material,” “technical support,” or “open source software” “goods” to power cryptocurrency networks that are overwhelmingly used for entirely legal activities. Like the internet and its protocols, however, these tools, once public, can be used by anyone, and some uses of those tools may be illicit. The mere fact that a stranger is using your software or network throughput to do something illegal without your knowledge cannot be a trigger for the crushing penalties that are sanctions.

This bill’s language could easily be interpreted to encompass someone who has written software that is used by sanctioned persons to transact, persons who run nodes on peer-to-peer networks on which sanctioned persons transact, and persons who mine or otherwise validate blockchains on which sanctioned persons transact. It is not per se unreasonable for the President to use his existing powers to sanction people performing these activities in cases where they have knowledge and intent to help someone violate sanctions. It is, however, unreasonable for Congress to call on the President to sanction every person who performs these activities irrespective of their knowledge or intent to facilitate some stranger’s illicit activity.

Further, the definition of “digital asset transaction facilitator” makes clear that the intent is to direct the President to target all manner of innocent persons in the cryptocurrency space, including persons in the business of effecting transactions via “communication protocol” (language which we must point out is strangely similar to language in the current overbroad and constitutionally-suspect SEC rulemaking on exchanges) or even by publishing mere “software, including open-source computer code[.]” Again, in cases where any of these parties have both the knowledge and intent to assist a sanctioned party in circumventing sanctions, it may be reasonable for the President to use existing authority to implement secondary sanctions. However, it is unreasonable for Congress to demand that the President sanction everyone matching such a broad description. Indeed it is blatantly unconstitutional under the First Amendment to forbid the publication of open source computer code.

Restriction on Cryptocurrency Exchanges

Section 4 enjoins the Secretary of Treasury to implement a full and indiscriminate ban on exchanges or non-custodial “transaction facilitators” doing business with anyone or any cryptocurrency address “known to be, or could reasonably be known to be, affiliated with persons” in Russia.

Our main concern with this provision is that it empowers the Treasury Secretary to arbitrarily ban software developers, miners, and node operators from having any “business” interaction with anyone or any address that might be Russian. Apart from being a sweeping and vague power to, at will, direct the behavior of untold Americans, it will also do little to nothing to prevent the Russian state or oligarchs from evading sanctions. It will also punish ordinary Russians who did not choose their government, may be against the war, and rely on cryptocurrency for their livelihood and to hold on to whatever savings they can. Targeting ordinary citizens who could be the West’s greatest allies against a regime they did not choose is not a good strategy. At least that’s what the Obama Administration thought when they designed the first sanctions on Russia after the invasion of Crimea. Here is current Deputy National Security Advisor Daleep Singh in Senate testimony (emphasis ours):

Before 2014, the United States had never imposed sanctions on a country the size of Russia. It was the tenth largest economy in the world, with a GDP roughly the size of Italy. More important than its size was the complexity of Russia’s economy and its connections to the rest of the world. Russia was and is of systemic importance in global energy markets, ranking second and third in the production of natural gas and oil, respectively. Its largest banks were comparable in size and complexity to Lehman Brothers before 2008. Given the high stakes involved, our objective was clear: design a menu of options that could deliver economic costs while minimizing spillovers to the U.S. and global economy.

We pursued this objective by first writing down a set of guiding principles that remain instructive. Sanctions against a large, complex, and integrated market economy such as Russia should be: (1) powerful enough to demonstrate U.S. resolve and our capacity to impose overwhelming costs; (2) responsible to limit contagion through the U.S. and global financial system; (3) targeted to avoid the appearance of punishing the Russian civilian population and, in doing so, strengthening Putin’s domestic narrative; (4) calibrated to increase the chance of partnering with European and international allies; and (5) staged to preserve scope for escalation or de-escalation, in addition to learning from previous steps.

The U.S. should not want to be seen as punishing the civilian population, giving them every reason to believe Putin’s claims that the West is attacking them rather than attacking the regime. It should be obvious that one shouldn’t want Facebook to ban Russians, but Russia to ban Facebook, so it’s clear who’s hurting citizens. The same should apply to cryptocurrency exchanges. And indeed, this is exactly what Michael Chobanian, founder of the Ukrainian crypto exchange working with the Ukrainian government, told the Senate Banking Committee in a hearing today. These ordinary Russians who depend on cryptocurrency, he said, are the opposition to Putin and should not be sanctioned. In his written statement he made clear: “Many civilians justifiably fear the seizure of retail deposits and want to protect their capital. Purchasing digital assets is an effective means by which ordinary Russian citizens can demonstrate their opposition to Putin’s regime by moving their savings out of the financial system of the Russian ruble.”

Additionally, this provision would be difficult to enforce on regulated custodial entities like exchanges and effectively impossible with regard to node operators, miners, it software developers. A cryptocurrency address is a set of letters and numbers generated by a device without reference to geographic location. It makes no sense to say that an address is Russian or American or Zambian. By using different digital clues, blockchain forensic services can make probabilistic estimates of what country an address may be related to. However, there is no way to know for sure, so you will end up with false-positives (blocking addresses that shouldn’t be blocked and hurting innocent users) and false-negatives (not blocking addresses that should be blocked, exposing otherwise compliant exchanges to liability, which in turn means they’ll be more conservative and block more addresses than they need to, thus hurting innocent users). We would not force Americans to inspect every packet of data their computers send or receive on the open internet for “Russianess” and it is equally absurd and offensive to human rights that we’d force Americans to do so with regard to open blockchain data.

This proposed legislation is dangerously overreaching and opportunistic. It will do nothing to improve sanctions against the Russian war machine and may even increase the Russian government’s ability to isolate and control those within their borders who do not support the war. We strongly object to Congress seizing on overblown concerns over sanctions to impose unreasonable and unconstitutional restrictions on the cryptocurrency ecosystem.