Powell Calls For 'Strong' Crypto Regs Amid Sanctions Worries

Law360 (March 3, 2022, 5:38 PM EST) -- Federal Reserve Chair Jerome Powell told senators on Thursday that recent concerns that cryptocurrencies could potentially be used to skirt Russian sanctions are bolstering the case for stronger oversight of digital finance, and endorsed a new push to pass Libor transition legislation.

At a Senate Banking Committee hearing, Powell said that while he has no special knowledge of any sanctions evasion involving crypto-assets, the risk "really underscores the need to have a strong regulatory regime that permits appropriate activity, but that that prevents inappropriate activity."

"We do have laws on the books," Powell said. "But I think for digital finance generally, we need a legal framework that would really take away as much as possible … the possibility that people could use unbacked cryptocurrencies as a way to evade the law, or to finance terrorism and hide their ill-gotten gains."

"I think it's very important," he added.

There has been growing discussion among U.S. and European policymakers about the role that cryptocurrencies and related tools could potentially play in undermining the international sanctions response to Russia's invasion of Ukraine last week.

Sanctions have involved harsh restrictions aimed at cutting Russia off from the traditional financial system, including by expelling major Russian banks from SWIFT, the global payments messaging system, and blocking assets of the Russian central bank. But reports of a recent surge in crypto trading with Russian rubles and several large crypto exchanges' resistance to calls for a blanket ban on Russian users have highlighted concerns about the digital asset industry as a potential weak spot for sanctions enforcement.

Powell's comments came after several Democrats on the Senate Banking Committee, including Sen. Elizabeth Warren of Massachusetts, aired some of those concerns in a Wednesday letter to the U.S. Treasury Department.

Warren reiterated at Thursday's hearing that cryptocurrency can "take the sting out of sanctions" and accused the digital asset industry of poor compliance with sanctions requirements in recent years.

"Cracking down on crypto is a critical piece of holding Russia accountable for its aggression," Warren said. "We can't fool around any longer. We need to get new crypto rules in place."

Thursday's hearing was the second of two regularly scheduled congressional appearances this week for Powell, whose expected confirmation to a second term as Fed chairman has been delayed amid a Republican boycott tied to Sarah Bloom Raskin, another one of President Joe Biden's five Fed nominees.

The boycott thwarted a Senate Banking Committee vote that was planned last month to advance Raskin, who is up for the role of Fed supervision vice chair, as part of slate with Powell and the other Fed nominees.

Republicans on the panel sent a letter to Biden on Wednesday that stressed their boycott is about Raskin only and rooted in what they called her "lack of candor" in response to ethics questions about her time on the board of a Colorado fintech company, not her "radical" views on climate risk regulation.

The letter also signaled the Republican members' intent to continue holding out on Raskin's nomination process, saying they can't support advancing it without "greater insight" on her past work.

The committee's Democratic chairman, Sen. Sherrod Brown of Ohio, dismissed such demands on Thursday, telling reporters that he may try to schedule another vote eventually and plans in the meantime "to continue to put the pressure on Republicans who know they're doing the wrong thing."

"She is clean. This is just a witch hunt," he said of Raskin.

Despite the partisan tensions, Brown and his counterpart on the Banking Committee, ranking member Sen. Pat Toomey, R-Pa., have found common ground on legislation introduced Wednesday that seeks to alleviate legal uncertainty related to the impending end of the London Interbank Offered Rate, which is set to be fully discontinued by mid-2023.

Titled the Economic Continuity and Stability Act, the legislation would provide a mechanism for automatically replacing Libor in the trillions of dollars of outstanding "tough legacy" financial contracts that currently reference it but have no good built-in alternative to fall back to once it is retired.

Brown and Toomey are co-sponsors on the bill, along with Sens. Jon Tester, D-Mont., and Thom Tillis, R-N.C. The financial industry has been eager for federal action to address these tough legacy contracts after the House passed a similar bill late last year.

At Thursday's hearing, Powell gave his thumbs-up to the bipartisan effort, calling it "very important from a financial stability standpoint" to deal with these older, difficult-to-amend contracts.

"It's good that we're down to this last so-called hard tail, but this is important legislation," Powell said.

A slew of major financial industry organizations have also endorsed the new bill.

In a letter to Senate leaders last week, the Securities Industry and Financial Markets Association and nearly two dozen other trade groups applauded the legislation as a "bipartisan solution that offers fair, equitable and consistent treatment for all tough legacy contracts in support of the Libor transition."

"We respectfully request the Senate to quickly pass this much needed Libor legislation," they wrote.

--Editing by Alanna Weissman. Additional reporting by James Arkin. 

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