Federal Reserve Board Chairman Jerome Powell appears for testimony before the Senate Banking, Housing, and Urban Affairs Committee
Federal Reserve Board Chairman Jerome PowellWin McNamee/Getty Images
  • Concerns that Russian use of crypto could weaken sanctions highlight a need for lawmakers to act, Fed Chair Jerome Powell said.
  • "There isn't in place the kind of regulatory framework that needs to be there," he told Congress on Wednesday.
  • Democratic senators have raised concerns that the use of cryptocurrencies could undermine sanctions. 

Concerns that cryptocurrencies could undermine US sanctions against Russia highlight a gap in regulation that lawmakers should plug, Federal Reserve boss Jerome Powell has said.

At an appearance in Congress Wednesday, the Fed chair was asked whether the use of cryptocurrencies could let Russians sidestep the sanctions placed on the country after its invasion of Ukraine.

"I just think it underscores the need, really, for congressional action on digital finance, including cryptocurrencies," he told the House Financial Services Committee.

"We have this burgeoning industry which has many parts to it, and there isn't in place the kind of regulatory framework that needs to be there."

"It was probably no different with railroads or telephones or the internet, and ultimately what's needed is a framework, and in particular ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist finance and just general criminal behavior."

Powell stressed he had no private information on the extent to which any crypto-based workarounds were happening, but acknowledged he had heard talk of it.

A group of Democratic senators wrote on Wednesday to Treasury Secretary Janet Yellen to raise their concerns that the use of cryptocurrencies could undermine sanctions. 

In October, the Treasury warned decentralized digital assets — which don't need a traditional intermediary such as a bank to be transferred — could dampen the impact of sanctions.

"These concerns have become even more urgent given the sanctions imposed on Russia after its invasion of Ukraine," Sen. Elizabeth Warren and three of her colleagues wrote.

At the weekend, the US and its allies removed access for selected Russian banks to SWIFT, the crucial messaging system that underpins global payments.

They also imposed restrictive measures to prevent the Russian Central Bank from deploying its international currency reserves in ways that undermine the impact of sanctions.

The country's currency, the ruble, crashed as the measures were rolled out, and clients of targeted Russian banks are unable to liquidate their foreign-exchange reserves.

Russia's central bank has put limits on money transfers out of the country by foreigners, in response to Western sanctions.

A rise in demand for bitcoin has led some to suggest people could be attempting to use cryptocurrencies to move money.

"If they can pay with bitcoin, of course, that's an avenue to get money out of Russia," investing legend Mark Mobius said this week.

"Otherwise, they're really in trouble, with all the closures of the different avenues for them to transfer money."

But those avenues can still be monitored, according to Caroline Malcolm, the head of international public policy for Chainalysis.

"As in the traditional financial system, the cryptocurrency ecosystem can put measures in place to identify transactions from identified sanctioned entities." Malcolm told Sky News  on Wednesday.

Read more: Macro strategists at a $900 billion asset manager break down how war in Ukraine and the related energy market turmoil could derail the Fed's monetary policy plans — and reveal which countries' stock markets are best placed to ride out the storm

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