Via the Washington Examiner. For more about how the Jones Act has encouraged imports of Russian energy, please see this blog post or visit the Cato Institute’s Jones Act webpage. 

“Never let a good crisis go to waste.” – Winston Churchill

Without missing a step, U.S. politicians have been beating the drums of war to parade their own agendas. Namely, Senate Democrats have been raising the alarm about cryptocurrencies being used to evade sanctions. The claim could not be further from the truth.

In a letter to Treasury Secretary Janet Yellen (and on social media), the lawmakers asserted that, “criminals, rogue states, and other actors may use digital assets and alternative payment platforms as a new means to hide cross-border transactions for nefarious purposes.” In other words, they are arguing that “cryptocurrencies risk undermining sanctions against Russia.”

Before addressing the issue itself, it’s worth noting that the letter to Yellen came days after officials from the U.S. Treasury Department told Politico,

[We] aren’t overly worried about crypto undermining the effort to choke off the Kremlin’s access to capital. Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming and would likely be visible in the broader crypto market, given the massive investment portfolios of individuals and institutions named in the sanctions.

In fact, Cato’s Matthew Feeney addressed that very issue as well when he wrote,

An oligarch who does manage to buy cryptocurrencies on an exchange with fiat could seek to throw investigators off their trail by sending their holdings to a tumbler. But these are not without significant drawbacks, and some exchanges do not allow assets that have been through tumblers to enter their platform.

In other words, it’s likely that the panicked oligarchs will be able to do little more than lose money and isolate themselves further if they try to go this route.

There is certainly a steep learning curve involved with cryptocurrencies and decoding the associated terms. But it does not take a full-scale investigation to understand the fact of the matter: Cryptocurrencies are far from the “get out of jail free” card that opportunists are making them out to be.

How Sanctions Affect Cryptocurrencies

For anyone still unconvinced, it might be helpful to dig a bit deeper into how the sanctions work and how they affect the crypto-economy.

Sanctions are often spoken of as if they are sweeping bans across an entire country, but the reality is a little more nuanced than that. Currently, the sanctions that have been set forth are targeted on specific Russian individuals and companies, not the entirety of Russia’s 144 million people. (Though they may be limited in terms of direct targets, it is important to note that the sanctions do in fact affect Russia’s citizens broadly as the economy continues to collapse.)

The data does show that Russians have been rushing to buy cryptocurrencies, but it seems much more likely that this activity is based on the millions of ordinary citizens that are desperately trying to preserve their wealth. As the following chart shows, the trading volume between the ruble and bitcoin hit a nine-month high at nearly 1.5 million rubles. Yet that is equal to just 13,911 dollars––which is clearly not a Russian billionaire moving all of their money.

As for the handful of specific targets being sanctioned, moving from rubles to cryptocurrencies really won’t help them in the end. The sanctions make it illegal for U.S. citizens and companies to transact with those on the sanctions list. As Jake Chervinsky noted, “It doesn’t matter if they use dollars, gold, sea shells, or bitcoin.” It is still illegal.

Russian politicians and billionaires are welcome to try to use cryptocurrencies, but a transparent, public ledger that cannot be edited is a recipe for disaster for any criminal trying to hide their money. U.S. Attorney General Merrick Garland said, “We will leave no stone unturned in our efforts to investigate, arrest and prosecute those whose criminal acts enable the Russian government to continue this unjust war.” Cryptocurrencies may offer ordinary citizens the opportunity to escape the falling ruble, but those being sanctioned are in for a harsh reality check if they choose to use cryptocurrencies and leave an immutable paper trail on the blockchain. Such evidence is just what Garland and his fellow prosecutors need.

If lawmakers want to take away a lesson from cryptocurrencies during this war, let it be that the adoption of cryptocurrencies has brought on a system that can simultaneously undermine the bad guys, help people in need, and raise more than $28 million for the Ukrainian government during this time of crisis. Politicians should be singing cryptocurrency’s praises rather than demagoguing it.

Since 1990, the executive branch has had the authority from Congress to provide Temporary Protected Status (TPS) to people already in the United States who are from countries in which an “ongoing armed conflict within the state” exists. A bipartisan group in Congress wrote a letter to the Biden administration requesting that it designate Ukraine for TPS, and then they also proposed legislation to require it to use its authority.

Finally, the administration has relented (with the full details still to be filled in). But Congress should still recognize the procedural problem with giving total discretion to the administration not to offer TPS and require it whenever there is a major armed conflict in order to permanently eliminate the problem of delayed TPS designations in those cases. Despite the TPS designation for Ukraine, other countries with serious armed conflicts, like Afghanistan and Iraq, are not being designated for TPS.

TPS would assure that perhaps as many as 28,000 Ukrainians in the United States in temporary statuses (or, in some rare cases, no status) are not forced to choose between living here illegally or having to find some way to return to the war zone. TPS provides work authorization and legal status for up 18 months at a time to people from the designated country who arrived before the designated date. The designation and status may be renewed if conditions do not sufficiently improve.

It should surprise no one that despite the clear authorization, the Department of Homeland Security (DHS) was slow to make the designation for Ukraine. Historically, the government has taken many months to designate a country for TPS following a crisis there. Half of all TPS designations took 233 days—nearly 8 months—or more to occur after the event that justified the designation, and the government failed to designate 63 percent of countries that have had at least one major armed conflict since 1990.

Under the statute, TPS can be granted in response to three broad types of crises:

1. environmental disasters—earthquakes, floods, epidemics, etc. (which has happened 9 times);
2. ongoing armed conflict (which has happened 13 times not including the forthcoming Ukraine designation); and
3. other extraordinary and temporary conditions preventing people’s return (which has happened 5 times where that was the sole justification).

Table 1 shows every TPS designation (not including Ukraine) and the number of days following the justifying event before the designation occurred. The median days to designate was 277 days (over 9 months) for extraordinary conditions designations, 233 days (nearly 8 months) for armed conflicts, and 66 days (about 2 months) for environmental disasters. This means that normally, the government takes 3 times longer to designate TPS after the start of an armed conflict than it does after an environmental disaster.

The shortest period to designate for any event was 9 days, following Haiti’s 2010 earthquake. This provides that it is bureaucratically possible for an administration to respond relatively quickly when it wants to act. The Ukraine designation might be close to the same amount of time, but the details remain to be seen.

In many cases, however, the government has simply never provided TPS despite an ongoing armed conflict. The statute does not define armed conflict, but the typical definition of a war or major armed conflict is 1,000 fatalities in a year. Table 2 shows the major armed conflicts (wars) as documented in the UCDP/PRIO Armed Conflict Dataset (1991–2020) and the Armed Conflict Location & Event Data Project (2021–2022). Altogether, major conflicts with at least 1,000 fatalities in a year occurred in 40 countries, and only 15 of those countries ever received TPS, so the government failed to use its statutory authority about 63 percent of the time.

As Table 2 shows, there are 11 active major conflicts in the world, and 7 of those countries have an active TPS designation. With the Ukraine designation, 4 countries have an active major armed conflict but no TPS designation. They are:

1. Afghanistan (Taliban takeover/​civil war);
2. Nigeria (Boko Haram/​insurgency);
3. Iraq (ISIS/​insurgency); and
4. Ethiopia (Tigray insurgency).

The only additional statutory requirement for a TPS designation based on an armed conflict is that the Secretary of Homeland Security must find that “requiring the return of aliens who are nationals of that state to that state (or to the part of the state) would pose a serious threat to their personal safety.” But it is almost tautological that major armed conflicts pose a “serious threat” to those who must live there.

The government has never explained in any long-delayed TPS designation why it failed to act before it ultimately did, and it obviously has never done so in any case where it has refused to ever provide TPS. These additional designations would probably only add about 5–10 percent to the current TPS population. Perhaps in some cases, the State Department or the Department of Defense had a specific objection on foreign policy grounds to TPS. But rather than simply assuming that there were objections, Congress should require DHS to consult with these departments when any armed conflict occurs, and if they fail to report an objection within 10 days of the consultation, the country should be automatically designated for TPS.

Congress should be forward looking and assure that it doesn’t need special legislation to force the administration to fulfill the intent of the TPS law and that the administration does not wait to issue TPS in obvious cases. It should require a TPS designation for any country suffering from a major armed conflict. This is already what the TPS statute is supposed to accomplish, but there is no reason to leave it to the administrative discretion—indeed, history shows that there is every reason to remove the discretion.

Original TPS Designation Citations

65 FR 16634, Angola, (March 29, 2000); 57 FR 35604, Bosnia-Hercegovina, (August 10, 1992); 62 FR 59735, Burundi, (November 4, 1997); 63 FR 31527, Kosovo, (June 9, 1998); 56 FR 12745, Kuwait, (March 27, 1991); 56 FR 12746, Lebanon, (March 27, 1991); 56 FR 12746, Liberia, (March 27, 1991); 59 FR 29440, Rwanda, (June 7, 1994); 62 FR 59736, Sierra Leone, (November 4, 1997); 56 FR 46804, Somalia, (September 16, 1991); 62 FR 59737, Sudan, (November 4, 1997); 76 FR 63629, South Sudan, (October 13, 2011); 77 FR 19026, Syria, (March 29, 2012); 80 FR 53319, Yemen, (September 3, 2015); 66 FR 14214, El Salvador, (March 9, 2001); 75 FR 3476, Haiti, (January 21, 2010); 80 FR 36346, Nepal, (June 24, 2015); 79 FR 69511, Guinea, (November 21, 2014); 79 FR 69502, Liberia, (November 21, 2014); 79 FR 69506, Sierra Leone, (November 21, 2014); 64 FR 542, Honduras, (January 5, 1999); 64 FR 526, Nicaragua, (January 5, 1999); 62 FR 45685, Montserrat, (August 28, 1997); 86 FR 28132, Burma (Myanmar), (May 25, 2021); 64 FR 12181, Guinea-Bissau, (March 11, 1999); 86 FR 41863, Haiti, (August 3, 2021); 86 FR 13574, Venezuela, (March 9, 2021); DHS, “Secretary Mayorkas Designates Sudan,” March 2, 2022.

This morning the Senate Homeland Security and Governmental Affairs Committee held a hearing titled “Examining the Senate Confirmation Process and Federal Vacancies.” I submitted a written statement, which is based on my recent Vacancies Act Briefing Paper. In the statement, I explain how presidents of both parties have increasingly exploited a loophole in the Vacancies Act to turn temporary acting officers into de facto permanent officers.

The Vacancies Act places limits on both who can serve as an acting officer and how long they can serve. These limits are the core limitations that the Vacancies Act places on the executive branch. Without such limits, the executive branch would have little incentive to nominate people for Senate confirmation rather than using the Vacancies Act.

In 1998, in an attempt to give real teeth to the Vacancies Act’s limitations, Congress created an enforcement mechanism that invalidates an illegal acting officer’s work. The intention was that if a purported acting officer stayed in office past the Vacancies Act’s deadline or lacked the required qualifications, that officer’s actions could be challenged in court and invalidated.

But this enforcement mechanism has not incentivized compliance as intended. That is because only actions that qualify as the performance of a “function or duty” of an office can be invalidated, and the Vacancies Act adopts an exceedingly narrow definition of “function or duty.” Essentially, only exclusive and nondelegable duties have been held to fall under the act’s definition of a “function or duty.” And since courts have held that all federal duties are presumptively subdelegable in the absence of specific evidence to the contrary, all federal duties are also presumptively exempt from the Vacancies Act’s limitations.

In the hearing this morning, Stanford Law School Professor Anne Joseph O’Connell described the reality for many agencies today when the time limits of the Vacancies Act run out: “You have delegations of authority downward for the nonexclusive functions, and basically most of the functions are nonexclusive in federal agencies. … Under these delegations there are no time limits. And so you can have those positions carried out for years, for entire presidential terms, without ever putting forward a nominee.” Although Prof. O’Connell and I may disagree on the details for the best statutory solution, we agree that this is not an ideal system. In my view, as explained in my statement, Congress can and should put a stop to this maneuver by eliminating the Vacancies Act’s exemption for delegable duties.

In the hearing this morning, there was unanimity among all three witnesses that federal law currently mandates Senate confirmation for too many positions. I agree: the Constitution leaves it up to Congress’s policy judgment to determine whether each “inferior officer” in the federal government should be appointed with or without Senate consent. Congress should take that responsibility seriously, weighing the relative values of accountability and efficiency for each position. In my view, the determinative factor should be the power an official has over the day-to-day lives of Americans. Officials with final authority to issue binding rules and policies are the ones who should be vetted by the Senate. Requiring Senate confirmation for other officials without such power may actually distract the Senate from those positions where vetting is most necessary.

I’m hopeful that in the wake of this hearing, Congress will show a new momentum toward fixing the federal appointments process. Reducing the number of positions requiring Senate consent and reforming the Vacancies Act are complementary parts of a complete solution. The Senate should focus on those positions where scrutiny is most important, and the executive branch should no longer be able to evade Senate scrutiny for officials performing the duties of those key positions.

Last week, Currency Research held its inaugural Digital Currency Conference in Washington, D.C. The event brought together experts, policymakers, technologists, central bankers, and stakeholders to discuss the future of digital currencies––namely, central bank digital currencies (CBDCs). It covered everything from quantum computing to the digital divide in payments.

While the event led to too many discussions to list in one sitting, here are three of the key takeaways that seemed to echo throughout the day.

A CBDC Is a Solution in Search of a Problem

The most pressing question of all was whether a CBDC was a “shiny new toy” for central bankers or the next great step forward in the history of money. It’s certainly might be a “step in history,” but the current outlook for CBDCs is far from great.

Douglas Elliott and Larissa de Lima at Oliver Wyman addressed the issue well last summer when they detailed six policy mistakes that need to be avoided when crafting CBDCs. One of the most important mistakes they describe might be the mistake of ignoring the other policy tools that are on the table. Luckily, some policymakers appear to be taking note of this warning. For example, Philip Lowe, Governor of the Reserve Bank of Australia (RBA), recently said, “The RBA is open to [the possibility of a CBDC]. To date, though, we have not seen a strong public policy case to move in this direction, especially given Australia’s efficient, fast, and convenient electronic payments system.”

The U.S. payments system is years behind that in Australia, but even here, a CBDC is not a unique solution. Not only has the private sector made great strides in speeding up payments, but the Fed itself is expected to launch a new service (FedNow) in 2023 specifically to update the payments system.

And much like with the payments system, the other issues a CBDC is purported to fix are all being addressed through more-targeted, private-sector endeavors. It’s just not clear what unique issue a CBDC will solve in practice, and how that solution would justify reinventing the dollar. And if that question can’t be answered, the United States would be better off renouncing plans to launch a CBDC.

Costs of Cryptocurrencies are “Too High”

Another common question throughout the conference was about the energy cost of cryptocurrencies like Bitcoin. Dave Mills, associate director at the Board of Governors of the Federal Reserve, noted the following: “If anything is to be a viable option, its costs need to be comparable to the existing banking system.” Mills is half right. However, with some tweaking, the statement can capture the full story:

If any cryptocurrency is to be a viable alternative to the traditional banking system, its net benefits need to be equal to or exceed those associated with the existing banking system.

In fact, Lawrence White wrote an essay this week explaining exactly that. A cost analysis may be one piece of the puzzle, but to judge the full picture, one must weigh both costs and benefits. It doesn’t matter if the item at hand is a bridge or a blockchain, a decision is only half informed if it’s solely judged by its costs.

Questions and Uncertainty

Finally, Sunayna Tuteja, chief innovation officer at the Federal Reserve, summarized the last takeaway when she said, “Just because you’ve been relevant for the last 100 years does not mean you’ll be relevant for the next 100 years.” Although the Fed may see a CBDC as a ticket to relevancy, there is still much uncertainty about how secure that ticket really is. For example, one of the greatest challenges in thinking about a CBDC is pinning down exactly which type of CBDC someone is talking about.

A CBDC can be wholesale, retail, synthetic, token-based, and the list goes on. Each variation has its own unique costs and benefits. So it’s important for central banks to nail down exactly what type of CBDC they want to pursue because it will ultimately undermine their attempt if they take a “Swiss Army knife approach” and try to blend them all together. It would be better to have a focused approach that delivers one or two benefits that improve (on net) problems in the current system than a scattered approach that does the minimum to check all the boxes.

The Fed did, after nearly a year of deliberations and postponing, outline its vision for a CBDC, but even that left many questions still unanswered. As time moves forward, the Fed will have to make some hard decisions about exactly what it wants in a CBDC if it is going to make the case to the American people. Until then, the future of a CBDC in the United States is far from certain.

For Next Time

With these takeaways in mind, it’s safe to say that Currency Research’s inaugural Digital Currency Conference set a great foundation for their future events to come.

A judge ruled today against New York Attorney General Letitia James’s request that the National Rifle Association be dissolved following claims of fraudulent use of funds, while still allowing her office to go forward in pursuing various other remedies for the alleged misconduct. The judge said dissolution of the NRA “could impinge, at least indirectly, on the free speech and assembly rights of its millions of members.” That’s exactly what I argued when James’s office filed the action.

Justice Joel Cohen of the New York Supreme Court in Manhattan — a trial-level court, notwithstanding the nomenclature — noted that James’s

allegations concern primarily private harm to the NRA and its members and donors, which if proven can be addressed by the targeted, less intrusive relief she seeks through other claims in her Complaint. The Complaint does not allege that any financial misconduct benefited the NRA, or that the NRA exists primarily to carry out such activity, or that the NRA is incapable of continuing its legitimate activities on behalf of its millions of members.… [State-imposed dissolution] should be the last option, not the first.

Exactly so. As I wrote then,

Had she contented herself with seeking such lesser but potent sanctions as restitution of ill‐​gotten money and court orders barring wrongdoers from managing non‐​profits in the future, few outside NRA circles would pay much heed. (The case is not a criminal prosecution.)

Instead James grabbed nationwide headlines by asking the court to dissolve the nation’s best‐​known gun rights organization in its entirety. Some of those praising her action were openly gleeful at the prospect that government action might shut down what is, from their perspective, a major opposition political group.…

[The demanded remedy] is hostile toward the wishes and interests of the group most directly harmed by the self‐​dealing, donors who wanted a maximally effective Second Amendment advocacy group and (if the allegations are true) were cheated of that.

There’s all the difference in the world between dropping a legal anvil on NRA insiders because you want to vindicate the interests of the organization’s donors and members, and demanding the group’s dissolution precisely because you don’t.… Whatever the implications for the Second Amendment, perhaps the greater danger here is to the First.

The New York Attorney General, as a matter of fact, is charged with the regulation of charitable nonprofits in large part because lawmakers sought to vindicate, not foil, donors’ interests in the causes they hoped to advance. “I suspect the judiciary will be unlikely to go along with James’s dissolution demand,” I predicted then. Today’s decision is a victory for liberty and the rule of law and a reproach to politically minded enforcement.

Prominent Russian oligarchs have found themselves on the receiving end of significant sanctions following Russia’s invasion of Ukraine. As a result of the invasion, the Russian ruble has collapsed and Russians are rushing to banks to withdraw rubles and American dollars. Amid all of this economic turmoil there has been an uptick in cryptocurrency trades involving rubles and the Ukrainian hryvnia. As a means to preserve savings in the midst of economic turmoil, buying cryptocurrencies might sound appealing despite their well-known volatility. However, those buying Bitcoin in an attempt to avoid sanctions will quickly learn that such an approach is unlikely to work. This is thanks to the transparent nature of Bitcoin and the regulations governing financial institutions and cryptocurrency exchanges.

Bitcoin is often described as “anonymous.” This is not true. It is more accurate to describe Bitcoin as pseudonymous. The entire history of Bitcoin transactions is available for anyone with an Internet connection to see. Transactions are linked to accounts, which you can find by conducting a simple search of the Bitcoin blockchain.

Yesterday, for example, a Bitcoin user transferred 919.877 BTC (worth almost $41 million at time of writing) to an account hosted by the popular cryptocurrency exchange Coinbase. The account’s address is: 17QyR2ixNj1AgpD5ZuXubvSJ3gPPQVcsvp. As you can see if you take a look at the account, the owner(s) of the account has conducted more than 700 transactions. This transparency is by design.

Even though an address does not come with a name attached, it is possible for investigators to link a Bitcoin address to an identity by using methods such as clustering. The blockchain data platform Chainalysis was able to identify a generous donor to individuals and organizations associated with the Alt-Right by tracing the wallet to a service that allows users to link their Bitcoin wallet address to an email address. After finding the email address it was not hard for researchers to identify a French computer programmer as the donor.

As the Chainalysis report noted:

“[T]hanks to the inherent transparency of cryptocurrency blockchains, law enforcement can track these transactions in real time and work with cryptocurrency businesses to prevent funds from reaching violent groups who may use them to fund their operations and commit acts of violence.”

The transparency of the Bitcoin network has also allowed the Southern Poverty Law Center to compile a list of wallets associated with racists and those catering to extremist politics.

I highlighted the 919.877 BTC above in particular because of the transfer to Coinbase, one of the most popular cryptocurrency exchanges. Coinbase verifies its customers’ identities to satisfy Know Your Customer (KYC) regulations. Whoever set up the account where the 919.877 BTC sits went through Coinbase’s identity verification process. Coinbase has already committed to blocking transactions associated with sanctioned Russians, but has declined to ban all Russian users.

If you are a Russian oligarch seeking to use cryptocurrencies to evade sanctions there are a few steps you have to take:

1. Use your $, €, £, or ₽ to buy cryptocurrencies at an exchange
2. Sell your cryptocurrencies for $, €, £, or ₽ on the exchange
3. Transfer the $, €, £, or ₽ from the exchange to a traditional financial institution.

All three steps would be very easy for investigators to trace. For many on the list of sanctioned individuals step #1 is already impossible, as their accounts are frozen and prominent cryptocurrency exchanges would not accept your transfer even if they could access their accounts.

An oligarch who does manage to buy cryptocurrencies on an exchange with fiat could seek to throw investigators off their trail by sending their holdings to a tumbler. But these are not without significant drawbacks, and some exchanges do not allow assets that have been through tumblers to enter their platform. If tumblers are not a viable option, a panicked oligarch might turn to privacy-oriented cryptocurrencies such as Monero, which allows users to hide transaction histories.

But Monero will not help you solve the problems inherent in step #3. Even if buying Monero does make it harder for investigators to trace your holdings, you still need to find an exchange that will allow you to sell your cryptocurrencies for fiat and then transfer that fiat to a financial institution such as a bank. Or wait for Monero to become a widely accepted cryptocurrency for ordinary everyday payments, which is unlikely any time soon.

There are exchanges that do not require identity verification. These might sound appealing to sanctioned oligarchs, but the conversion of cryptocurrencies into fiat and the use of cryptocurrency for purchases would put them back on the radar of investigators before too long.

Given the costs and risks associated with transferring and concealing massive cryptocurrency transfers it is unlikely that many oligarchs will try to evade sanctions by using cryptocurrencies. This should reassure lawmakers such as Sen. Elizabeth Warren (D‑MA), who yesterday tweeted, “Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain. U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets.”

The conflict in Ukraine does not require financial regulators to increase their scrutiny of cryptocurrencies. Lawmakers should remember that for millions of law-abiding people across the world living under authoritarian regimes, cryptocurrencies offer the opportunity to evade corrupt, unreliable, and unstable institutions. But they are of limited use to prominent international pariahs seeking to hide billions of dollars.