US Treasury seeks crypto sanctions authority, but oil sanctions impact may be small

The US Treasury Department is urging Congress to give it more authority to go after bad actors that use cryptocurrency to evade sanctions, but any shift in policy is expected to have a limited impact on oil-related sanctions in the near term, experts say.

"These new tools are less important for the oil markets given that crypto markets tend to struggle to do large transactions at scale and thus aren't really a viable option for paying for fuel cargos," Rachel Ziemba, a senior advisor at political risk consultancy Horizon Engage, said in an April 10 email.

The sanction power of the US relies on the fact that entities under US financial sanctions cannot use dollars to process oil payments and proceeds, and most of the oil market is still settled in dollars, said Andrea Leonard Palazzi, a research associate with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies.

Actors looking to avoid oil sanctions would need to diversify away from the dollar, but cryptocurrencies are unlikely to be an option because they are not scalable, Palazzi said. "Cryptocurrencies have a trilemma: they cannot be decentralized, secure and scalable at the same time," he said in an email.

However, US sanctions could become less effective in the future if the US is not able to develop a competitive digital dollar and other digital currencies like China's e-yuan gain momentum, Palazzi said. "If the dollar loses its centrality, the sanctions power that comes with it could be eroded too, because fewer global transactions would be settled via institutions that are subject to US law," he said.

Market considerations

Even if Treasury gets new authorities, Biden administration may be hesitant to ramp up oil sanctions enforcement given the current oil market conditions, Ziemba said.

"If anything, right now I would see the US government signaling that there are some energy transactions with countries like Russia that are still legal (via the price cap) as the White House becomes increasingly concerned with the tightening of the global oil market," she said.

Backwardation in the ICE Brent forward curve has steadily widened in recent weeks, suggesting increasingly tighter supply outlooks. The prompt-dated contract has averaged a $4.45/b premium to the sixth-dated contract to-date in April, marking the widest backwardation in that part of the curve since mid-October.

Treasury seeks new authority

Deputy Treasury Secretary Wally Adeyemo on April 9 urged US lawmakers to strengthen Treasury's counter-terrorist financing authorities. "Today, while Treasury has tools that Congress has given us that we are using to go after terrorist actors and other illicit actors, we need new tools," he said at an April 10 hearing of the Senate Banking, Housing and Urban Affairs Committee.

Adeyemo reiterated three reforms he recommended to lawmakers in November. The first is a secondary sanctions tool targeted at foreign digital asset providers that facilitate illicit finance, Adeyemo said.

The second reform would expand Treasury's authority to explicitly cover key players and core activities in the digital asset ecosystem, including virtual asset service providers and cryptocurrency exchanges, Adeyemo said in written testimony.

"A third reform addresses jurisdictional risk from offshore cryptocurrency platforms, which is a key challenge that we face today," Adeyemo said at the hearing.

Committee Chairman Sherrod Brown of Ohio said more should be done to ensure that crypto platforms play by the same rules as other financial institutions. "We need to make sure we have the tools to crack down on illicit finance with digital assets, just as we would with any other asset," he said at the hearing.