Former Iran official warns crypto bill could weaken sanctions enforcement

A former U.S. National Security Council Iran director is warning that pending crypto legislation could make it easier for sanctioned actors to move money outside the banking system. Richard Nephew said the CLARITY Act, as drafted, would leave parts of the digital asset market without clear anti-money laundering and counterterrorism financing duties.

Nephew, now a senior research scholar at Columbia University’s Center on Global Energy Policy and a Bernstein Adjunct Fellow at the Washington Institute for Near East Policy, made the argument in a Fortune commentary published Thursday. He previously served as the State Department’s inaugural Coordinator for Global Anticorruption, deputy special envoy for Iran and director for Iran at the NSC.

His warning follows a May alert from the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, about Iran’s use of digital assets. Nephew wrote that FinCEN said Iran was using cryptocurrency to evade sanctions and support terrorist groups, and that Iran had tried to force ships leaving the Strait of Hormuz to pay tolls in crypto.

Nephew said the Treasury Department has sought to sanction that activity over the past three months. He argued that Congress should weigh those risks while the Senate considers the CLARITY Act.

The bill’s supporters say it would bring major digital asset intermediaries under anti-money laundering and counterterrorism financing rules. Nephew said the measure would still create gaps for decentralized finance, offshore platforms and stablecoin-related activity.

According to Nephew, Section 201 of the bill would expand anti-money laundering requirements for some crypto intermediaries. He said it would not clearly require all businesses that operate, administer, profit from or help provide decentralized finance services to run anti-money laundering programs, monitor suspicious activity or report it to law enforcement.

He said that omission could expose the crypto system to use by terrorists, sanctions evaders, fraudsters and other illicit actors. Nephew framed the concern as a weakening of financial safeguards developed after the Sept. 11 attacks, when banks and other financial firms were pressed to block access for terrorist financiers and other national security threats.

The Fraternal Order of Police has also criticized parts of the CLARITY Act, according to Nephew. The organization said carve-outs for crypto firms would strip prosecutors and law enforcement of statutes used to track and prosecute criminals who use digital assets.

Nephew also pointed to the Financial Action Task Force, the international standard-setter for combating money laundering and terrorist financing. He wrote that when the United States held the FATF presidency in 2018, risks tied to virtual currency were listed among its top three priorities.

FinCEN’s May alert said uneven and inadequate regulation of digital assets across countries, including failures to implement FATF standards, helps Iranian facilitators access digital assets through international service providers. Nephew said passing the CLARITY Act without stronger safeguards would preserve vulnerabilities that U.S. financial intelligence officials have already identified.

He said Iran is not the only potential beneficiary of weak digital asset rules. Nephew argued that North Korea, Russia and China could use cryptocurrency to move funds, avoid controls and extend malign influence, while corrupt officials and criminal networks could use the same gaps.

Nephew called on Congress to regulate crypto as a financial service and apply requirements similar to those imposed on banks and other financial institutions. He said lawmakers should avoid new carve-outs for decentralized finance and require stablecoin issuers and other digital asset intermediaries to detect and report suspicious transactions.

This story draws on original reporting from Fortune.