UPDATE 1-US Treasury's Adeyemo warns 'malign' actors are using virtual assets

(Adds previously unreported letter from Coinbase, Circle)

By Andrea Shalal

WASHINGTON, April 8 (Reuters) - The U.S. Treasury Department fears terrorist groups will increase their use of virtual currencies and other digital assets unless Congress approves new regulatory tools, Deputy Secretary Wally Adeyemo said on Monday.

In testimony prepared for a hearing of the Senate Banking, Housing and Urban Affairs Committee on Tuesday, Adeyemo warned groups like al Qaeda, Hamas and even state actors like Russia and North Korea were finding new ways to hide their identities and move resources using virtual currency.

Adeyemo said Treasury had shown some success in rooting out illicit finance in the digital ecosystem, but said the United States needed to expand enforcement to prevent such activities by "malign actors."

"While we continue to assess that terrorists prefer to use traditional financial products and services, we fear that without congressional action to provide us with the necessary tools, the use of virtual assets by these actors will only grow," Adeyemo said in the prepared remarks.

He said while Treasury was using its authority to cut off these groups from the traditional financing, their use of virtual assets was expanding.

North Korea, he said, had been able to acquire, launder and store illicit revenue through complex cyber heists, relying on anonymity-enhancing technologies like mixers to hide the sources of funds.

Treasury had also seen Russia increasingly use alternative payment mechanisms such as the stable coin tether to circumvent sanctions and finance its war against Ukraine, he said.

Adeyemo urged Congress to pass legislation aimed at strengthening its tools to go after such actors, including secondary sanctions targeted at foreign digital asset providers that facilitate illicit finance.

Such tools would help Treasury evolve its targeting capabilities to go after foreign cryptocurrency exchanges and some money services that do not use correspondent accounts.

He also called for moves to close gaps in existing authorities by expanding them to explicitly cover entities such as virtual asset wallet providers and cryptocurrency exchanges that sprang up after current laws were enacted.

Congress should also address jurisdictional risks from offshore cryptocurrency platforms to ensure Treasury can reach overseas when digital asset entities harm U.S. national security, he said.

Coinbase Global and cryptocurrency operator Circle Internet Financial urged Senate Majority Leader Chuck Schumer and House Speaker Mitch McConnell to enact regulations for stablecoins and digital asset market structure, to ensure foreign and domestic companies combat illicit finance.

"The lack of U.S. regulation undermines compliant U.S. companies," both firms said in a previously unreported letter sent on Monday, warning of regulatory arbitrage risks given the unclear U.S. framework.

They said Schumer and McConnell should pass legislation currently before Congress and extend existing anti-money laundering and sanctions regulations to cover foreign stablecoin issuers referencing the U.S. dollar.

Adeyemo said Treasury had sent the committee recommended reforms in November that overlapped with the committee's legislation, and said the department was eager to keep working with lawmakers on the issue.

(Reporting by Andrea Shalal; Editing by Sam Holmes)