By Andrea Shalal

WASHINGTON (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 steps aimed at closing gaps in existing authorities by expanding their reach 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.

Adeyemo said Treasury, which sent the committee recommended reforms in November, was eager to keep working with lawmakers on legislation.

(Reporting by Andrea Shalal. Editing by Sam Holmes.)