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US Expands Sanctions Enforcement in Cryptocurrencies

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  • The US government carried out its first ever sanctions designation against a virtual currency exchange.
  • This was followed by several insightful reports regarding the US government’s approach to virtual currencies in the field of sanctions enforcement.
  • These reports express a desire by the authorities to cooperate with players in the crypto industry.

Ridding the cryptocurrency ecosystem of bad actors is always a cause for celebration. The last few months saw encouraging steps in this direction, as the US Treasury carried out enforcement measures and signalled their desire to collaborate with players in the industry.

Action

September and October 2021 saw the US Treasury’s Office of Foreign Assets Control (OFAC) take a keener interest in the cryptocurrency space. OFAC is responsible for administering and enforcing the economic and trade sanctions imposed by the US government. These sanctions target governments, terrorist networks, crime organisations and individuals hostile to the foreign policy and national security goals of the US. The use of sanctions has increased 933% since the year 2000 and OFAC currently administers and enforces 37 sanctions programmes and 12,000 designations.

In the last years, it has carried out a few interventions in the crypto sector. In March 2018, for example, President Trump issued an executive order prohibiting US persons from dealing with any digital asset issued by the government of Venezuela. In 2020 and 2021 OFAC also fined BitGo and BitPay for having facilitated crypto transactions by entities located in sanctioned jurisdictions.

Most recently, on 21 September 2021, OFAC designated a virtual currency exchange for sanctions for the first time. The exchange in question was a Russian entity that facilitated transactions involving ransomware. According to the Treasury’s estimates, 40% of the platform's transactions involved illegal activity. Adding them to the List of Specially Designated Nationals and Blocked Persons (SDN) means that all their US interests are blocked and that all US persons are prohibited from dealing with them. Any entity found dealing with them could also subsequently be subjected to sanctions. This punitive measure was followed by two reports regarding sanctions enforcement that featured digital currencies.

Direction

On 18 October 2021, the US Treasury published its 2021 sanctions review. The purpose of the review was to examine how US sanctions can remain effective going forward. As the report points out, sanctions rely “on the formidable strength of, and trust in, the U.S. financial system and currency”. US sanctions hit the entities they target and also deter others from dealing with these entities at the threat of losing access to the US financial system. This threat ensures widespread international enforcement.

The report highlights evolutions in the financial landscape, which are making enforcement more challenging. It mentions dollar alternatives as a threat to the efficacy of US sanctions. In tandem, it mentions technology and digital currencies, in particular, as further threats to the “dollar’s global role”. Alternative financial systems and payment mechanisms, such as cryptocurrencies, pose a risk to the effectiveness of sanctions by putting transactions out of the reach of the US government. This situation creates a trade-off, as harsher sanctions risk accelerating the US dollar’s decline as the global reserve currency. A quote by the former Treasury Secretary, Steven Mnuchin, cited in the report, encapsulates this well: “I do seriously think we have a responsibility to use sanctions for important national security issues. But we need to think about the long-term impact on the global currency.”

The Treasury concludes from this that it must modernise, and remain nimble, in order for its measures to keep having teeth. On a broader level, this means modernising their technical abilities. In their words, the “Treasury should invest in deepening its institutional knowledge and capabilities in the evolving digital assets and services space to support the full sanctions lifecycle of activities.”

To complement these efforts, the review states that the Treasury wishes to “build on existing outreach and engagement capabilities through enhanced communication with industry, financial institutions, allies, civil society, and the media, as well as new constituencies, particularly in the digital assets space.” This approach seems to indicate that the agencies are willing to cooperate with the industry rather than trying to bludgeon it with other regulations in this area. This is a far more logical and effective approach to combatting on-chain crime, as we discussed elsewhere. It may also be an admission that they cannot shut down the crypto ecosystem even if they wanted to.

This sanctions review was preceded by OFAC’s “Sanctions Compliance Guidance for the Virtual Currency Industry” published on 15 October. The report states that sanctions apply equally across fiat and virtual currencies and, again, that it seeks the collaboration of players in the virtual currency industry to enforce US sanctions. Once actors, such as exchanges, are aware of holding virtual currency that is subjected to sanctions, they must report it to OFAC within 10 days and deny all access to the sequestered virtual assets. The report recommends using geolocation tools and IP address blocking controls to block access from users in sanctioned jurisdictions.

The approach taken by the Treasury, in its latest reports, seems to indicate that they recognise that regulating crypto too tightly or banning the sector entirely, would put nefarious financial transactions even further away from their reach. This could thus be encouraging news for the sector as a whole, as the industry is often blamed for many ills and subsequently threatened with heavy-handed measures, which is not the case this time. It will also be an opportunity for the crypto industry to show that it can take on responsibilities that are common across the financial industry. Whatever the short-term outcome, it will be important to see how these measures evolve to determine any further implications on cryptocurrencies and their regulatory frameworks.

Conclusion
The US Treasury designated a digital currency exchange for sanctions, for the first time, and released important information regarding its approach to sanctions enforcement in the digital currency sphere. These are encouraging steps but progress will have to be monitored vigilantly. If used effectively, blockchain can be a formidable tool in the fight against crime.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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