When the United States first started prosecuting crypto companies for violating its economic sanction rules, it didn’t exactly start off with a bang.
In December, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that Billing with the crypto wallet provider BitGo after the Palo Alto Company failed to prevent anyone appearing to be in the Crimean region, Iran, Sudan, Cuba and Syria from “using its non-liability secure digital wallet management service”. The penalty for the “183 obvious violations” of US sanctions? A disappointing $ 98,830.
This was “the first published OFAC enforcement action against a company in the blockchain industry”. according to to the law firm Steptoe, although OFAC six weeks later reached a similar agreement with BitPay, a payment processor, for 2,102 “apparent multiple sanctions violations” in which BitPay reportedly allowed individuals in the same countries as BitGo – but with the addition of North Korea – to “do business with merchants in the US.” and elsewhere using digital currency on BitPay’s platform, although BitPay had location information, including internet protocol addresses and other location information, about these individuals prior to conducting the transactions. BitPay has agreed to pay $ 507,375 to resolve its potential civil liability.
But future transgressors should not be treated so leniently.
It is worth noting that economic sanctions are usually applied “against countries and groups of people such as terrorists and drug traffickers”. according to to the US Treasury Department, typically “using asset lockdowns and trade restrictions to meet foreign policy and national security objectives.”
Further enforcement measures are pending
“The crypto industry should definitely expect more enforcement action from OFAC, and they can expect much higher penalties as well,” David Carlisle, director of policy and regulatory affairs at Elliptic, told the magazine. “OFAC’s first two enforcement actions in this area were fairly straightforward cases where the underlying violations were not serious and the fines were small. But the next cases could be different, “he says, adding:
“There will undoubtedly be other cases involving much more serious and serious violations – and we can expect OFAC to impose fines on crypto companies much higher than what we have seen so far.”
Expect more enforcement actions like those targeting BitPay and BitGo, says Doug McCalmont, founder of BlocAlt Consulting LLC, the magazine, as well as “expanding targeted individuals such as B. Programmers connected to the technology ”.
The United States, the European Union and the United Nations have imposed large-scale sanctions in recent years, often directed against “rogue” nation-states such as North Korea and Iran. One of the most famous early crypto cases Virgil Griffith, a former hacker arrested in April 2019 After speaking at a blockchain and cryptocurrency conference in North Korea in violation of sanctions against this outcast nation, the US was charged.
“Sanction violations are a real problem,” said David Jevans, CEO of CipherTrace, its crypto forensics company recently found that more than 72,000 unique Iranian IP addresses are linked to more than 4.5 million unique Bitcoin addresses, “which suggests that sanctions violations are likely to be rampant and undetected by most” Virtual asset service provider, ”he tells the magazine.
It is not just US authorities that are concerned that “bad actors” are using emerging blockchain technology to evade economic sanctions. Agata Ferreira, assistant professor at Warsaw University of Technology, tells the magazine that authorities in Europe are “becoming more active and focused. The crypto space is under increasing scrutiny, and I think this trend will continue and accelerate. “
OFAC’s recent crypto focus is not surprising either, according to Robert A. Schwinger, partner in the Commercial Litigation Group at Norton Rose Fulbright. The US government has no choice but to restrict this new asset class in cryptocurrencies, because “otherwise it would expose it to the risk that its sanctions regime could become toothless due to new financial technologies. Players in the cryptocurrency space who ignore the restrictions imposed by US international sanctions are cautioned that they do so at their own risk, ”he said wrote on Law.com.
Is DeFi Problematic?
With increasing crypto acceptance, it only seems inevitable that its decentralized financial networks (DeFi) will fight back against further nation-state privileges, including economic sanctions. But isn’t it inherently problematic to take action against a decentralized exchange (DEX)? Does the exchange even have a head office address? Is there anyone at home at all? And should it even answer anyone if it is really decentralized?
Enforcing regulations in a decentralized world presents certain challenges, says Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University Kennedy School, told the magazine, but US regulators are “trying to find out.” Finally, could the government put more pressure on the developers of DeFi firms, including decentralized exchanges? “Yes, you can build some appropriate techniques into the code … but it’s a lot easier to find centralized intermediaries,” says Massad.
“I think we’ll see DeFi developers come under real pressure to make sure their platforms can’t be used to evade sanctions – for example, by enforcing address blacklists,” says Carlisle, adding: “There’s been a lot of talk about it lately [traditional] Financial institutions are interested in DeFi, but it’s hard to imagine large institutions getting involved in DeFi unless they are confident that doing so is consistent with sanction requirements. ”
DeFi projects are “decentralized, disintermediated and limitless – everything that our legal and regulatory framework is not,” Ferreira informs the magazine. The latter are based on a centralized, mediated and jurisdiction-based architecture. “So this is a challenge and a learning curve for regulators and not all of the solutions proposed will be optimal,” adds Ferreira.
The European Union is aware of the challenge of DeFi compliance. His latest regulatory proposal on the Crypto Assets Markets (MiCA) “will force DEXs to have legal entities to do business with EU citizens, effectively banning fully decentralized exchanges,” Jevans told the magazine. He adds, “Many so-called DEXs have very centralized governance, venture capital investors, and physical headquarters, which leads to the FATF categorizing them as VASPs.”
Meeting compliance requirements for digital service companies like BitPay and BitGo takes some effort. “Trying to find where a counterparty is in a crypto transaction is inherently difficult because of the nature of the technology,” notes Carlisle, but crypto firms need to recognize that every time they conduct a transaction, they “are not trying to to identify them ”. Source or destination of funds, they run a great risk of sanction violations. “
Crypto mining also harbors risks with regard to compliance with sanctions. “If you are transacting on behalf of participants in a mining pool affiliated with a country like Iran, or paying a fee to an Iranian miner,” you could run into conflict with OFAC, Carlisle says. There are also risks of sanctions when processing ransomware payments, “because cyber criminals in countries such as North Korea and Iran were involved in some ransomware campaigns.”
Also, the increasing use of privacy coins like Monero and Dash, which hide users’ addresses and transaction amounts – unlike Bitcoin – arguably makes the task more difficult.
However, forensic blockchain firms are exploring how they can “improve sanction compliance by virtual asset providers,” comments McCalmont. CipherTrace, for example, developed the ability to track the Anonymity Enhanced Currency (AEC) Monero, which was once considered “the gold standard of AECs”. He adds:
“These [forensic] Companies will take the opportunity to introduce capabilities that “bypass” all compliance “speed bumps” used by decentralized exchanges. It really is something of a regulatory arms race. “
And the stakes seem to be increasing.
“At this point in time, there is overwhelming evidence that sanctioned countries are using crypto,” says Carlisle, concluding, “North Korea’s crypto-related cybercrime has raked in at least hundreds of millions of dollars. Iran and Venezuela have considered crypto mining as a way of circumventing sanctions and generating revenue. “
Connected: Crypto Hacking in North Korea: Separating Facts from Fiction, Cointelegraph Magazine
To stay ahead in the “regulatory arms race,” some crypto companies are now using tools like blockchain analytics, Carlisle says, to determine if a crypto wallet is owned by a sanctioned party, but even then, compliance can be difficult stay. “Not only do you need to check addresses against the OFAC list, you should have systems calibrated to detect more subtle signs of sanction risk, and your staff must be trained to deal with situations that involve potential sanction issues. “
OFAC also works on the principle of strict liability. “You can be held accountable even if you acted in good faith,” with no intentional wrongdoing, adds Carlisle. “The crypto industry must adhere to very high standards for compliance with sanctions in order to avoid clashes with OFAC.”
Part of a larger global regulatory trend
The recent sanctions activity is only part of a global crackdown that can be expected in the crypto sector, some say. In May, the U.S. Treasury Department announced stricter new rules for Bitcoin and other cryptocurrencies. Crypto transfers worth $ 10,000 or more must be reported to the Internal Revenue Service.
This Treasury Department move is likely “the first big step towards global regulation” for cryptocurrencies. according to to Nigel Green, CEO and founder of the deVere Group, in a public statement. “This is inevitable as the market grows and matures.”
The crypto community shouldn’t fight it either – they should embrace it, suggests Green. “One should advocate for a proportionate regulation”, he says and explains further:
“It would help protect investors, prop up the market, fight crime, and reduce the potential for disrupting global financial stability, not to mention providing a potential long-term economic boost to the countries adopting it. ”
In the absence of new crypto laws and regulatory guidance, the players themselves – i.e. the crypto and blockchain industries – need to get their house in order, James Cooper, assistant dean of experiential learning at the California Western School of Law in San Diego, told The magazine : “We have an obligation to create self-regulating organizations. […] The industry has to drive out all the bad actors. “
If 95 percent of the media coverage and public discussion of crypto is on ransomware or Iranian miners or criminal organizations, “then something is wrong,” Cooper continues, because of all the good things like blockchain for food safety or blockchain for tracing Vaccines to be pushed out.
A Bretton Woods for crypto?
“We need our Bretton Woods moment,” says Cooper, referring to the multi-government agreement that outlined the international financial world after World War II. Something similar is needed for the crypto century.
Not everyone agrees. “The Bretton Woods Agreement centralized monetary policy,” says Jevans, and it’s “an approach that is unlikely to be accepted in the decentralized blockchain economy because different projects have very different goals and governance models.”
From his point of view, the Financial Action Task Force is more promising‘s recently updated compliance Guidelineswhich make it clear that “decentralized exchanges and other DeFi platforms are responsible for compliance with global sanctions and the laws on combating money laundering and the financing of terrorism. The solution is for these companies, now classified as VASPs by the FATF, to adopt solutions that allow them to achieve compliance without compromising decentralization and user privacy. ”
Many have called for international collaboration to address these new technological developments like crypto and blockchain, notes Ferreira, but “I’m not sure how feasible this is. Authorities sometimes act when there is a trigger. Libra was such a trigger – and a wake-up call – for the authorities. “She adds:” Perhaps we will see other events in the future that could mobilize the authorities to act more internationally. “
Decentralization contrary to the law?
But isn’t there an inherent conflict between economic sanctions – imposed by sovereign nations or quasi-governments like the United Nations – and decentralized funding?
Finally, one of the strengths of decentralized finance, proponents say, is that it provides a safeguard against centralized government corruption, including authoritarianism. For example, could a blanket ban on Iranian users also exclude Iranian dissidents who want to transfer money outside the reach of the government? “Absolutely,” replies McCalmont:
“I, a ‘normal Joe guy’, can open an account on a decentralized exchange within minutes and immediately transfer funds to North Korea, Syria, Iran – completely under the radar and with little effort – speaks volumes. If these dissidents have a will, there is no doubt a way. “
All in all, an average between two undesirable results may be required here. A young, developing sector like the crypto and blockchain industries will inevitably have “vacuums” that nefarious non-state actors will exploit “until the state comes in and throws them out,” Cooper tells the magazine.
That is to be expected. But the US has four years of anti-regulatory rhetoric behind it, at least nationally, and now, under a new administration, it risks trying to monopolize all digital assets – and wipe out innovation.
Doing nothing is bad, Cooper continues, but the US government – or any other state – monopolizing digital assets, whether through central bank digital currency or otherwise, is also undesirable. The challenge is to “find the sweet spot”.