{"id":7889,"date":"2021-06-08T09:44:10","date_gmt":"2021-06-08T13:44:10","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=7889"},"modified":"2021-06-22T17:29:55","modified_gmt":"2021-06-22T21:29:55","slug":"rogue-states-dodge-economic-sanctions-but-is-crypto-in-the-wrong","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2021\/06\/08\/rogue-states-dodge-economic-sanctions-but-is-crypto-in-the-wrong","title":{"rendered":"Rogue states dodge economic sanctions, but is crypto in the wrong?"},"content":{"rendered":"

When the United States first began going after crypto companies for violating its economic sanctions rules, it didn\u2019t exactly start with a bang.<\/strong><\/p>\n

In December, the Treasury Department\u2019s Office of Foreign Assets Control (OFAC) announced a <\/span>settlement with crypto wallet provider BitGo<\/span><\/a> after the Palo Alto firm failed to prevent persons apparently located in the Crimea region, Iran, Sudan, Cuba and Syria \u201cfrom using its non-custodial secure digital wallet management service.\u201d The penalty for the \u201c183 apparent violations\u201d of U.S. sanctions? An underwhelming $98,830.\u00a0<\/span><\/p>\n

This was \u201cthe first published OFAC enforcement action against a business in the blockchain industry,\u201d <\/span>according<\/span> to law firm Steptoe, though six weeks later, the OFAC <\/span>reached a similar settlement with BitPay<\/span><\/a>, a payment processing firm, for 2,102 \u201capparent violations of multiple sanctions programs,\u201d in which BitPay reportedly allowed persons in the same countries as in the BitGo case \u2014 but with the addition of North Korea \u2014 \u201cto transact with merchants in the United States and elsewhere using digital currency on BitPay\u2019s platform even though BitPay had location information, including Internet Protocol addresses and other location data, about those persons prior to effecting the transactions.\u201d BitPay agreed to pay $507,375 to resolve its potential civil liability.\u00a0<\/span><\/p>\n

But future violators may not be treated so leniently.\u00a0<\/span><\/p>\n

It\u2019s worth mentioning that economic sanctions are typically applied \u201cagainst countries and groups of individuals, such as terrorists and narcotics traffickers,\u201d <\/span>according<\/span><\/a> to the United States Treasury, typically \u201cusing the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.\u201d<\/span><\/p>\n

More enforcement actions are coming<\/span><\/h4>\n

\u201cThe crypto industry should absolutely expect more enforcement actions from OFAC, and it can expect that there will be much larger penalties as well,\u201d David Carlisle, director of policy and regulatory affairs at Elliptic, tells Magazine. \u201cOFAC\u2019s first two enforcement actions in this space were fairly simple cases, where the underlying violations were not egregious, and the fines were small. But the next cases could be different,\u201d he says, adding:<\/span><\/p>\n

\u201cThere will undoubtedly be other cases out there that involve much more serious and egregious violations \u2014 and we can expect that OFAC will issue fines against crypto businesses that are much larger than those we\u2019ve seen thus far.\u201d\u00a0<\/span><\/p><\/blockquote>\n

Expect more enforcement actions like those targeting BitPay and BitGo, Doug McCalmont, founder of BlocAlt Consulting LLC, tells Magazine, as well as \u201cthe expansion of targeted individuals, such as coders linked to the technology.\u201d<\/span><\/p>\n

Sanctions regimes have been applied extensively in recent years by the United States, as well as the European Union and United Nations, often targeting \u201crogue\u201d nation-states, such as North Korea and Iran. One of the best-known early crypto cases involved <\/span>Virgil Griffith, a former hacker, who was arrested in April 2019<\/span><\/a> after he spoke at a blockchain and cryptocurrency conference in North Korea, in violation of sanctions against that outcast nation, the U.S. charged.<\/span><\/p>\n

\u201cSanctions violations are a real problem,\u201d says David Jevans, CEO of CipherTrace, whose crypto forensics firm recently <\/span>found<\/span><\/a> that more than 72,000 unique Iranian IP addresses are linked to more than 4.5 million unique Bitcoin addresses, \u201csuggesting that sanction violations are likely rampant and mostly undetected by <\/span>virtual asset service providers,\u201d he tells Magazine.<\/span><\/p>\n

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It\u2019s not only U.S. authorities who are concerned about \u201cbad actors\u201d using the nascent blockchain technology to dodge economic sanctions. Agata Ferreira, assistant professor at the Warsaw University of Technology, tells Magazine that authorities in Europe \u201care becoming more active and more focused. The crypto space is under increasing scrutiny, and I do think this trend will remain and accelerate.\u201d<\/span><\/p>\n

Nor is OFAC\u2019s recent crypto focus surprising, according to Robert A. Schwinger, partner in the commercial litigation group at Norton Rose Fulbright. The United States government has no choice but to rein in this new, cryptocurrency asset class because \u201cnot to do so would expose it to the risk that its sanctions regime could be rendered toothless by new financial technology. Players in the cryptocurrency space who ignore the restrictions imposed by U.S. international sanctions are being put on notice that they do so at their peril,\u201d he <\/span>wrote<\/span><\/a> on Law.com.\u00a0<\/span><\/p>\n

Is DeFi problematic?<\/span><\/h4>\n

As crypto adoption grows, it seems only inevitable that its decentralized finance (DeFi) networks will push up against more nation-state prerogatives, including economic sanctions. But isn\u2019t there something inherently problematic about cracking down on a decentralized exchange (DEX)? Does the exchange even have a headquarters address? Is anyone even home at home? And should it even answer to someone if it\u2019s truly decentralized?<\/span><\/p>\n

Enforcing regulations in a decentralized world presents certain challenges, Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University Kennedy School, tells Magazine, but U.S. regulators are \u201ctrying to figure it out.\u201d Might the government eventually put more pressure on developers at DeFi firms, including decentralized exchanges? \u201cYes, they can build into the code some proper procedures… but it\u2019s a lot easier to go after centralized intermediaries,\u201d says Massad.<\/span><\/p>\n

\u201cI think we\u2019ll see DeFi developers come under real pressure to ensure their platforms can\u2019t be abused for sanctions evasion \u2014 for example, by enforcing address blacklisting,\u201d says Carlisle, adding, \u201cThere\u2019s a lot of talk lately about [traditional] financial institutions taking interest in DeFi, but it\u2019s hard to imagine major institutions participating in DeFi unless they\u2019re confident it can be compatible with sanctions requirements.\u201d\u00a0<\/span><\/p>\n

DeFi projects are \u201cdecentralized, disintermediated and borderless \u2014 everything our legal and regulatory frameworks are not,\u201d Ferreira informs Magazine. The latter are built around centralized, intermediated and jurisdiction-based architecture. \u201cTherefore, this is a challenge and a learning curve for regulators, and not all proposed solutions will be optimal,\u201d Ferreira adds.<\/span><\/p>\n

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