Since the inception of cryptocurrency, regulators have been concerned about the use of cryptocurrencies to avoid international sanctions.
This discussion is more important than ever because of the rapid increase in adoption of digital currencies over the past two years, particularly with the introduction of central bank digital currencies (CBDCs), such as the digital yuan.
Wally Adeyemo, United States Deputy Treasury Secretary, stated that U.S. sanctions will not be affected by digital currencies from central banks in an interview on November 17.
Adeyemo’s comments follow those of Oleg Deripaska (an American oligarch sanctioned), who encouraged the Russian government use Bitcoin to avoid U.S. sanctions. He also suggested that the U.S. dollar be weakened by the influence of uncontrolled digital payments. Deripaska stated that the U.S. knew long ago that uncontrolled payments can not only negate the effectiveness of all economic sanctions, but also take down the whole dollar.
The entire Biden administration has taken a tough stance against cryptocurrency companies that aid such causes. It found cryptocurrency exchanges guilty in ransomware attacks that were facilitated by rival countries.
Related: A jury must hear testimony from an Ethereum developer accused of helping North Korea to evade sanctions
Ransomware attacks are just the tip of the iceberg
The Treasury Department Office of Foreign Assets Control approved Suex, an over-the-counter broker. It was added to the list of Specially Designated Nationals. Assets are now blocked. Any U.S. person is prohibited from making financial transactions with them. As part of the sanctions, the government agency also listed the broker’s Moscow and Prague offices. It also included 25 cryptocurrency addresses for Bitcoin (BTC), Ether(ETH), and Tether (USDT).
On Nov. 8, Chatex, a cryptocurrency exchange, was sanctioned by the regulator and $6.1 million worth of cryptocurrency tokens were seized from Chatex. Both exchanges were sanctioned by the regulator for the same reason, namely. Accepting cryptocurrencies used to pay hackers for ransomware attacks.
Cointelegraph spoke with Ari Redbord (head of legal and government affairs at TRM Labs), about these sanctions. TRM Labs is a protocol for blockchain intelligence. Redbord was previously a senior advisor to the Deputy Secretary and Undersecretary for Terrorism and Financial Intelligence, United States Treasury.
Redbord explained to Cointelegraph that these are “non-compliant nesting exchanges or parasite virtual assets service providers who nest on the infrastructure larger compliant exchanges to take advantage their speed and liquidity.”
These exchanges live in shadows of the crypto ecosystem, which is largely compliant, and don’t have sufficient compliance procedures to avoid illicit financial risk. Redbord also mentioned the Administration’s position on the matter:
“Ransomware is not a crypto issue,” said the administration. This is a cyber issue and we should focus on strengthening cyber defenses. Treasury was very deliberate in its actions, focusing on the illegal underbelly of crypto ecosystem (e.g. parasite VASPs or darknet mixing services) rather than the growing and overwhelmingly legal crypto economy.
Regulators are also concerned about terrorist financing using cryptocurrencies. It is a major reason why the Indian regulator decided to ban cryptocurrency, leading to panic selling in the region after the news was announced.
Redbord stated that there has been a shift in the world towards a “post-9/11” world, where the battlefield is now largely digital. Redbord said, “We have witnessed cryptocurrency used in terrorist financing and ransomware payments as well as programmatic money laundering by country-state actors like North Korea.” We have seen law enforcement also use blockchain analytics tools […] in order to track and trace funds to reduce the risk posed by these illegal actors.
Open-source cryptocurrencies and blockchains that enable them mean that regulators, law enforcement and financial institutions have greater visibility into the flow of funds than they do in fiat-enabled transactions. Financial watchdogs need to have a better understanding of the technology and asset class that backs cryptocurrencies in order to ensure they are not being used to evade sanctions.
Charlie Chen, chief market officer at decentralized finance protocol Horizon Finance told Cointelegraph that “Governments and financial institution have not yet learned how cryptocurrencies work, so they can be chosen to commit crime.” Stories like the Silk Road are all over the world. There are actual criminal cases that involve cryptocurrency and there have been convictions.
Related: Iranian General Calls For Use of Crypto To Evade Sanctions
Sanctions will not be affected by CBDCs
The central bank digital currencies are another aspect of the cryptoverse which could impact sanctions. China currently leads in CBDCs with its most advanced CBDC program, the Digital Currency Electronic Payment (or the digital yuan).
In the past, some major Chinese banks that have operations in the U.S. made tentative moves to comply with American sanctions. Some worry that the adoption by global markets of this CBDC could cause a weakening in the dollar if the United States does not catch up with China’s program.
Chen believes, however that CBDCs cannot be used to bypass economic sanctions. Chen stated that most international transactions are currently conducted in U.S. Dollars. Russian companies will find it difficult to convince their partners to switch to a digital ruble over USD.
He said that existing algorithms and mechanisms for tracking transactions allow for the detection of suspicious transactions and will continue to improve their efficiency and effectiveness.
There are currently no restrictions that would prohibit a sanctioned entity from paying for services with cryptocurrencies such as Bitcoin. These transactions will not be noticed by financial regulators, even if they are made with popular cryptocurrencies or whitelisted wallets. Chen said that there would be problems if the tokens were exchanged for fiat currencies or transferred to the bank account the sanctioned party.
Chen said, “If Binance is your main exchange, then this bank transfer will not be possible.” You will need to use smaller exchange services, which are very popular in post-Soviet spaces.
Although cryptocurrency is becoming more mainstream, many jurisdictions around world still have not yet regulated them and their adoption is still in its infancy. It is still unclear whether cryptocurrencies can be used on the same scale as a nation-state in order to avoid sanctions.
One thing is certain: whether crypto turns out be the next generation of money or just another investment form, regulators closely monitor its use in illicit activities, such as sanctions avoidance.
Related: China’s CBDC is not about beating the dollar, but domestic dominance