If you don’t watch the news, go on the internet, or have friends, then you probably haven’t heard of cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. While these digital assets have been around for years, they have recently gained increased public attention due to the meteoric rise of their values, particularly over the last several months. The potential benefit of such seemingly anonymous payment systems has not been lost upon those feeling the pinch of U.S. sanctions due to their location in an embargoed jurisdiction, or because they themselves have been targeted by sanctions. Indeed, the idea is now even being publicly proposed by an advisor close to Russian President Vladimir Putin.
It is being reported that Sergey Glazev, one of Putin’s advisors, has stated that there is an objective need to bypass sanctions imposed by the U.S., Europe, and Japan. These statements are made at time where Russia is considering further regulation of cryptocurrencies that would potentially restrict use of all cryptocurrencies, other than one regulated by the Central Bank of Russia. The inference being drawn from Mr. Glazev’s statement is that such a cryptocurrency could help evade or mitigate the pressure of U.S. sanctions. Mr. Glazev’s statement is not an isolated example. Indeed, over the past several weeks there have been multiple reports that suggest Venezuela is also looking to lean upon cryptocurrencies as a way to counter the effect of U.S. sanctions on its economy.
So do cryptocurrencies offer a path to evade U.S. sanctions and castrate the enforcement efforts of the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)? I don’t think so. While I can’t profess to know the technicalities of how these virtual currencies work, I don’t think it needs to be that complicated. Indeed, while sanctions in practice can be complex, the rules themselves are pretty simple: U.S. persons cannot transact with targeted parties or countries directly or indirectly, except for limited circumstances. In short, and in the most general of terms, those who provide goods or services in furtherance of such transactions, or facilitate such transactions by others are liable for violating the sanctions.
As such, it seems pretty clear that U.S. persons transacting with sanctioned parties–Specially Designated Nationals and Blocked Persons (“SDN”)–or in relation to sanctioned jurisdictions cannot proceed with transactions just because they are doing so in Bitcoin, or some other cryptocurrency. The fact that the payment is made in a cryptocurrency–although perhaps making the remitter of funds hard to identify–does nothing to change the liability for engaging a prohibited transaction. Thus, it is not much different than if someone transacts with a sanctioned party or jurisdiction in cash.
In my opinion, enforcement action would most likely be taken against the exchanges facilitating the transactions, as well as the crypto wallets holding, releasing, and accepting the funds related to prohibited transactions. For example, Coinbase–based in San Francisco, CA (i.e., a U.S. person), a platform that allows users to both exchange, as well as hold cryptocurrencies–would be generally prohibited from processing an exchange of Bitcoin to resolve payment for a transaction with a company owned or controlled by a party on OFAC’s SDN List. How to screen for such a transaction may differ depending on the particular circumstances, but a company such as Coinbase should, at a minimum, be verifying customer information during the account registration phase to determine whether the customer is an SDN, owned or controlled by an SDN, or a person residing in an embargoed jurisdiction. Thereafter, assuming the transaction does not involve an SDN or a sanctioned jurisdiction–and involves a transfer from one person to another and not occurring on the general exchange–the exchange or wallet should determine what the purpose of the transfer is to determine whether any sanctions provisions are implicated.
Screening for transactions prohibited by sanctions which rely upon cryptocurrencies as the payment method for the underlying activity may present new technological challenges to sanctions compliance personnel, however, the basic principles of compliance remain: 1) U.S. persons cannot supply services to or for the benefit of sanctioned parties or embargoed jurisdictions; 2) there is a strict liability standard for sanctions violations. Thus, those who think cryptocurrencies are a silver bullet against sanctions should keep an eye on OFAC’s enforcement announcements over the next couple of years, as I predict there will be an enforcement action involving apparent violations of U.S. sanctions where cryptocurrencies were used in making payments related to the transactions by 2022. Check back in with SanctionLaw in five years and if this bold predication is wrong, I will give a free prize to the first five people who call me out on it.
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or email@example.com