No End in Sight: An Update on the Rising Risk and Recent Developments in Cryptocurrency Sanctions and Enforcement

Countries around the globe continue to use economic sanctions as a targeted means of implementing foreign policy objectives. By their nature, sanctions evolve continuously to address new threats and to advance a particular government’s current foreign policy objectives. Due to its seamless peer-to-peer transfer capabilities, pseudo-anonymous qualities, and the still-maturing regulatory environment in which it exists, cryptocurrency has become an attractive alternative for criminals and other malign actors that seek to evade sanctions and move illicit funds across international borders. Governments and regulators are responding to this rising risk through new guidance, regulation, and enforcement. Since the initial publication of this chapter in the 2020 edition of the ICLG – Sanctions guide, the pace of these developments has been swift and shows no sign of slowing down. Download the latest chapter, which provides an updated overview of recent cryptocurrency developments for 2021, particularly as they relate to economic sanctions.

Cryptocurrency Background

Cryptocurrencies are digital representations of value that, unlike government-issued fiat currency, do not have any status as legal tender.  Some digital assets are “centralized”, meaning they have a central payment ledger that is run by a centralized administrator who issues currency. Cryptocurrencies, on the other hand, use “distributed” ledger technology (e.g., blockchain), to enable individual computers within peer-to-peer networks to record and share transactions in their respective electronic ledgers.  Bitcoin, Ether, and Litecoin are some of the most well-known types of cryptocurrencies and are designed to function as a medium of exchange or payment for goods and services.

Most cryptocurrencies use cryptographic protocols to both secure the ledger and make sure transactions that are recorded on the blockchain are public. Cryptocurrencies provide “pseudo-anonymity” to users because although a transaction can be associated with a specific cryptocurrency address, the name of the actual address holder is not visible on the blockchain and can remain anonymous. Law enforcement and the commercial sector have developed forensic and monitoring tools to help identify illicit actors who are associated with particular cryptocurrency addresses, but technology that allows individuals to process financial transactions with any level of anonymity can create a significant risk that sanctions evaders could seek to exploit.

Virtual currency exchanges provide platforms for customers to either trade cryptocurrencies for other cryptocurrencies, or to trade cryptocurrencies for fiat currency.  Similar to banks, many virtual currency exchanges also store cryptocurrency for their customers. Most jurisdictions regulate cryptocurrency exchanges as financial institutions, usually as money transmitters or payment services.  Deemed to be money transmitters, virtual currency exchanges in the United States are required to comply with the Bank Secrecy Act (BSA) and its associated regulations, which involves conducting due diligence on customers and maintaining adequate anti-money laundering (AML) controls. In addition, the U.S., along with other countries and governmental bodies, have well-developed economic sanctions programs that apply to cryptocurrency exchanges regardless of their regulatory status.