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Crypto's Impact on Sanctions: Are Regulators' Concerns Justified?

7 min reading

Cryptocurrencies along with CBDCs are acting on the effect of the sanction all because of the increase in adoption.

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The use of cryptocurrencies to evade international sanctions by various international governmental organizations such as the United Nations (UN), International Monetary Fund (IMF) and the World Bank has been a concern of regulatory authorities since the creation of cryptocurrencies. The rapidly growing adoption of digital currencies over the past two years has made this discussion more important than ever, especially with the emergence of central bank digital currencies (CBDCs) such as the digital yuan.

In an interview on Nov. 17, US Treasury Secretary Wally Adeimo said the central bank's digital currency would not undermine the effectiveness of US sanctions. Adeyemo's remarks follow comments from sanctioned Russian oligarch Oleg Deripaska, who urged the Russian government to use Bitcoin to evade US sanctions and even weaken the dominance of the US dollar. Deripaska said, “The United States has long recognized that uncontrolled digital payments can not only undermine the effectiveness of the entire economic sanctions mechanism, but can also lower the dollar as a whole.

The Biden administration has generally taken a firm stand against cryptocurrency companies that support the cause. He found that cryptocurrency exchanges were responsible for enabling ransomware attacks made possible by competing countries.

Also read: Brand Notice: Crypto is not a joke. It’s a society in itself

Ransomware attacks are the tip of the iceberg

In September, the Treasury's Office of Foreign Assets Control sanctioned OTC broker Suex by adding it to a list of specially designated citizens whose assets were blocked and barred from all U.S. persons from conducting financial transactions with them. Brokerage offices in Moscow and Prague are also listed by government bodies as part of their sanctions, including 25 cryptocurrency addresses for Bitcoin (BTC), Ether (ETH) and Tether (USDT). Most recently, on November 8, regulators approved cryptocurrency exchange Chatex and confiscated $6.1 million worth of cryptocurrency tokens from the company. Both exchanges have been sanctioned for the same reason, namely the introduction of a cryptocurrency used to pay hackers for ransomware attacks.

When discussed about sanctions with Ari Redboard, director of legal and government affairs at TRM Labs, a blockchain intelligence protocol. Redboard was previously Senior Advisor to the Undersecretary and Assistant Secretary for Terrorism and Financial News at the Treasury. Redboard said, “These are inconsistent embedded exchanges or parasitic virtual asset service providers that nest in the infrastructure of larger compatible exchanges to take advantage of their speed and liquidity.

Exchanges like this live in the shadow of a cryptocurrency ecosystem which is mostly compatible and does not have adequate compliance procedures in place to avoid illegal financial risks. Redboard also mentions the administration's position on the matter: “The government is very clear that ransomware is not a crypto issue. This is a cyber issue and the focus should be on strengthening cyber security. The Ministry of Finance is well aware of its actions - only after the illegal handover of crypto ecosystems - e.g. parasitic VASP and dark network mixing services - instead of a highly legal and thriving crypto economy.

The financing of terrorism with cryptocurrencies is also a major concern for regulators. In fact, this is one of the main reasons behind the Indian regulator's intention to ban cryptocurrencies, which sparked panic selling in the area when the developments became known. Redboard mentions that in the past year there has been a global shift towards a post-9/11 world where the battlefield is now largely digital. He added, “We have seen cryptocurrencies used by nation-state actors such as North Korea in terrorist financing, ransomware payments, and money laundering programs. But we are also seeing law enforcement agencies using blockchain analytical tools [...] to track and trace the flow of money to reduce the risk posed by these illegal participants.

The fact that most cryptocurrencies and the blockchains that enable them are open source means law enforcement, regulators, and financial institutions have better visibility into cash flow than with fiat-enabled transaction mechanisms. However, to ensure that cryptocurrencies are not used effectively to evade sanctions, it is important for financial regulators to have a better understanding of the asset classes and the technology that supports them. Charlie Chen, head of marketing for decentralized finance protocol Horizon Finance, told, “Governments and financial institutions haven't learned how to use cryptocurrencies, so they can actually be singled out for crimes. The world is full of stories like the Silk Road. There are real criminal cases involving cryptocurrencies and there are penalties, which means there is evidence.

Also read: Binance CEO discloses one key aspect for token listings

CBDC is said to have minimal impact on sanctions

Another aspect of cryptocurrencies that could potentially have an impact on sanctions is central bank digital currencies. China is currently in the lead when CBDC deals with the most advanced CBDC program - electronic payments with digital currency or digital yuan. In the past, major Chinese banks operating in the US have taken the first steps to comply with US sanctions. However, some are concerned that the introduction of these CBDCs to global markets could cause the dollar to weaken over time, unless the United States follows China's program.

However, Chen believes the CBDC has little chance of evading economic sanctions. He said: “Currently, most international transactions are conducted in US dollars and Russian companies will find it difficult to convince their partners to abandon US dollar transactions in favor of the digital ruble. He added that existing transaction tracking mechanisms and algorithms are capable of detecting suspicious transactions and will only become more sophisticated and effective in the future.

Currently, there are no barriers preventing sanctioned countries from paying for services using cryptocurrencies like Bitcoin. Even if popular cryptocurrencies and whitelisted portfolios are used, these transactions will go unnoticed by financial regulators. However, Chen stated that problems would arise if the tokens were exchanged for fiat currency and transferred to the bank accounts of the sanctioned parties. Chen added, “If you use a big exchange like Binance, this bank transfer won't work. Hence, you need to take advantage of the smaller exchange services which are very popular in the post-Soviet space.

As cryptocurrencies become more common every day, they remain largely unregulated in many jurisdictions around the world and their adoption is still in its infancy. Therefore, it remains to be clarified whether cryptocurrencies can be used nationally to evade sanctions. One thing is clear, whether cryptocurrencies turn out to be the next iteration of money or just another form of investment, regulators keep an eye on their use in illegal activities such as evading sanctions.

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