Gary DeWaal, special counsel and chair of the financial markets and regulatory practice group at Katten, says U.S. officials’ concern about the potential misuse of cryptocurrency to evade sanctions against Russia in the war in Ukraine is warranted based on recent cases.
But he says blockchain transactions are visible and traceable and the ability of law enforcement, including the DOJ, to detect and prosecute cryptocurrency misuse is improving.
Many government officials worldwide are very concerned about Russia and certain of its nationals using cryptocurrencies to evade extensive sanctions imposed by the U.S., the European Union, and other countries following Russia’s unprovoked invasion of Ukraine on Feb. 24.
Four U.S. senators, for example, sent a letter to Treasury Secretary Janet Yellen on March 2 expressing concern about how “Russia may use cryptocurrencies to circumvent broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine.”
In particular, the senators posited that Russia might use dark web marketplaces “powered by cryptocurrencies” to launder funds and use crypto wallets and mixing services to enable sanctioned persons to disguise and move their wealth. (Mixers are software devices that are designed to pool and scramble virtual currencies from many locations to obfuscate their origin.)
Additionally, an executive order issued issued by President Biden on March 9 regarding the “responsible development of digital assets” expressly cautioned that digital “assets may also be used as a tool to circumvent United States and foreign financial sanctions regimes and others tools and authorities.”
Concern regarding the potential misuse of virtual assets is also warranted. In October 2020, the Justice Department’s Cyber Digital Task Force warned that “individuals, companies and rogue regimes may use cryptocurrency in attempt[s] to avoid the reach of economic sanctions imposed by the United States or other rule-of law countries.”
This is because, cryptocurrency’s “decentralized and peer-to-peer format may allow sanctioned entities to bypass the financial controls built into traditional financial marketplaces to enforce such sanctions.”
In February, Chainalysis Pte Ltd.—a crypto analytics and compliance support enterprise—reported that heavily sanctioned North Korea obtained nearly $400 million worth of virtual assets in 2021 through at least seven hacks of investment firms and centralized crypto exchanges.
North Korea apparently was able to launder its funds through a variety of mixers and decentralized finance protocols that typically do not screen participants through know-your-customer (KYC) procedures applied by traditional financial institutions.
Chainalysis also estimated that Iranian bitcoin mining generated more than $160 million from 2015 to 2021 that was routed to Iranian interests. Bitcoin mining is attractive to Iran because it is one of the world’s largest energy producers, thus minimizing the cost of electricity necessary to support mining activity.
Use of Cryptocurrencies to Evade Sanctions Is Hard to Assess
Whether Russia and its sanctioned nationals will use cryptocurrencies in any widespread manner to evade sanctions, however, is hard to assess. This is because transactions on blockchains are visible to all and thus traceable even if the identities behind public wallets are private in the first instance; additionally, the records of transactions are immutable and saved forever.
Forensic tools increasingly available to law enforcement as well as crypto-enterprises can potentially detect and stop proposed transactions with potentially sanctioned persons on a real-time basis. Laundering money in plain sight is typically not a preferred method.
Globally, more and more entities involved in facilitating cryptocurrency transactions are expressly required to apply traditional anti-money laundering (AML) measures, including customer-identity verification, transactions monitoring, and suspicious activity reports, and are fully adhering to all sanctions requirements.
According to a March 4 tweet by Brian Armstrong, CEO of Coinbase—a well-known U.S. trading platform—this is “why we screen people who sign up for our services against global watchlists, and block transactions from IP addresses that might belong to sanctioned individuals or entities, just like any other regulated financial services business.”
However, this increased vetting is principally occurring at more-traditionally organized crypto-enterprises—so-called “CeFi” entities—that are more and more registered in some capacity with a government authority, but not at decentralized protocols—so-called “DeFi” applications—which are daily facilitating a greater percentage of all crypto-asset transactions, or at dark web applications.
Fortunately, even persons utilizing DeFi or dark web applications must likely involve a financial institution that is obligated to apply AML and sanctions requirements to initially fund or ultimately convert crypto assets to fiat currency.
Additionally, the liquidity of cryptocurrency transactions is seen by many experts as not sufficient to support transactions in very large amounts. Crypto “markets are too small,” costly, and “transparent to be useful for the Russian economy,” tweeted Jake Chervinsky, executive vice president and head of policy of the Blockchain Association on March 1. “Crypto markets are thin to start with, [and] ruble trading pairs are rare. With Russia cut off from the world’s crypto industry, they can’t source nearly enough liquidity to matter.”
Indeed, on March 7, Acting Director Him Das of the Financial Crimes Enforcement Network indicated that, “…we have not seen widespread evasion of our sanctions using methods such as cryptocurrency…” However, he indicated that “…prompt reporting of suspicious activity contributes to our national security and our efforts to support Ukraine and its people.”
Law Enforcement is Increasingly Vigilant and Effective
In any case, recent successes by the DOJ in seizing 63.7 bitcoins valued at $2.3 million that represented proceeds of a May 8, 2021, ransom payment that targeted the Colonial Pipeline, and recovering $3.6 billion worth of bitcoin and arresting two persons in connection with their alleged role in the 2016 hack of Bitfinex—another very large crypto-trading platform—point to the increased vigilance and effectiveness of law enforcement in identifying and prosecuting misuses of cryptocurrencies and blockchain technology.
The establishment of the National Cryptocurrency Enforcement Team within the DOJ to act as the “focal point” for the potential criminal misuses of cryptocurrencies and other digital assets, as well as the increased diligence and willingness of CeFi crypto asset enterprises to comply with sanctions and other KYC requirements, should help deter attempts by Russia and its sanctioned nationals and blocked persons to try to evade worldwide sanctions using cryptocurrencies and to make attempts at evasion more likely to be detected and mitigated.
Gary DeWaal is special counsel and chair of the Financial Markets and Regulatory Practice Group at Katten Muchin Rosenman LLP. He is the former worldwide group general counsel of a subsidiary of Société Générale that was, at the time, the world’s largest derivatives broker, as well as a senior trial attorney for the Division of Enforcement of the Commodity Futures Trading Commission.
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