OFAC Continues To Demonstrate Greater Interest In Cryptocurrency Regulation And Enforcement – Fin Tech – United States – Mondaq News Alerts


With the widespread arrival of Initial Coin Offerings
(“ICOs”) over the last several years,1 U.S.
authorities have made deliberate progress toward keeping pace with
the fast-growing crypto industry.2 The Department of
Treasury’s Office of Foreign Assets Control
(“OFAC”) has arguably been slower to action than either
the U.S. Department of Justice (“DOJ”) or the U.S.
Securities and Exchange Commission (“SEC”), both of
which have taken an aggressive approach resulting in high-dollar
settlements.3 With that said, however, OFAC has more
recently taken steps that suggest cryptocurrency regulation and
enforcement will be a high-priority item moving forward.

I.OFAC’s Historical Regulation of Cryptocurrency

OFAC first demonstrated its interest in regulating
cryptocurrency in January 2018 after Venezuela announced its plans
to launch a state-sponsored digital coin called the
petro.4 In response to this offering, OFAC published an
FAQ admonishing that, “U.S. persons that deal in the
prospective Venezuelan digital currency may be exposed to U.S.
sanctions risk.”5 This guidance was quickly
supplemented by President Trump’s Executive Order 13827,
issued in March of 2018.6 The Executive Order went
further than OFAC’s admonition, expressly prohibiting all
U.S. persons from transacting in or financing any digital currency,
coin, or token issued by the Venezuelan government.7
With firmer ground to stand on, OFAC soon after rewrote its FAQs on
the petro and began to weigh in with greater detail on how it
viewed compliance obligations surrounding the digital currency
industry at large.8 For example, the FAQs state that
OFAC’s compliance obligations are no different for digital
currency users than they are for persons or companies who transact
using traditional fiat currency.9 OFAC also specifically
recommended that parties who deal in cryptocurrency “develop
a tailored, risk-based compliance program, which generally should
include sanctions list screening and other appropriate
measures” and advised that it would use sanctions against
“criminals and other malicious actors abusing digital
currencies.”10

The publication of its own sanctions roadmap sent a clear
message that sanctions were fast on the horizon. Nearly sixteen
months later, OFAC has not yet taken aggressive action to
illustrate the full application and extent of its intention to
regulate cryptocurrency from an enforcement perspective. Indeed, it
has only taken one enforcement action against two Iranian
individuals using cryptocurrency for illicit purposes.11
That action, however, did set a precedent in that it marked the
first time OFAC added digital currency addresses to its Specially
Designated Nationals and Blocked Persons (“SDN”)
List.12 The Iranian individuals had used those digital
addresses to conduct extortion-style ransomware attacks on their
victims.13 Not only is it significant that OFAC
specifically attributed these addresses to SDNs, but it also
suggests that OFAC will focus on intersections between schemes
involving digital currencies and potential cybersecurity and
ransomware threats.14

II. The Road Ahead

Through its guidance and clear messaging that it will target
schemes involving digital currencies, OFAC has already made clear
that regulation and enforcement of cryptocurrency are key
priorities. Standing alone, however, exchange platforms could
hardly have viewed these steps as a shot across the bow indicating
that more enforcement activity was to come until more recently. In
particular, recent commentary suggests that OFAC is actively
collecting information from upwards of a dozen exchange platforms,
with at least one digital currency exchange receiving a subpoena
over the last year.15

What OFAC intends to do with that information remains to be
seen. OFAC could merely be establishing a knowledge base in order
to identify additional individuals transacting in cryptocurrencies
with individuals or entities on the SDN list or for illicit
purposes. It could also be signaling its intention to sanction and
blacklist exchange platforms which fail to screen their user base
against the SDN list. Regardless of OFAC’s intention with
these requests, given recent trends, one can fairly assume that
whatever information OFAC receives from subpoenaed parties may be
shared with other government agencies in order to collaborate in
enforcement actions, or for other agencies’ independent
use.16 For example, information provided by a subpoenaed
party regarding internal controls could be shared with the
SEC’s Office of Compliance Inspections and Examinations
(“OCIE”) for use in entity examinations. Indeed, OCIE
designated digital assets as a key item in its 2019 Examination
Priorities, focusing on “portfolio management of digital
assets, trading, safety of client funds and assets, pricing of
client portfolios, compliance, and internal
controls.”17 Similarly, information provided to
OFAC suggesting involvement of coins or exchanges implicating
potential money laundering violations could be shared with the DOJ
Criminal Division’s Money Laundering and Asset Recovery
Section for further action. Furthermore, as international
coordination between agencies has become a hallmark of recent
enforcement activity implicating criminal conduct in multiple
jurisdictions, information obtained by OFAC could be shared with
authorities abroad potentially leading to parallel prosecutions for
violations of laws in other countries.

III. Conclusion

Recent activity by OFAC in the digital currency space suggests
that individuals and companies with an interest in utilizing
cryptocurrency or participating in an ICO—state sponsored or
otherwise—should proceed with caution. To that end, the
following key takeaways can be drawn from OFAC’s recent
activity.

  • Know Your Counterparty: Just
    as digital currencies are now at the core of AML/Know Your Customer
    (“KYC”) due diligence, even entities that are not
    subject to AML/KYC requirements should conduct sufficient due
    diligence when transacting in digital currencies to ensure that a
    counterparty does not appear on, or affiliate with anyone that
    appears on, OFAC’s SDN list.

  • Know Your Exchange Platform:
    Do your research as to which exchanges are fully compliant with
    OFAC’s regulations. Many exchanges are in the process of
    developing platforms customized for their U.S. customer base, which
    are compliant with U.S.-based trade restrictions.18
    Several prominent exchanges have blocked U.S. customers to avoid
    regulatory issues.19 While U.S. customers should be
    blocked from accessing those platforms or designated
    cryptocurrencies within the exchange, do not attempt to bypass
    those restrictions through any means.20

  • Monitor OFAC Guidance:
    Monitor OFAC’s FAQs regarding state-sponsored ICOs to ensure
    that any transaction involving a state-sponsored coin complies with
    all applicable laws, rules, and regulations. Although it may be
    apparent, do not engage in transactions that involve coins issued
    by sanctioned countries or digital addresses appearing on
    OFAC’s SDN list.

  • Maintain a Record of
    Transactions
    : Although the blockchain can create an immutable
    public ledger of transactions in theory, ensuring that an
    independent, auditable trail of digital currency transactions has
    been created could prove key toward establishing a compliance
    record in the event of an OFAC inquiry.

Footnotes

1. See, e.g., Daniele Pozzi, ICO Market 2018
vs 2017: Trends, Capitalization, Localization, Industries, Success
Rate
, COINTELEGRAPH (Jan. 5, 2019), https://cointelegraph.com/news/ico-market-2018-vs-2017-trends-capitalization-localization-industries-success-rate.

2.See Wick Sollers et al., Cryptocurrency
Crackdown
, AMERICAN BAR ASSOCIATION PRACTICE POINTS (Feb. 5,
2019), https://www.americanbar.org/groups/litigation/committees/criminal/practice/2019/cryptocurrency-crackdown/;
Press Release, Treasury Inspector General for Tax Administration,
Rising Use of Virtual Currencies Requires IRS to Take
Additional Actions to Ensure Taxpayer Compliance
(Nov. 8,
2016), https://www.treasury.gov/tigta/press/press_tigta-2016-34.htm.

3.See, e.g., Press Release, U.S. Securities and
Exchange Commission, SEC Obtains Emergency Freeze of $27
Million in Stock Sales of Purported Cryptocurrency Company
Longfin
(Apr. 9, 2018), https://www.sec.gov/litigation/litreleases/2018/lr24106.htm;
Press Release, U.S. Securities and Exchange Commission, SEC
Obtains Emergency Order Halting Alleged Diamond-Related ICO Scheme
Targeting Hundreds of Investors
(May 21, 2019), https://www.sec.gov/litigation/litreleases/2019/lr24473.htm;
Press Release, U.S. Department of Justice, Manhattan U.S.
Attorney Announces Charges Against Leaders of “OneCoin,”
a Multibillion-Dollar Pyramid Scheme Involving the Sale of a
Fraudulent Cryptocurrency
(Mar. 8, 2019), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-charges-against-leaders-onecoin-multibillion-dollar;
Press Release, U.S. Department of Justice, Alleged
Cryptocurrency Fraudster Arrested in Thailand, Charged in
Multi-Million Dollar Investment Scheme
(June 19, 2019), https://www.justice.gov/opa/pr/alleged-cryptocurrency-fraudster-arrested-thailand-charged-multi-million-dollar-investment.

4.Bill Chappell, Venezuela Will Create New
‘Petro’ Cryptocurrency, President Maduro Says
, NPR
(Dec. 4, 2017), https://www.npr.org/sections/thetwo-way/2017/12/04/568299704/venezuela-will-create-new-petro-cryptocurrency-president-maduro-says.

5.See Richard Oehler, OFAC Warns that
Venezuela’s Proposed Digital Currency May Violate U.S.
Sanctions
, VIRTUAL CURRENCY REPORT (Jan. 23, 2018), https://www.virtualcurrencyreport.com/2018/01/ofac-warns-that-venezuelas-proposed-digital-currency-may-violate-u-s-sanctions/.

6.Exec. Order No. 13,827, 83 F.R. 12469, 12469
(2018).

7.Id.

8.OFAC FAQs: Sanctions Compliance, Questions on Virtual
Currency, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_compliance.aspx#559
(last visited July 9, 2019).

9.Id.

10.Id.

11.Press Release, U.S. Department of the Treasury,
Treasury Designates Iran-Based Financial Facilitators of
Malicious Cyber Activity and for the First Time Identifies
Associated Digital Currency Addresses
(Nov. 28, 2018), https://home.treasury.gov/news/press-releases/sm556.

12.See Id.

13.Id.

14.Id.

15.Id.

16.See, e.g., How will OFAC use its existing
authorities to sanction those who use digital currencies for
illicit purposes?
, OFAC FAQs: Sanctions Compliance, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_compliance.aspx
(last visited July 12, 2019) (indicating that OFAC’s
enforcement strategy is a collaborative,
“whole-of-government” one, which may include other
federal agencies).

17.U.S. Securities and Exchange Commission, Office of
Compliance Inspections and Examinations, 2019 Examination
Priorities, available at
https://www.sec.gov/files/OCIE%202019%20Priorities.pdf.

18.Id.

19.Larry Cermak, U.S. Customers to be Blocked from
Trading on Binance.com
, THE BLOCK (Jun. 14, 2019), https://www.theblockcrypto.com/2019/06/14/us-customers-to-be-blocked-from-trading-on-binance-com/.

20.Id.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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