The impact of cryptocurrency on sanctions: Are the regulators’ concerns reasonable?

Since the birth of cryptocurrency, the use of cryptocurrency to evade international sanctions by various international government organizations such as the United Nations (UN), the International Monetary Fund (IMF) and the World Bank has always been a concern of regulatory agencies.

In the past two years, the rapid popularity of digital currencies has made this discussion more important than ever, especially with the emergence of central bank digital currencies (CBDC) such as the digital renminbi.

On November 17, U.S. Deputy Treasury Secretary Wally Adeyemo stated in an interview that the effectiveness of U.S. sanctions Will not be destroyed Through the central bank digital currency.

Adejemo’s remarks were made after comments by the sanctioned Russian oligarch Oleg Deripaska (Oleg Deripaska). Urge the Russian government to use Bitcoin To evade US sanctions and even weaken the dominance of the US dollar. Deripaska said: “The United States realized long ago that uncontrolled digital payments can not only offset the effectiveness of the entire economic sanctions regime, but also depreciate the U.S. dollar as a whole.”

The Biden administration has taken a strong stance against cryptocurrency companies that instigate such reasons. It found that cryptocurrency exchanges were guilty of ransomware attacks facilitated by rival countries.

related: Ethereum developers must face a jury for allegedly helping North Korea evade sanctions

Ransomware attacks are just the tip of the iceberg

In September, the Overseas Assets Control Office of the Ministry of Finance Sanctioned Over-the-counter broker Suex by adding it to List of specially designated nationals Their assets are frozen, and any American is prohibited from conducting financial transactions with them. The broker’s offices in Moscow and Prague are also listed as part of sanctions by government agencies, including 25 Bitcoin cryptocurrency addresses (Bitcoin), ether (Ethereum) And tether (USDT).

Recently, on November 8, the regulator Approval of the cryptocurrency exchange Chatex And confiscated $6.1 million in cryptocurrency tokens from the company. Both exchanges were sanctioned for the same reason, namely accepting cryptocurrency used by hackers to pay for ransomware attacks.

Cointelegraph discussed these sanctions with Ari Redbord, director of legal and government affairs at TRM Labs, a blockchain intelligence protocol. Redbord previously served as a senior adviser to the US Undersecretary of the Treasury and the Undersecretary of Terrorism and Financial Intelligence.

Redbord told Cointelegraph, “These are non-compliant nested exchanges or parasitic virtual asset service providers that are nested on the infrastructure of large compliant exchanges to take advantage of their speed and liquidity.”

Exchanges such as these live in the shadow of a highly compliant cryptocurrency ecosystem and do not have sufficient compliance procedures to avoid illegal financial risks. Redbord further mentioned the government’s position on this issue:

“The government is very clear that ransomware is not an encryption issue. This is a cyber issue, and the focus should be on strengthening cyber defenses. The Ministry of Finance is very deliberate in its actions—only targeting the illegal weaknesses of the crypto ecosystem—for example, the parasite VASP. Hybrid services with the dark web-not an absolutely legal and growing crypto economy.”

The use of cryptocurrency for terrorist financing is also a major concern for regulators.Indeed, it is the main motivation behind Indian regulators intend to ban cryptocurrencies, Which led to panic selling in the region.

Redbord mentioned that in the past year, the world has turned to the “post” 9-11 world, where the battlefield is now mainly digital.He added: “We have seen North Korea and other nation-state actors use cryptocurrency for terrorist financing, ransomware payments, and programmatic money laundering. However, we have also seen law enforcement agencies using blockchain analysis tools. […] Track and trace the flow of funds to mitigate the risks posed by these illegal actors. “

Most cryptocurrencies and the blockchains that support them are open source, which means that law enforcement, regulatory agencies, and financial institutions have better visibility into the flow of funds than the trading mechanisms that support fiat currencies. However, in order to effectively ensure that cryptocurrencies are not used to evade sanctions, financial regulators must have a deep understanding of the asset classes and technologies that support it.

Charlie Chen, chief marketing officer of Horizon Finance, a decentralized financial protocol, told Cointelegraph, “Governments and financial institutions have not yet learned how to use cryptocurrencies, so they can really be selected to commit crimes. The world is like silk. A story like Lu. There are real criminal cases involving cryptocurrency, and there are convictions, which means there is evidence.”

related: Iranian general calls for the use of cryptocurrency to evade sanctions

CBDC has minimal impact on sanctions

Another aspect of cryptocurrency that may affect sanctions is central bank digital currency.China is currently the leader of CBDC attention The most advanced CBDC program — Digital currency electronic payment or digital yuan.

In the past, major Chinese banks operating in the U.S. Make Initial measures taken to comply with US sanctions. But some people worry that unless the United States keeps up with China’s plans, the adoption of this kind of CBDC in the global market may cause the dollar to weaken over time.

However, Chen believes that it is unlikely that CBDC will be used to circumvent economic sanctions. He said: “Currently, most international transactions are conducted in U.S. dollars. Russian companies will find it problematic to persuade their partners to abandon U.S. dollar transactions and switch to digital rubles.”

He added that the existing mechanisms and algorithms for tracking transactions have allowed the detection of suspicious transactions, and in the future, these mechanisms will only become more advanced and efficient.

Currently, there are no obstacles to prevent the payment of bitcoin and other cryptocurrency services to sanctioned parties. Even with popular cryptocurrencies and whitelisted wallets, financial regulators will not notice these transactions. However, Chen explained that when coins are converted into legal tender and transferred to the bank account of the sanctioned party, there will be problems.

Chen added: “If you use a major exchange like Binance, this bank transfer will not work. Therefore, you will have to use the small exchange service that was so popular in the post-Soviet era.”

Although cryptocurrencies are becoming more and more mainstream every day, they are still largely unregulated in many jurisdictions around the world, and their adoption is still in its infancy. Therefore, the ability to use cryptocurrency to avoid sanctions on the scale of a nation-state remains to be determined.

One thing is clear, whether encryption is the next iteration of currency or just another form of investment, regulators are monitoring its use in illegal activities such as avoiding sanctions.

related: China’s CBDC is about domestic dominance, not about beating the U.S. dollar