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United States authorities delegate sanctions monitoring to cryptocurrency exchanges and industry players

Against the experience and limited resources to oversee the use of potentially unlawful digital assets, the United States government delegates supervision and punishment to cryptocurrency exchanges and players in the industry.

But the reality today does more harm than good?

Within the U.S. Treasury, the Office of Foreign Assets Control (OFAC), is responsible for penalizing individuals and organizations that the nation considers threats to national security. Earlier this month, OFAC added two Chinese nationals accused of money laundering to the infamous North Korean Lazarus Group. Notably, OFAC’s designation includes cryptocurrency addresses for these individuals, an OFAC measure first introduced near the end of 2018 while targeting two Iranians for sanctions.

On newly sanctioned targets, Jesse Spiro, head of policy at Chainalysis, said:

“This action is particularly notable because it was brought against people who helped a previously sanctioned entity – Lazarus – transfer stolen funds through a complex money laundering process. This signals that the Treasury is not only using advanced blockchain investigative techniques but also taking action against people who exploited illicit activity in any way.”

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Jesse Spiro, head of policy at Chainalysis

It is not uncommon for OFAC to be wary of the role of cryptocurrencies in countries under U.S. sanctions. Amidst North Korea’s strong exchange hacking program, Petro, the Iranian President called for the creation of a cryptocurrency that the U.S. could not touch, many U.S. authorities were still skeptical about the entire industry.

Despite the periodic appointment of specific cryptocurrency wallets, OFAC has restricted its direct involvement with cryptocurrencies and other branches of the U.S. government. More comfortable with traditional financial systems, the authorities have found it challenging to adapt to this new ecosystem.

Vice President at the Financial Integrity Network, Senior Director at the Foundation for Defense of Democracies, Eric Lorber, confirmed that authorities had been hard at work in this new field:

“There’s been a huge focus in the U.S. government on this in the last couple of years. There is a good sense that the U.S. government has a general sense of what’s going on.”

Spiro agrees that the relevant financial management agencies have worked hard:

“We also know that the Treasury Department – FinCEN, OFAC, and even the policy office of TFFC (Terrorism Financing and Financial Crimes) – is active ramping up their work on cryptocurrency and identifying and targeting potential bad actors that abuse the ecosystem.”

OFAC’s dependence enters cryptocurrency exchanges

OFAC’s established practices require financial institutions operating in the United States to act as frontlines in the search for sanctions violations. OFAC has limited resources when actively monitoring transactions.

Regulators have shown a tremendous unanimity in anticipation of anti-money laundering (AML) activities and against the financing of businesses’ terrorist (CFT) programs in the cryptocurrency space. Such measures are familiar to traditional financial institutions, but they involve mechanisms that do not always suit cryptocurrencies. A big part of the debate about cryptocurrencies is the speed of transactions, the ability to reach people who leave traditional finance, and easily cross the border – characteristics that are opposed to traditional control measures as punishment.

John Roth, head of compliance at Bittrex, said:

“OFAC’s approach to crypto is pretty much the same as fiat. OFAC designates, but they expect exchanges to have programs in place to prevent transactions to/from prohibited persons/countries. It is not that much different from a traditional bank.”

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John Roth, head of compliance at Bittrex

While government agencies may be new to technology, even cryptocurrency companies have to enlist help from companies like Chainalysis to deal with legal obligations.

As with all types of security concerns, if preventive measures work, they will seem to overreact. However, these safeguards can punish well-meaning entities while not dealing with the most intimidating technical challenges.

A residual technical question is the subject of privacy coins like Monero (XMR) and Dash (DASH).

In this regard, Yaya Fanusie, a former CIA counterterrorism analyst and current fellow at several national security-focused think tanks stated:

“I don’t think anyone has cracked that yet.”

Blockchain analysis companies have yet to release software that can track transactions on private currencies consistently. The other side of this security debate is its impact on business. No question increasing regulations and expectations have caused damage to exchanges. In an event last week at the IRS, representatives of Coinbase and Kraken emphasized that excessive scrutiny from regulators hit their bottom line. Compliance with OFAC expectations is essential for any cryptocurrency exchange trying to operate in the United States and requires additional legal groups and external contracts.

Roth said:

“A compliant crypto exchange needs a dedicated compliance department, with the kinds of third-party tools necessary to ensure that they aren’t doing business with bad actors. This is the price of admission for doing business in the U.S., and most crypto companies understand that. If you don’t, I think the risks are significant.”

And while the expenses required to keep track of OFAC’s requirements – which change, and are not always evident in public – may be simple annoyances for more extensive exchanges, they can be untenable costs for newer players. What happens as a result is simple: businesses leave.

While the United States may be the largest economy in the world, pushing exchanges out of the country doesn’t necessarily solve the problem. Bad actors using cryptocurrencies can fully adapt and manipulate regulations to transfer money in the least prescribed form. The most vulnerable parties to more positive expectations from OFAC are exchanges that try to operate legally.

In addition to hurting large exchanges and companies for a short time, these measures restrict the U.S. access to cryptocurrency services. From a long-term perspective, overbearing sanctions can encourage even US-friendly nations to operate in economic systems that the U.S. simply isn’t part of – limiting economic growth and the effectiveness of future sanctions.

The risks to the United States extend beyond crypto – The role of cryptocurrencies in the big punishment plan

In January, economists released a warning that strong sanctions and economic war could push the international market to abandon the dollar.

Returning to the example of Bittrex freezing on Iranian accounts, OFAC’s fear of stopping Bittrex from accessing Iranian accounts that OFAC itself would not have legal recourse.

Lorber explained:

“If you’re a European firm and there’s an Iranian SDN who sends money to your European financial institution, that European financial institutions may not have the legal authority to block those funds.”

Tanvi Ratna, who recently wrote a section for Foreign Policy named Iran Iran with a Bitcoin strategy to defeat Trump, made it clear the issues facing the United States in increasing international support to Punishment continues:

One American unilaterally changes his position and others do not necessarily want to play with. You cannot impose unilateral sanctions. People also don’t care or are intimidated by Iran. Look at the attitude of the Europeans, Chinese and Indians towards Iran.

In the vast arsenal of OFAC sanctions, cryptocurrency is a small player. However, it is worth noting that both its dynamism and some of its basic virtues, including speed and indifference towards the national border. Cryptocurrencies also present a clear challenge to the financial systems that the United States has used for its political interests, such as SWIFT for international payments.

The coming years will be crucial to establishing not only the US Treasury’s relationship with cryptocurrencies but also the ability to adapt to changing financial systems. In these terms, OFAC’s response to cryptocurrencies will be an important barometer for evaluating its priorities and comfort with innovation.

The article is referenced from Cointelegraph.

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