Rogue states dodge economic sanctions, but is crypto in the wrong? – Cointelegraph Magazine
Bitcoin is the center of a storm of controversy. The blockchain, the technology that backs it, has been hailed as a revolutionary innovation that could cut out the middleman and save the world. If it succeeds, we might all be able to sit at home and send money to each other for free, with no need for banks or governments. However, the reactions of world governments to bitcoin and other cryptocurrencies, as well as the reasons for their opposition, have been revealing.
As the world’s biggest oil producer and exporter, Saudi Arabia has long been the target of economic sanctions. In a bid to cut oil exports and cripple the nation’s economy, the US and the EU have imposed a plethora of measures on the country over the years. The latest round of sanctions is no exception. From August 2017, Saudi Arabia and all other countries that provided support to the Houthi movement in Yemen were subject to economic sanctions. These measures include Washington’s ban on trade and investment with the country, a gradual reduction in oil output, and stringent measures to ensure that the country’s central bank deposits are not used to fund terrorism.
Cryptocurrencies have been a target of sanctions. The U.S., for example, banned U.S. persons from transactions with all transfers of digital currency to or from Iran. But, as the following article shows, these sanctions have been ineffective: The Cryptocurrency Sanctions Game Of all the sanctions in the world, the sanctions against cryptocurrencies are the most bizarre. The Iranian rial sits on the black market, and governments around the world fear the financial unrest that the rial brings. The state of North Korea’s economy is a mess, and the government is eager to cash in on cryptocurrency. The Venezuelan economy has been destroyed by inflation and a currency that is near worthless. Bitcoin and other cryptocurrencies have been used to. Read more about bitgo and let us know what you think.
When the US began prosecuting cryptocurrency companies for violating economic sanctions rules, it didn’t exactly start with a bang. In December, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced a settlement with cryptocurrency wallet provider BitGo after the Palo Alto-based company failed to prevent individuals in Crimea, Iran, Sudan, Cuba and Syria from using its secure digital wallet management service, which is not subject to custody. The penalty for 183 clear violations of US sanctions? $98,830. According to law firm Steptoe, this is OFAC’s first enforcement action against a blockchain company, although six weeks later OFAC reached a similar agreement with payment processor BitPay for 2.102 apparent violations of multiple sanctions programs where BitPay allegedly allowed individuals from the same countries as in the BitGo case – but adding North Korea – to conduct transactions with merchants in the U.S. and other countries using digital currency on the BitPay platform, even though BitPay had information BitPay agreed to pay $507,375 to settle its potential civil liability. But future offenders may not be treated so leniently. It should be noted that, according to the U.S. Treasury Department, economic sanctions are generally applied against countries and groups such as terrorists and drug traffickers, typically using asset freezes and trade restrictions to achieve foreign policy and national security objectives.
Other enforcement measures
The cryptocurrency industry should certainly expect more enforcement action from OFAC, and it can expect much larger fines, David Carlyle, director of policy and regulatory affairs at Elliptic, told the Journal. The first two OFAC actions in this area were fairly straightforward cases where the underlying violations were not egregious and the fines were small. But future cases could be different, he said, adding: Other cases will undoubtedly follow with much more serious and egregious violations – and we can expect OFAC to fine cryptocurrency companies far more than we’ve seen so far. Doug McCalmont, founder of BlocAlt Consulting LLC, tells the magazine he expects more enforcement actions like those against BitPay and BitGo, as well as an expansion of who is being targeted, such as programmers connected to the technology. In recent years, the United States, the European Union, and the United Nations have implemented large-scale sanctions regimes, often targeting rogue states such as North Korea and Iran. One of the most famous early cryptocurrency cases involves Virgil Griffith, a former hacker who was arrested in April 2019 after speaking at a blockchain and cryptocurrency conference in North Korea in violation of sanctions against the rogue nation on U.S. charges. Sanctions violations are a real problem, said David Jevans, CEO of CipherTrace, whose cryptocurrency company recently discovered that more than 72,000 unique Iranian IP addresses are linked to more than 4.5 million unique bitcoin addresses, suggesting that sanctions violations are likely to be widespread and go largely unnoticed by virtual asset providers, he told the Journal. US authorities are not the only ones concerned about bad actors using emerging blockchain technology to circumvent economic sanctions. Agata Ferreira, associate professor at Warsaw Technical University, told the magazine that European authorities are becoming increasingly active and targeted. The crypto space is getting more and more scrutinized, and I think that trend will continue and accelerate. According to Robert A. Schwinger, a partner in Norton Rose Fulbright’s commercial litigation group, OFAC’s recent interest in crypto-currencies is not surprising. The US government has no choice but to regulate this new asset class of cryptocurrencies, because if it does not, it runs the risk that its sanctions regime will have no effect on new financial technologies. Players in the cryptocurrency space who ignore the restrictions of U.S. international sanctions are advised that they do so at their own risk, he wrote on Law.com.
Is DeFi problematic?
As cryptocurrencies proliferate, it seems inevitable that their decentralized financial networks (DeFi) will face government prerogatives, including economic sanctions. But isn’t managing a decentralized exchange (DEX) inherently problematic? Does the exchange have a main business address? Anybody home? And is it actually accountable to anyone if it is truly decentralized? Timothy Massad, former chairman of the US Commodity Futures Trading Commission and now a lecturer at Harvard University’s Kennedy School, tells the magazine that enforcing rules in a decentralised world is not easy, but that US regulators are trying to find a solution. Could the government eventually put more pressure on developers ofFi companies, including decentralized exchanges? Yes, they can build interesting procedures into the code. …. but it’s much easier to follow centralized intermediaries, Massad says. I think WiFi developers will come under pressure to ensure that their platforms cannot be used to circumvent sanctions – for example, by blacklisting addresses, Carlyle says, adding: There has been a lot of talk recently about the interest of [traditional] financial institutions in the DeFi, but it is hard to imagine large institutions participating in the DeFi unless they are confident that it will meet the sanction requirements. DeFi projects are decentralized, unmediated and borderless – all things that our legal and regulatory frameworks do not have, Ferreira tells the magazine. These are built on a centralised, intermediate and legal architecture. So it’s a challenge and a learning opportunity for regulators, and not all solutions will be optimal, Ferreira said. The European Union is aware of the problem of compliance with the DeFi Directive. The latest proposal for regulation of crypto asset markets (MiCA) would require DEXs to have legal entities to trade with EU citizens, effectively banning fully decentralized trading, Jevans told the Journal. He adds: Many so-called DEX companies have highly centralized management, venture capitalists, and physical headquarters, which led the FATF to classify them as PSATs. Compliance requirements for digital service companies like BitPay and BitGo will require some effort. Attempting to determine the counterparty of a cryptocurrency transaction is inherently difficult due to the nature of the technology, Carlyle notes, but cryptocurrency companies need to understand that every time they execute a transaction and make no effort to determine the source or destination of the funds, they are taking a serious risk of violating sanctions. Crypto-currency mining also poses compliance risks. If you’re acting on behalf of members of a mining group that has ties to a country like Iran, or if you’re paying fees to an Iranian miner, you could fall under OFAC, Carlisle says. There are also sanction risks in processing payments for ransomware, as some ransomware campaigns have involved cybercriminals from countries such as North Korea and Iran. Moreover, the increasing use of private currencies like Monero and Dash, which unlike bitcoin hide users’ addresses and transaction amounts, further complicates matters. However, blockchain forensics companies are exploring how to improve compliance with sanctions by virtual asset providers, notes McCalmont. For example, CipherTrace has developed the ability to track the anonymous currency (ACS) Monero, once considered the gold standard of ACS. He adds: These [forensic] companies will pick up the gauntlet and deploy capabilities that can bypass all the barriers used by decentralized exchanges. It really is a kind of regulatory arms race. And the stakes seem to be getting higher. Right now, there is overwhelming evidence that sanctioned countries are using cryptocurrencies, Carlyle says, concluding: North Korea’s cybercrime involving cryptocurrencies has raised at least hundreds of millions of dollars. Iran and Venezuela see cryptocurrency mining as a way to circumvent sanctions and generate revenue. relating to : North Korean crypto-currency hacking: Separating fact from fiction, Cointelegraph Magazine To stay ahead of the regulatory arms race, some cryptocurrencies are now using tools like blockchain analytics, Carlyle reminds us, to determine if a cryptocurrency is owned by a sanctioned party, but even then it can be challenging to stay compliant. Not only should you check addresses against the OFAC list, but you should also have systems in place to detect more subtle signs of potential sanctions, and your employees should be trained to handle situations with potential sanctions. The FOCA is also based on the principle of strict liability. You can be held liable even if you acted in good faith and without the intent to commit an illegal act, Carlisle adds. The cryptocurrency industry will need to operate under very stringent sanction compliance standards to avoid clashes with OFAC.
Part of a wider global regulatory trend
The recent sanctions are just part of an expected global crackdown on the cryptocurrency industry, some say. In May, the U.S. Treasury Department announced new, stricter rules for bitcoin and other cryptocurrencies. Transfers of crypto currency of $10,000 or more must be reported to the IRS. According to Nigel Green, CEO and founder of deVere Group, in a public statement, this action by the Treasury Department is likely the first major step towards global regulation of cryptocurrencies. This is inevitable as the market evolves and matures. According to Green, the crypto community should not fight this phenomenon, but embrace it. Proportionality must be maintained, he says, and he continues: It will help protect investors, strengthen the market, fight crime and reduce the risk of global financial instability, not to mention the potential for long-term economic recovery for countries that adopt it. In the absence of new cryptocurrency laws and regulatory guidance, the players themselves – that is, the crypto and blockchain industries – need to get their house in order, says James Cooper, associate dean for experiential learning at California Western School of Law in San Diego, reports the magazine, adding: We have a duty to establish self-regulating bodies. …] The industry must drive out all the bad actors. If 95 percent of the media coverage and conversation about cryptocurrencies is about ransomware, Iranian miners or criminal entities, something is wrong, Cooper continued, because all the good stuff, like blockchain for food safety or blockchain for vaccine tracking, is being crowded out.
Bretton Woods for crypto-currencies?
We need our own Bretton Woods moment, Cooper said, referring to the multilateral agreement that defined the contours of international finance after World War II. Something similar is needed for the cryptographic era. Not everyone agrees. According to Jevans, the Bretton Woods accords centralized monetary policy, an approach that is unlikely to be followed in a decentralized blockchain economy because different projects have very different goals and governance models. More promising, he says, are the recently updated recommendations of the Financial Action Task Force on Money Laundering, which clearly state that decentralized exchanges, as well as other DeFi platforms, are responsible for complying with global sanctions and laws on money laundering and terrorist financing. The solution for these organizations, which are now classified as VASPs by the FATF, is to implement solutions that allow them to be compliant without compromising decentralization and user privacy. Many are calling for international cooperation to deal with these new technological developments, such as cryptocurrencies and blockchain, notes Ferreira, but I don’t know if that’s feasible. Authorities sometimes act when there is a reason. The ladder was such a trigger – and a wake-up call – for the authorities. She adds: Perhaps in the future we will see further developments that could lead to a more coordinated approach at international level.
Decentralisation in conflict with the law?
But isn’t there an inherent conflict between economic sanctions imposed by sovereign states or quasi-governments like the UN and decentralized funding? One of the strengths of decentralized finance, according to its proponents, is that it provides a safeguard against central government corruption, including authoritarianism. For example, could a total ban on Iranian users also cut off access for Iranian dissidents who want to transfer money beyond the government’s reach? Absolutely, McCalmont replied: The fact that I, an ordinary person, can open an account on a decentralized exchange in minutes and instantly transfer money to North Korea, Syria or Iran – completely unnoticed and without much effort – speaks volumes. If these dissidents have a will, there’s probably a way. In general, something is needed here between the two undesirable outcomes. In an industry as young and emerging as crypto and blockchain, there will inevitably be loopholes that malicious non-state actors will try to exploit until the state steps in and kicks them out, Cooper told the magazine. That’s normal. But the US has had four years of anti-regulatory rhetoric, at least at the national level, and now, under the new administration, there is a risk that they will try to monopolise all digital assets – and stifle innovation. Doing nothing is bad, Cooper continued, but monopolization of digital assets by the U.S. government or any other state, through a central bank for digital currency or otherwise, is also undesirable. The challenge is to find the optimal location.The United States, European Union, and United Nations have renewed their sanctions against Iran, as part of a package of worldwide penalties against the country and its leadership for its ballistic missile program, for its role in the Yemen war, and for human rights abuses. The sanctions are not intended to hurt the Iranian people, but rather to apply pressure on their government by cutting off its ability to sustain its military and the economy. The UN Security Council is also trying to hold Iran accountable for the attacks on oil tankers in the Gulf of Oman in July.. Read more about bitcoin price and let us know what you think.
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