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US Authorities Becoming More Savvy in Enforcing Crypto Sanctions

2 mins
Updated by Geraint Price
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In Brief

  • The Office of Foreign Assets Control (OFAC) is learning how to sanction entities that utilize cryptocurrencies.
  • OFAC gleaned experience from sanctioning entities located in both cooperative and uncooperative jurisdictions.
  • Decentralized finance protocols also pose challenges, such as determining who the responsible individuals are.
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U.S. authorities have made progress in their enforcement of sanctions with regard to cryptocurrencies, according to a recent report.

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury is responsible for implementing sanctions. However, over the past few years, those under sanction have started using cryptocurrencies in order to circumvent their financial restrictions. 

Now, over the past two years, OFAC has gained experience in dealing with cryptocurrency services that facilitate illicit transactions. A recent report from Chainalysis details three use cases that helped inform OFAC.

Cooperating Jurisdictions

One case involved Hydra, a darknet market that offered money laundering services to cybercriminals, in addition to facilitating drug sales. Despite being based in Russia, its servers were located in Germany. 

In coordination with U.S. authorities, German law enforcement subsequently seized these servers, once OFAC designated Hydra in April 2022. According to the report, the case demonstrates that “sanctions can be extremely effective against entities with key operations in cooperative jurisdictions.” 

Lack of Cooperation

On the other hand, authorities have also gained experience from dealing with designated entities based in uncooperative areas. OFAC sanctioned high-risk crypto exchange Garantex at the same time as Hydra for similar money laundering activity. However, unlike the other entity based in Russia, Garantex was not seized following its designation and continues its operations.

Although largely cut off from the compliant exchange ecosystem, Garantex still maintains a large user base in Russia, where the government is also disinclined to enforce U.S. sanctions. This case demonstrates the difficulty of implementing sanctions in countries that have  no formal cooperation channels with OFAC.

More Complex Cases

In addition to dealing with varying cooperation in different jurisdictions, OFAC was also challenged by the technology facilitating cryptocurrencies. Until recently, OFAC had only designated centralized exchanges or personal wallets. However, decentralized mixing service Tornado Cash became the first DeFi protocol when OFAC designated it in Aug. and Nov. 2022.

After designating Tornado Cash primarily for facilitating money laundering, OFAC managed to take down its front-end website. However, with its decentralized back-end utilizing smart contracts that run indefinitely, it is unclear how to effectively cease its operation. This has generated questions around the feasibility of sanctioning DeFi protocols, as well as which individuals authorities could hold responsible.

Consequently, the report suggests that sanctions act more as a tool against decentralized services to disincentivize use, instead of prohibition. In the case of Tornado Cash, this appears to have been effective, as its inflows fell 68% in the 30 days following its designation. 

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Nicholas Pongratz
Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.
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