Regulatory intelligence for US exporters

More Collaboration, Industry Guidance Will Improve Crypto Sanctions Compliance, Companies Say

The U.S. should better regulate the cryptocurrency industry to increase sanctions compliance, but not in a way that inhibits innovation, companies and trade groups told the Treasury Department in comments released this month. Some commenters said Treasury should issue more guidance to help firms better understand their compliance obligations and help digital assets from being used to evade global sanctions.

Start A Trial

Treasury received the comments in response to its July request for information (see 2207130009) to inform its work under a March executive order on illegal uses of cryptocurrencies and other digital assets (see 2203090067). The request for information asked industry to share information on the “general risks” in digital assets financial markets.

The Chamber of Digital Commerce said the markets can be dangerous, especially because “bad actors are becoming more sophisticated in the digital asset sector.” There is an “opportunity for a robust partnership between industry and government to minimize vulnerabilities, risk, and damage,” the chamber said, pointing to past sanctions guidance by the Office of Foreign Assets Control.

OFAC has issued guidance aimed at helping the virtual currency industry navigate and comply with sanctions (see 2110150069) and published information on the sanctions risks of facilitating ransomware payments (see 2010010018). These guidance documents “strengthen regulatory clarity for sanctions compliance and provide actionable steps for the digital asset industry,” the digital chamber said.

Government efforts to identify financial crime by analyzing digital asset transactions are “projected to lead to a 30% drop in successful thefts of digital assets and ransomware payments” by 2024, the organization said. But it also said more can be done, and called for improvements to Treasury’s ability to “sanction malicious digital asset exchanges that facilitate ransomware crime, while providing greater regulatory clarity to industry good actors.”

Mastercard also said the U.S. should work closer with industry, including with “digital asset stakeholders” that specialize in anti-money laundering and sanctions analytics to “support the overall security and compliance of this emerging industry.” Treasury should also continue to identify and designate virtual asset platforms “that present high levels of money laundering, dark market, and other criminal activities.”

The U.S. also can take steps to improve “regulatory certainty” for industry, including through clear definitions for digital-asset security, digital-asset commodity, and stablecoin, said Anchor Labs, a digital asset platform. Without these definitions and other “prudent and well-balanced laws and regulations,” sanctions evasion could grow more common, the company said.

“That is because if the United States can’t lead on digital-assets, other countries will,” Anchor Labs said, “and unfortunately many offshore locations will be beyond the reach of U.S. sanctions, where anti-money laundering laws, know your customers regulations, as well as America's high standards for consumer protections will not apply.” The company said this offshoring would “dull the impact of U.S. sanctions.”

Treasury also should pursue “leading-edge privacy technologies that can help satisfy privacy and law enforcement objectives simultaneously,” PayPal said. The financial technology company pointed to “zero-knowledge proofs,” which “allows network participants to validate certain information without having direct access” to sensitive information. “[T]his might mean verifying that an individual is not on a sanctions list without revealing the identity of the individual to the entity seeking verification,” PayPal said. “These technologies may help policymakers satisfy what have previously been perceived as dueling interests between privacy and law enforcement.”

Cryptocurrency company Coinbase Global argued that many of the U.S. government’s sanctions fears related to digital assets are unfounded. The company specifically pointed to Russia’s sanctions evasion attempts, saying there is “little to no evidence that crypto assets have played a role in helping Russians avoid U.S. and global sanctions.” Although “crypto assets have certain features,” such as speed and anonymity, that “may appear to be beneficial to illicit actors,” Coinbase said, “only a small percentage of crypto transactions are related to criminal activity.”

“So, while some speculate that stablecoins could spur illicit activity, the evidence suggests this is not the case,” the company said. “As with most illicit finance risks, it appears the best defense against misuse of stablecoins is to ensure that regulated financial institutions handling these assets maintain effective anti-money laundering programs, including implementing Know Your Customer procedures, monitoring transactions, and filing suspicious activity reports.”