The United States Office of Foreign Assets Control has made significant progress in implementing sanctions related to cryptocurrency. Sanction implementation falls under the purview of OFAC, a national Department of Treasury division. But in recent years, sanctioned individuals have begun utilising cryptocurrencies to get around their financial constraints. In a recent report, Chainalysis, an on-chain analytics company, stated that the OFAC has experience handling cryptocurrency-related illegal transactions.
One of the cases highlighted in the report was that of Hydra, a darknet market that offered money laundering services to cybercriminals and facilitated drug sales. The entity was based in Russia, but its servers were located in Germany. In coordination with the US authorities, the German law enforcement agency seized the servers of Hydra once OFAC designated the company in April last year. This case demonstrates that sanctions can be extremely effective against entities with key operations in cooperative jurisdictions.
Another case highlighted in the report shows that the authorities have gained experience dealing with designated entities based in uncooperative areas. For example, around the same time as the case of Hydra, the OFAC sanctioned a high-risk crypto exchange called Garantex for similar money laundering charges.
However, in this case, Garantex was not seized following its designation, and it continues to operate. The guarantee has been largely cut off from the compliant exchange ecosystem but still maintains a large user base in Russia. Unfortunately, the Russian government has been unwilling to enforce the US sanctions, and this case highlights the difficulties in implementing sanctions in countries that don’t have formal channels with the OFAC.
OFAC has also been challenged by the technology that facilitates cryptocurrencies and deals with varying levels of cooperation in different jurisdictions. Until recently, the OFAC had only designated centralised exchanges or personal wallets.
Tornado Cash, a decentralised mixing service, became the first decentralised finance (Defi) protocol designated by the OFAC in August and November last year. After designating Tornado Cash primarily for facilitating money laundering, the OFAC managed to take down its front-end website. However, with its decentralised back-end utilising smart contracts that run indefinitely, it is still unclear how the operations could be effectively seized. This has raised questions about the feasibility of sanctioning DEFI protocols and the respective authorities that could be held responsible.
The report also suggested that sanctions act more like a tool against decentralised services to discourage their use instead of a complete prohibition. According to the report, in the case of Tornado Cash, this appears to have been effective, as data revealed that its inflows fell by almost 68% in the 30 days following its designation.
In addition to the above, a class-action lawsuit has been filed against Gemini Trust Company and its founders, Tyler and Cameron Winklevoss, on allegations that the cryptocurrency exchange provided interest-bearing accounts without properly registering them as securities. Investors have accused the business and its founders of fraud and Exchange Act violations in the class-action lawsuit filed in the Southern District of New York on Tuesday. Gemini is an American-based cryptocurrency exchange and custodian that allows customers to buy, sell, and store digital assets.
In conclusion, the OFAC has been making progress in enforcing sanctions related to cryptocurrencies, but it has also faced challenges in dealing with illegal transactions using cryptocurrencies. OFAC has had to adapt to dealing with decentralised services, such as Tornado Cash, which has raised questions about the feasibility of sanctioning Defi protocols and the respective authorities that could be held responsible. The report also suggested that sanctions act more like a tool against decentralised services to discourage their use instead of a complete prohibition.
