Digital Currencies Within the Framework of OFAC Sanctions
Introduction
In recent years, digital assets have become a prominent component of the global economy, driven by the acceptance of digital currencies as a valid payment method in more and more places. However, the increasing use of digital currency also heightened the risk of such currencies being used for ill-minded purposes, such as evading sanctions. As a result, the digital currency industry has become a key focus point for sanction regulators.
The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) has also shifted its focus to digital currencies. As of then, OFAC’s economic sanctions target individuals and entities that have used digital currencies in connection with malign activity. Accordingly, administrators, exchangers, and users of digital currencies and other payment processors should ensure that they do not engage in unauthorized transactions prohibited by OFAC sanctions, and develop a tailored, risk-based compliance program, which generally should include sanctions list screening and other applicable measures[1] .
This article aims to provide a framework of OFAC sanctions and actions that persons in contact with digital currencies should be acquainted with and consider when formulating their sanctions compliance programs.
General Overview of OFAC Sanctions
OFAC administers and enforces comprehensive or targeted economic sanction programs against foreign countries, geographic regions, entities, and individuals to combat global threats such as terrorism, transnational organized crime, malicious cyber activity, narcotics trafficking, weapons of mass destruction proliferation, and human rights abuses. These programs typically involve asset freezes and restrictions on financial or trade activities. OFAC sanctions may be analyzed under two main categories: (i) primary sanctions and (ii) secondary sanctions.
Primary sanctions may be broadly defined as sanctions targeting transactions and activities with a U.S. nexus, such as those occurring within the U.S., involving U.S. persons, or relating to U.S.-origin products. On the other hand, secondary sanctions target non-U.S. persons engaged in certain activities that the U.S. government has determined to counter U.S. national security or foreign policy interests, even if there is no direct U.S. nexus.
The most common form of secondary sanctions is to be listed in the Specially Designated Nationals and Blocked Persons List (“SDN List”). When a person is designated in the SDN List, their property and interests in property within the U.S. are blocked and prevented from receiving services from the U.S. financial system. Furthermore, U.S. persons are generally prohibited from dealing with persons on the SDN List.
Digital Currencies
Certain key concepts of digital currencies are defined as follows for OFAC sanctions programs[2] :
Virtual currency:
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, which is neither issued nor guaranteed by any jurisdiction. To exemplify, Facebook Credits was a virtual currency that enabled people to purchase items in games and non-gaming applications on the Facebook Platform[3] . Another well-known example is Bitcoin, which was designed to be a decentralized virtual currency, independent of governments, banks, and other institutions[4] .
Digital currency:
Digital currency is a broader concept than virtual currency, which includes sovereign cryptocurrency, virtual currency, and digital representations of fiat currency. An example of a digital currency that is not a virtual currency is a central bank digital currency (CBDC) issued by a country’s central bank.
Digital currency wallet:
A digital currency wallet is a means of holding, storing, and transferring digital currencies. It stores the user’s digital currency addresses, enabling them to receive digital currency and private keys that grant them the ability to send or transfer digital currency. Many wallet providers offer their customers software to create and manage wallets. Additionally, there are hosted wallet providers that make and store digital currency wallets on behalf of their customers. Many hosted wallet providers also offer exchange and payment services.
Digital currency address:
Digital currency addresses are linked with a digital currency wallet, an alphanumeric identifier representing a potential destination for a digital currency transfer.
Digital Currencies in OFAC Sanctions
OFAC compliance obligations are the same for all transactions, regardless of whether they are denominated in digital or traditional fiat currency. OFAC leverages sanctions to combat the abuse of digital currencies and emerging payment systems that complement existing tools, including diplomatic outreach and law enforcement authorities. Accordingly, OFAC includes digital currency addresses associated with blocked persons on the SDN List to alert the public[5] . Furthermore, OFAC lists actors from different levels of the digital currency industry, such as digital currency exchanges or users, in the SDN list.
The first noticeable sanction designation of OFAC related to virtual currency exchanges dates back to 2021. In a press release dated 21.09.2021, OFAC announced the designation of SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, in the SDN List for its part in facilitating financial transactions for ransomware actors[6] . Through its announcement, OFAC highlighted that virtual currencies are suitable for illicit activity through peer-to-peer exchangers, mixers, and exchanges such as facilitation of sanctions evasion, ransomware schemes, and other cybercrimes. Furthermore, it stated that while some virtual currency exchanges are exploited by malicious actors, others like SUEX, facilitate illicit activities for their illicit gains. Since then, there has been a significant increase in the number of digital currency-related designations on the SDN List.
Moreover, many penalties and enforcement actions have been released concerning the digital currency industry. To provide a notable example, on 21.10.2023, OFAC announced its settlement with Binance Holdings, Ltd. (“Binance”), the largest virtual currency exchange in the world by trading volume, for $968,618,825[7] . According to the announcement, violations subject to the settlement relate to Binance’s matching and execution of virtual currency transactions on its online exchange platform between U.S. persons and sanctioned jurisdictions or blocked persons over more than five years. As a part of the settlement procedure, Binance agreed to undertake many compliance commitments, including retaining a monitor that will review and evaluate the effectiveness of its compliance. Through its announcement, OFAC highlighted that all virtual currency exchanges based outside the U.S. that conduct business with U.S. persons or within the U.S. must ensure that (i) their activities do not cause U.S. persons to violate U.S. economic sanctions or (ii) result in the exportation, re-exportation, sale, or supply, directly or indirectly, of goods, services, or technology from the U.S. to sanctioned jurisdictions or blocked persons. Furthermore, it underlined that virtual currency exchanges that fail to do so may face significant civil monetary penalties and other sanctions, such as being designated in the SDN List.
Persons in contact with digital currencies can eliminate such risks through a well-functioning sanctions compliance program. Although there is no single compliance program suitable for each circumstance, OFAC’s Sanctions Compliance Guidance for the Virtual Currency Industry[8] provides a starting point for designing a compliance program for technology companies, exchangers, administrators, miners, and wallet providers, as well as more traditional financial institutions that may have exposure to virtual currencies or their service providers. However, it is assessed that the aforementioned guidance does not include tailored recommendations for different actors in the digital currency industry. Therefore, there are still many uncertainties for actors in the digital currency industry, creating an expectation and demand for more detailed and personalized guidance.
Conclusion
The growing use of digital currencies has undoubtedly increased the risk of such currencies being used to evade sanctions. Thus, many sanction regulators, particularly OFAC, have shifted their focus to the digital currency industry.
OFAC compliance obligations are the same for all transactions, regardless of whether they are denominated in digital or traditional fiat currency. Accordingly, OFAC issues sanctions to combat the abuse of digital currencies and emerging payment systems by including digital currency addresses associated with blocked persons on the SDN List. In addition, OFAC also lists actors from the digital currency industry in the SDN List. In this context, following the issuance of its first notable sanctions decision regarding virtual currency exchanges in 2021, OFAC announced many designations to the SDN List concerning digital currencies, and has also released several penalty and enforcement decisions.
The most effective approach to avoid the risk of violating OFAC sanctions is to adopt and follow a comprehensive compliance program. Therefore, persons in contact with digital currencies should adopt a compliance program, taking into account, but not exclusively limited to, OFAC’s Sanctions Compliance Guidance for the Virtual Currency Industry.
- OFAC: “Questions on Virtual Currency - FAQ 560” (https://ofac.treasury.gov/faqs/topic/1626, Date of Access: 13.01.2025).
- OFAC: “Questions on Virtual Currency - FAQ 559” (https://ofac.treasury.gov/faqs/topic/1626, Date of Access: 13.01.2025).
- European Central Bank: “Virtual Currency Schemes”, 2021, p. 14 (https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf, Date of Access: 13.01.2025)
- Segendorf, Björn: “What is Bitcoin?”, Sveriges Riksbank Economic Review, 2014:2, p. 73 (https://www.riksbank.se/globalassets/media/rapporter/pov/filer-fore-2017/artiklar/rap_pov_artikel_4_1400918_eng.pdf, Date of Access: 13.01.2025)
- OFAC: “Questions on Virtual Currency - FAQ 561” (https://ofac.treasury.gov/faqs/topic/1626, Date of Access: 13.01.2025).
- U.S. Department of Treasury: “Treasury Takes Robust Actions to Counter Ransomware” (https://home.treasury.gov/news/press-releases/jy0364, Date of Access: 13.01.2025)
- U.S. Department of Treasury: “OFAC Settles with Binance Holdings, Ltd. for $968,618,825 Related to Apparent Violations of Multiple Sanctions Programs”, 2023 (https://ofac.treasury.gov/media/932351/download?inline, Date of Access: 27.01.2024)
- OFAC: “Sanctions Compliance Guidance for The Virtual Currency Industry”, 2021 (https://ofac.trhttps//ofac.treasury.gov/media/913571/download?inlineeasury.gov/media/913571/download?inline, Date of Access: 13.01.2025).
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