Whereas traditionally sanctions have been imposed against individuals, property or legal entities, the advent of crypto has seen sanctions being implemented against wallet addresses and centralised crypto service providers.
However, the U.S Department of Treasury’s Office of Foreign Assets Control’s (”OFAC”) recent designation of the Ethereum protocol Tornado Cash shows that government bodies are willing to think even more creatively in terms of imposing sanctions in line with developments in technological advances.
Indeed, with the increased range of new decentralised technologies, each affecting the new and novel ways of transferring value, the imposition of creative sanctioning is perhaps not surprising as we move into an era of new decentralised financial technologies.
Background
On 8 August 2022, the U.S. Department of Treasury’s OFAC announced that the Treasury’s Office of Foreign Assets Control (“OFAC”) had sanctioned virtual currency mixer Tornado Cash.
What is Tornado Cash?
Tornado cash is a virtual currency mixer. A virtual currency mixer is essentially computer software that obscure cryptocurrency transactions by jumbling up data referring to the individuals placing and removing funds in relation to transactions.
Given that all transactions on the blockchain are traceable, a way to obfuscate transactions is to actually obscure who sent what to whom. Virtual currency mixers potentially enable this obscuring to be done.
Virtual currency mixers therefore essentially blur the link between such things as the person depositing and withdrawing to and from a crypto transactions and their real-life identity. Virtual currency mixers therefore offer pseudonymity to crypt users, which anonymises transactions.
Virtual currency mixers can therefore be controversial for obvious reasons.
Why is the sanctioning of Tornado Cash unusual?
According to the Wall Street Journal this action is unprecedented, as according to crypto industry participants “the U.S has previously only sanctioned wallet address and centralised services”.
According to some the effects can be far-reaching, the Wall Street Journal also quotes Miller Whitehouse-Levine, who states that “It’s a new development in crypto and will have deep implications down the line”, adding “The industry’s impression is that the U.S Government is pivoting from focusing on punishing bad actors to policing the protocols now”.
What can be said with certainty is that as the use of decentralised technology to affect the transfer of value becomes more prolific we can certainly expect more cases like this.
UK crypto sanctions compliance
Meanwhile back in the UK Gherson’s criminal litigation, investigations and regulatory team have recently written about how to address the risk of sanctions evasion via cryptoassets.
This followed an 11 March 2022 joint statement reiterating that all UK financial services firms are expected to play their part in ensuring that sanctions are complied with. That includes firms in the cryptoasset sector.
This statement additionally served as a timely reminder that financial sanctions regulations do not differentiate between cryptoassets and other forms of assets. Therefore, the use of cryptoassets to circumvent economic sanctions is a criminal offence under the Money Laundering Regulations (“MLRs”) and regulations made under the Sanctions and Anti-Money Laundering Act 2018.
Indeed, the use of technology to obfuscate transactions is one of the following red flags suggesting an increased risk of sanctions evasion according to the statement:
- Customers who are located or conducting business to or from a jurisdiction subject to sanctions, or which is on the UK’s High Risk Third Country list;
- Transactions to or from a wallet address associated with a sanctioned entity, or a high-risk wallet address;
- Transactions involving a cryptoasset exchange or custodian wallet provider known to have poor customer due diligence procedures or otherwise high risk; and
- The use of tools to obfuscate the location of the customer.
Conclusion
What can be said with certainly going forwards is that authorities will look to increasingly novel ways to sanction aspects of the crypto world. Those working in the compliance of this sector will need to keep a keen ear to any developments.
This will be a fascinating space to watch going forwards.
Regulation and compliance
In these constantly changing times, firms that deal with cryptoassets, and additionally have exposure to firms that do, will need to carefully consider all their systems and controls to ensure that they are able to comply with all relevant AML and sanctions regulations.
How Gherson can assist
Gherson’s white-collar crime and regulatory team are able to provide advice and assistance with AML and sanctions compliance, including in situations involving cryptoassets.
Additionally, the team has recently started a series on the regulation of crypto, with the aim of advising those who work in the compliance of this sector. In addition, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.
Please do not hesitate to contact us for further advice, send us an e-mail, or, alternatively, follow us on Twitter, Facebook, or LinkedIn to stay up-to-date.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.
©Gherson 2022