The Office of Foreign Assets Control ("OFAC"), responsible for enforcing U.S. economic sanctions, has taken its first steps to tackle the exploding use of digital currencies. On March 19, 2018, OFAC released a digital currency-related FAQ indicating that OFAC may include digital currency addresses on its Specially Designated Nationals ("SDN") list of blocked persons, companies and entities.
In its guidance, OFAC defines digital currency broadly to include "sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency." This definition covers typical cryptocurrencies (Bitcoin, Litecoin, Ethereum, etc.) and the purportedly oil-backed "petro-gold" token issued by the government of Venezuela.
In its FAQ, OFAC states that it will use sanctions against criminal actors abusing digital currencies and emerging payment systems in addition to existing tools, such as diplomatic outreach and law enforcement authorities. To strengthen these efforts under its existing powers, OFAC stated that it "may include as identifiers on the SDN List specific digital currency addresses associated with blocked persons." A digital currency address is an alphanumeric identifier that represents a potential destination for a digital currency transfer. Adding such addresses to the SDN List would alert the public of those addresses that have been identified as being owned by, or associated with, a blocked person.
Individuals and companies on the SDN List typically have their assets blocked, and U.S. persons are generally prohibited from dealing with them. OFAC stated that the addition of digital currency addresses would not change any OFAC compliance obligations. Those requirements remain the same regardless of whether a transaction is denominated in digital or traditional fiat currency. This means that U.S. persons, and those otherwise subject to OFAC jurisdiction (U.S. companies, permanent residents of the U.S., and anyone in the U.S.), "are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions, such as dealings with blocked persons or property, or engaging in prohibited trade or investment-related transactions." This prohibition would apply to firms that facilitate or engage in online commerce or process transactions using digital currency.
The FAQ concluded by noting that exchangers of digital currencies, administrators, and other industry participants should develop tailored, risk-based compliance programs which should include SDN screening, among other appropriate measures. The adequacy of a compliance plan will depend on a variety of factors, including the type of business involved. Many of these entities – particularly exchanges and administrators – are also subject to anti-money laundering compliance obligations as "money services businesses" registered with the Financial Crimes Enforcement Network (FinCEN). See our prior article Filthy Lucre: Regulatory Risks of Digital Currency, Loot Crates, and Other Video Game Monetization Strategies for a discussion on the money service business implications for digital currencies in videogames.
Parties who identify a digital currency address or wallet that they believe is owned by or affiliated with an individual or entity on the SDN should file a report with OFAC and, if the party holds the property, take steps to block the relevant digital currency.
The OFAC FAQ is an important step in limiting illicit use of digital currencies, but its practical impact is not entirely clear at this time. Most digital currencies allow users to generate an almost unlimited number of addresses, meaning that sophisticated users are likely to use an individual address only once. This makes it difficult to track the transaction activity of such users. However, since transactions in and out of digital currency addresses are usually recorded in a blockchain ledger, the flow of funds can often be tracked further downstream.
As AML programs for digital currencies become more sophisticated, following cryptocurrency transactions, and identifying the participants, may become easier. This makes publication of addresses associated with SDN blocked persons valuable to industry participants and regulators. Listing digital currency addresses also give U.S. law enforcement and intelligence services another important data point in supporting U.S. foreign policy objectives.