Judge Discusses Crypto Transaction Traceability and OFAC Sanction Enforcement in New Opinion
In March of this year, the Department of Justice filed a criminal complaint against an unnamed defendant and a foreign exchange for allegedly using cryptocurrency to evade United States economic sanctions.
The complaint was filed after the Department of Justice discovered that the defendant and parties from a sanctioned country had set up a payments network designed for users to skirt U.S. economic sanctions. The unnamed defendant, an American citizen, had transmitted a total of $10 million of value in Bitcoin to persons or entities in one of several countries currently facing economic sanctions (Iran, North Korea, Russia, or Syria).
The defendant set up the payments network and buy the domains to enable its customers. Since these institutions are subject to Know Your Customer (“KYC”) federal disclosure requirements, the Justice Department was able to subpoena these institutions and successfully identify the defendant.
In his nine page opinion, U.S. Magistrate Judge Zia M. Faruqui strongly asserted two key points — first that virtual currency transactions are traceable and second that virtual currency transactions are subject to existing U.S. economic sanctions.
He went on to cite the Office of Foreign Asset Control’s (“OFAC”) October guidance that made it clear that sanctions laws are to apply to digital currency and asset transactions. Judge Faruqui concluded that the foreign exchange involved subjected itself to United States regulations when it “knowingly re-exported financial services — including virtual currency that originated in the U.S. or came from a U.S. person” to a sanctioned recipient.
The DOJ has already made it clear they will actively enforce U.S. economic sanctions on cryptocurrency transactions. In February of this year, the Department successfully prosecuted two American citizens responsible for the well-known Bitfinex hack that resulted in the theft of $3.6 billion of Bitcoin.
Similarly, the Department of Treasury sanctioned a “virtual currency mixer” by the name of Blender.io after its “blender” service was used by North Korean hackers to obscure the source of over $20 million of stolen assets.
Why does this matter?
In his opinion, Judge Faruqui echoed a key point many in the crypto community have made about the use of cryptocurrencies for illicit activity — they are a bad option because of the nature of the public ledger.
Judge Faruqui reasoned that the immutable, append-only features of public blockchains creates an accurately time-stamped and accessible transaction ledger for law enforcement to use when tracing illicit financial activity.
Hopefully examples of law enforcement using blockchain analysis to trace illicit activity will help alleviate policymakers’ concerns about this issue.
ECB Executive Discusses Stablecoins + Forecasts Timeline for Digital Euro Rollout
On Monday, European Central Bank Executive Fabio Panetta delivered a keynote speech at the National College of Ireland where he discussed the status of the ECB’s Digital Euro rollout.
Panetta suggested that a beta version of the technology could be rolled out within the next four years. This beta would likely be restricted to peer-to-peer transactions before eventually extending to commercial transactions between businesses and consumers.
In his speech, Panetta mentioned the need to move quickly but diligently on this project because of the rise in the adoption of stablecoins and the risks associated with these private, fiat-pegged assets. He cited the recent collapse of TerraUSD (“UST”) as an important reason for developing what he claimed would be a safer and more reliable digital form of fiat currency.
Panetta also expressed his belief that a digital Euro would help to enforce sanctions more effectively, something that ECB President Christine Lagarde has been on record discussing in the past. Both believe the effectiveness of these sanctions are especially important in times of war to deter and contain actors like Russia.
Why does this matter?
Many U.S. legislators have become increasingly vocal in their opposition to a U.S. CBDC.
Shifting from paper-backed fiat currency to tokenized fiat currency presents significant threats to the civil liberties and privacy of citizens. Depending on how a CBDC is designed, it could replicate the privacy and autonomy that physical cash provides, but it is unclear the extent to which governments and central banks would support a CBDC design that does. On the other end of the spectrum, a CBDC can be one of the most potent surveillance tools ever built.
The recent collapse of UST and the general concern over other stablecoins like Tether will likely fuel efforts to develop CBDCs. It’s safe to assume that we will see jurisdictions announce plans to roll out their own digital fiat currencies to meet consumer demand for them, evidenced by the popularity of stablecoins.