The Russian invasion of Ukraine and ensuing sanctions has illuminated the growing reach and efficacy of regulators to combat money laundering and crime, and to enforce sanctions in the cryptocurrency (crypto) space. Recent developments provide a front-row seat to observe the participation of entities providing critical infrastructure for crypto and decentralized finance (DeFi) in the global response to sanctions.
It is always important to remember that illicit activities represent a very small fraction of transactions within the crypto space. As a tool for money-laundering, crypto “remains far below that of fiat currency and more traditional methods” according the the US Treasury Department’s 2022 National Money Laundering Risk Assessment. Despite this, the rise of crypto and DeFi has led to assertions that these emerging innovations pose a bigger threat than they do in actuality.
The use of crypto or DeFi platforms by nation states to avoid sanctions is not a practical one, as acknowledged in a report by the Atlantic Council. Firstly, amassing sufficient crypto to have an impact on their sanction-evading project would result in significant buy-side activity that would lead to price appreciation; increasing the cost of their endeavour. Moreover, there are very few cryptos that could address scale, liquidity, and risk concerns of a nation state. Of the top five cryptocurrencies, three are controlled by central entities subject to Anti-Money Laundering and Sanctions regulations. One is integrated into a platform that supports numerous regulated DeFi services. The last one standing is bitcoin.
If 2021 has taught us anything about bitcoin’s role in fighting illicit activity it is this: governments and law enforcement have embraced the transparent bitcoin blockchain as a highly efficient tool to follow the money and seize it. We have witnessed this in the Colonial Pipeline ransomware attack and ensuing bitcoin seizure, and more recently in the US Department of Justice seizure of $3.6 billion in cryptocurrency from the Bitfinex exchange hack. Bitcoin wallet addresses controlled by rogue states, criminals, and sanctioned individuals are also increasingly being added to sanctions watchlists and blocked from transacting at regulated off-ramps where crypto is converted to fiat currency.
When regulators imposed sanctions on Russia, regulated crypto entities responded. In some cases they cast their nets wider than necessary and ruffled a few feathers among their customer base. However, their mobilization demonstrated that regulators continue to be informed about how and where to impose regulations to manage risks associated with cryptocurrency. As a result of sanctions, the popular MetaMask cryptocurrency wallet banned users in targeted countries, while the largest NFT marketplace, Opensea, disabled accounts of users and entities in sanctioned jurisdictions. Both of these platforms provide a gateway for converting fiat to internationally tradable digital assets such as cryptocurrencies, NFTs, and virtual land in the metaverse. The response to sanctions drew the ire of some unhappy users in restricted states who took to Twitter to vent about what they felt was a paradox; decentralized finance services controlled by central entities and subject to state regulation. Hopefully, some of the misconceptions around DeFi being beyond the reach of regulations will be quelled by these developments. Ah yes, there are decentralized autonomous organization (DAO), but that is another article.
Entities that facilitate transactions within the crypto space have come into the fold of Anti-Money Laundering and sanctions regulation. The cryptocurrencies that they exchange are not viable for sheltering significant state assets. Bitcoin and it’s transparent blockchain has demonstrated again that an increase in regulator’s knowledge and practical regulation around crypto is a formula for decreasing attractiveness of the cryptocurrency as a haven for illicit activities and sanctions evasion.
Jeff Bryan, MA, BA, CBP, CTCE, CFE