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The year 2022 is proving to be another big year for sanctions on cryptocurrency-related activities.
The US Treasury’s Office of Foreign Assets Control (OFAC) continued its relentless focus on the cryptoasset space, adding more than 200 additional cryptoasset addresses to its list of Specially Designated Nationals and Blocked Persons (SDN List).
These included addresses belonging to Russian paramilitary groups, Iranian cybercriminals and North Korean hackers, as well as the controversial Tornado Cash mixer mark in August, which industry participants are seeking to overturn in US courts (at the time of publication, no verdicts had been issued in these court cases that include Tornado Cash).
OFAC has also made a big splash in the crypto space from an enforcement perspective. In October 2022, it issued the largest fine to date against a crypto company when it announced a $24 million settlement with US exchange Bittrex for violations related to the processing of transactions with sanctioned countries.
We expect 2023 to be a bigger – and potentially even more controversial – year for sanctions compliance in the crypto space. We also predict that OFAC will focus a lot of attention on three key areas of activity in the crypto space: mining, mixing, and DeFi.
In April 2022, OFAC imposed sanctions against Russian mining company BitRiver. The sanctions appear to have been imposed in response to statements by the Russian government – including directly from President Vladimir Putin – suggesting that Russia may try to use its vast energy reserves to mine Bitcoin and circumvent the sanctions. Elliptic’s research found that Iran already mines as much as 4.5% of all bitcoins mined in the world to avoid trade and financial sanctions, so it wouldn’t be surprising if Russia tried the same.
In 2023, we expect OFAC to increase its efforts to target mining activities in sanctioned jurisdictions by designating additional mining-related entities in countries such as Russia and Iran. We also expect OFAC to take steps to clarify the sanctions implications of mining and related activities – similar to how it previously issued guidance on sanctions risks associated with paying or facilitating the payment of ransomware.
Furthermore, in 2023, OFAC will intensify its sanctions efforts targeting cryptocurrency mixing services. US regulators and law enforcement agencies are increasingly concerned about the potential for illegal actors to use mixers to launder funds related to crimes such as ransomware and hacking. The ability of threat actors such as North Korea’s Lazarus Group to launder cryptocurrencies using mixers has been a cause of particular alarm.
In addition to the aforementioned action it took in August to sanction Tornado Cash, in May OFAC sanctioned another blending service – Blender – for allowing North Korea to launder Bitcoin. In 2023, we expect OFAC to sanction more interference services that facilitate illegal activity in an effort to make these services less useful to criminals.
We expect OFAC to intensify sanctions activities targeting the DeFi space.
Tornado Cash’s designation was significant not only because it included a commingling service, but also because Tornado Cash is the first DeFi service designated by OFAC. Unlike other OFAC cryptocurrency sanctions targets that are centralized in nature, Tornado Cash is an open source protocol that facilitates transactions using smart contracts and without taking control of user funds. This has led some industry advocates to question whether OFAC has the legal authority to sanction DeFi protocols.
Despite these challenges, we think OFAC will continue to identify and sanction more DeFi applications and services in 2023. This will be largely driven by concerns within the US government about North Korea’s increasing use of DeFi services to engage in cross-chain laundering.
While some observers have questioned whether sanctions can be effective in disrupting activities involving open source DeFi services (on the basis that they are decentralized, they cannot be shut down), we expect OFAC to be encouraged by indications that the volume of transactions processed by Tornado Cash -and has dropped significantly from the OFAC designation. Elliptic’s research shows that while there are several other mixers that could potentially replace Tornado Cash as the primary mixer on Ethereum, none of them are yet processing significant transaction volumes that would make them viable for continued use by illegal actors.
To prepare for this increased sanctions activity, crypto companies and financial institutions should ensure they have access to wallet and transaction sanctions screening solutions such as those offered by Elliptic.
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Click here for parts one, two, three and four of our five excerpts from our “Regulatory Outlook Report”.
