Digital Currencies: Sanctions Evasion Risks

Digital Currencies: Sanctions Evasion Risks

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February 8, 2018
Digital Currencies: Sanctions Evasion Risks
Introduction
Growth in the Cryptocurrency Market
As the market for digital currencies evolves, one area on
Bitcoin, launched in 2009, was the first and continues to be the
which Congress has focused is the potential use of digital
most widely used “cryptocurrency.” Today, there are nearly
currencies for sanctions evasion. Digital currencies face an
1,500 cryptocurrencies in circulation with a total market
uneven international regulatory environment, and countries
capitalization of $340 billion, although valuations have fluctuated
are considering different approaches to regulating and/or
widely (Figure 1). The five largest cryptocurrencies account for
issuing digital currencies. Some governments are exploring
70% of total virtual currency market capitalization, and include
the possibility of issuing digital currency as a means of
Bitcoin ($121 billion); Ethereum ($70 billion); Ripple ($28
sanctions evasion (as in the case of Venezuela and Russia),
billion); Bitcoin Cash ($15 billion); and Cardano ($9 billion).
while others are exploiting weaknesses in existing virtual
currency markets to evade restrictions on access to the
Figure 1. Market Capitalization of Major
international banking system (as in the case of North
Cryptocurrencies ($ in billions)
Korea).
Digital Currency Market
Money is the set of assets used to buy goods and services
from others. It functions in the economy as a: (1) medium
of exchange; (2) unit of account; and (3) store of value.
Although money may be made of materials that have
intrinsic value, such as gold, most countries today use fiat
currency, which has no intrinsic value, but serves as
money by government decree.
Virtual currencies are digital representations of value that
can be digitally traded and function like money. Unlike fiat
currencies, virtual currencies do not have legal tender

status. Virtual currencies may be convertible or non-
Source: https://coinmarketcap.com/.
convertible. Convertible virtual currencies can be
exchanged for fiat currencies. Non-convertible virtual
Benefits and Risks of Virtual Currencies
currencies are restricted to online domains (such as
Virtual currencies have the potential to revolutionize the
multiplayer online gaming).
financial and banking industries. They could increase
payment efficiency, reduce transaction costs of payments
Some virtual currencies are run by a centralized
and fund transfers, increase participation in the financial
administrator that issues currency and maintains a central
system, and facilitate transactions. Digital currencies,
payment ledger. Other virtual currencies are decentralized,
however, also present risks. Virtual currency platforms
for which transactions are recorded on a blockchain ledger
remain largely unregulated, and could be vulnerable to
and rely on encryption techniques to control the creation of
fraud and theft. There are also risks related to security,
monetary units and to verify the transfer of funds.
payment beneficiary identification, and currency volatility.
Convertible, decentralized currencies are also called
cryptocurrencies.
Virtual currencies may also pose a variety of illicit finance
concerns. They provide total or partial anonymity to users
Many central banks worldwide, including the U.S. Federal
and transactions and can be used as an alternative to the
Reserve and the People’s Bank of China, are evaluating the
formal banking sector, which is more highly regulated. The
creation of digital representations of fiat currencies, or
uneven international regulatory environment surrounding
digital fiat currencies. In September 2017, the Bank for
the rapidly evolving virtual currency market is also
International Settlements, an organization of 60 central
attractive to illicit actors, who may seek to exploit virtual
banks including the U.S. Federal Reserve, recommended
currencies operating in unregulated jurisdictions to launder
that central banks pay attention to the development of
ill-gotten funds, finance terrorism, or evade sanctions.
virtual currencies and consider the issuance of their own
digital currencies.
Sanctions Evasion Risks
Recent events have highlighted the interest of some
governments subject to economic sanctions in exploiting
virtual and digital currencies to evade U.S. sanctions.
According to Treasury officials, however, sanctions evasion
risks posed by virtual currencies have been limited in
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Digital Currencies: Sanctions Evasion Risks
practice. Individuals, entities, and transactions subject to
currency exchanges and investors—through the theft of
U.S. jurisdiction are required to comply with all U.S.
digital wallets, deployment of ransomware and phishing
sanctions, regardless of the currency, including virtual
campaigns, as well as mining operations—for financial gain
currencies. Treasury officials also assess that the current
and to ease the economic burden of ongoing sanctions
domestic anti-money laundering (AML) regulatory
pressure. This observed trend includes the WannaCry
approach to virtual currencies is sufficient (see text box on
attack, during which attackers locked users worldwide out
U.S. AML guidance).
of their computers until they paid a ransom in Bitcoins;
several Bitcoin wallets associated with WannaCry have
Nevertheless, the characteristics of virtual currencies that
reportedly been emptied. Several suspected North Korean
make them attractive to criminals may also make them
cyberattacks also targeted South Korean exchanges.
attractive to sanctions evaders. The risks could increase if
virtual currencies were more widely adopted, such that
U.S. Anti-Money Laundering (AML) Guidance
daily financial life could be conducted for the most part in
Treasury’s Financial Crimes Enforcement Network (FinCEN)
an entirely virtual currency universe.
monitors the exchange of virtual currency for legal tender (and
Selected Country Case Studies
vice versa) for compliance with AML requirements.

Venezuela. In December 2017, Venezuelan President

Since the mid-2000s, U.S. authorities have targeted virtual
currency businesses and exchanges, as well as websites that
Nicolás Maduro announced plans to launch a new digital
currency, the “petro” backed by oil reserves and other
brokered transactions involving virtual currency through a
variety of enforcement actions.
commodities. Maduro stressed the petro would help
Venezuela overcome U.S. sanctions and provide a fresh

In 2011, FinCEN amended its rule dealing with Money
infusion of funds to the government. The Venezuelan
Services Businesses (MSBs) to regulate those engaged in
government refers to the petro as a cryptocurrency, but it
accepting convertible virtual currency from one person and
would operate very differently from other cryptocurrencies.
transmitting it to another person or location.
The petro would have a central administrator (the

In 2013, FinCEN issued guidance to clarify that
government) and be backed by commodity assets. On
administrators and exchangers of virtual currency are
January 19, 2018, the U.S. Treasury’s Office of Foreign
considered MSB money transmitters and must register as
Assets Control (OFAC) stated that any purchases of the
such with FinCEN as well as implement relevant AML
proposed petro currency would appear to be an extension of
recordkeeping, reporting, and compliance measures.
credit to the Venezuelan government, and thus U.S.

Since 2014 (FY2015), FinCEN has worked with the Internal
investors who deal in petros could found to be in violation
Revenue Service (IRS), to identify licensed and unlicensed
of U.S. sanctions.
MSBs operating in the virtual currency marketplace subject
Russia. The Russian government is exploring ways to
to U.S. jurisdiction for AML compliance examination.
create a new, state-run cryptocurrency, or “cryptorouble.”

In 2016, Treasury conducted risk assessments on money
According to Russian officials, a primary motivation is to
laundering and terrorist financing, which described criminal
“settle accounts with our counterparties all over the world
exploitation of virtual currencies as a vulnerability deserving
with no regard for sanctions.” Reportedly, the
of further scrutiny.
cryptocurrency would be a digital version of the rouble. As

As of January 2018, approximately 100 virtual currency
with the Venezuelan petro, the proposed cryptorouble
providers and exchangers have registered in the United
appears to resemble a digital fiat currency: it would be
States as money transmitters; IRS and FinCEN have
administered by the Russian government rather than a
examined approximately 40 registered and unregistered
decentralized network, although the Russian government
MSBs involved in the virtual currency market.
may provide some anonymity to users. There are a number
Outlook
of questions about how a cryptorouble would operate. The
Russian central bank is reportedly pushing back against the
Digital currencies face an uneven international regulatory
proposal.
environment, and countries are considering different
approaches to regulating and/or adopting digital currencies.
Iran. Despite the lifting of some sanctions against Iran in
A growing area of concern is potential exploitation of
2015, other U.S. sanctions remain in effect. Meanwhile,
digital currencies to evade sanctions. Policymakers may
European and other major global banks have been slow to
continue to monitor their impact on the efficacy of
reenter the Iranian market since implementation of the 2015
sanctions.
Joint Comprehensive Plan of Action. In light of Iran’s
ongoing banking challenges and popular interest in
For more, see CRS In Focus IF10824, Introduction to
expanding its virtual currency market, the Central Bank of
Financial Services: “Cryptocurrencies”, by David W.
Iran (CBI) has been reportedly studying the issue of virtual
Perkins.
currencies and intends to announce the results of their
studies sometime in 2018. CBI is designated by Treasury as
Rebecca M. Nelson, Specialist in International Trade and
a jurisdiction of primary money laundering concern, and
Finance
remains subject to restrictions that prohibit CBI’s
Liana W. Rosen, Specialist in International Crime and
transactions with U.S. accounts in foreign banks.
Narcotics
North Korea. Beginning in 2017, observers indicate that
IF10825
purported North Korean cyber operations targeted virtual

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Digital Currencies: Sanctions Evasion Risks

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