US courts react to cryptocurrency exchanges that circumvent sanctions

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Cryptocurrencies have long been considered the Wild West of money transfers, but few online payment and money transfer platforms are as outspoken in calling for illicit cash as this one. Platform highlighted but not named in memorandum opinion unsealed May 13 in U.S. District Court in Washington, D.C., was based in a “comprehensively sanctioned country” — likely North Korea, according to those in the crypto space — and advertised its services as a circumvention US financial sanctions. According to court records, it was built using a US shell company that facilitated the purchase of the domain names.

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The platform, which was designed to circumvent financial bans designed to harm rogue nations, processed more than $10 million worth of bitcoin that was transferred between the United States and the sanctioned country using a US-based crypto exchange that, as follows from the opinion, was not aware that it helps to avoid sanctions.

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Opinion, written by Justice of the Peace Zia Farooqi, was probably printed out because someone was arrested for using a crypto platform. All of this marks a change in how US law enforcement — and the law — handles cryptocurrencies.

“Question one: Is virtual currency untraceable? NOT RIGHT. … Question two: do sanctions not apply to virtual currency? WRONG,” concludes Farooqi, directly quoting two Saturday night life sketches parodying TV presenter and political commentator John McLaughlin, known for his straightforward style.

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“We have been hearing reports for some time that crypto could potentially be used to evade sanctions,” says Ari Redbord, head of legal and government affairs at TRM Labs, which tracks cryptocurrency fraud and financial crime. “What we are seeing here is the first time that the Department of Justice has opened a criminal case related to the use of cryptocurrencies to evade sanctions.”

The decision notifies cryptocurrency exchanges that they may be held responsible for allowing users to circumvent sanctions—whether intentionally or not—and is a warning to those who attempt to evade such sanctions that law enforcement will come after them.

For years, cryptocurrencies have been seen as a safe haven for criminal gangs and businesses seeking to launder ill-gotten gains. Unlike a bank account, cryptocurrencies do not require a name associated with transactions that are recorded on a public blockchain ledger. This apparent anonymity attracted criminal enterprises in the early days of cryptocurrencies such as Bitcoin. “You had Silk Road peace and Alpha Bayssays Jesse K. Liu, partner at the law firm Skadden, Arps, Slate, Meagher & Flom. A former Deputy General Counsel for the U.S. Treasury Department who also worked for the Justice Department, Liu handled several crypto cases. “The first reports about bitcoin said that it was some kind of secret anonymous currency that the bad guys used for bad things.” The founding principles of Bitcoin — and the libertarian, privacy-loving, decentralized attitude that gave birth to it — also created the notion that virtual currencies were untraceable.

What all these groups and individuals have lost sight of is that the backbone of cryptocurrencies—an immutable blockchain that keeps a record of every transaction that takes place—created stock of evidence for prosecutors. “The uniqueness of crypto is that you can track the flow of these funds in a completely open ledger,” says Redbord. “Just because the cryptocurrency moves around and lives in a public ledger on the blockchain, it allows for these kinds of investigations.”

In his opinion, Farooqi explains how the respondent’s identifying information and IP address were tracked and linked to the payment platform operated by the defendant. “The striking thing is that cryptocurrency has quickly turned into this dark asset used for illicit activities that were never targeted, and now it is being turned on its head and will just as quickly become more transparent than traditional asset classes,” says Nimesh Shah. CEO of London-based accounting firm Blick Rothenberg. Others go even further: “Judge Farooqi’s opinion casts a shadow over the idea that cryptocurrencies mean the death of sanctions,” says Anupam Chander, professor of law at Georgetown University in Washington, DC. Chander says this sentiment is good for cryptocurrencies as they seek to shed the bad reputation they acquired in their early days and enter the mainstream: “Judge Farooqi treats virtual objects as if they were dollars or dinars.” .

While the court’s decision sets a legal precedent that cryptocurrency transactions can and should be monitored by the authorities, it is otherwise completely unremarkable. “Judge Farooqi, to my knowledge, is the first judge to actually say directly that cryptocurrencies could be against the sanctions,” Liu says. “But this is the view of the Treasury Department for a number of years.” What is important about this decision is that it codifies what has long been an informal attitude towards cryptocurrencies.

“The question is no longer whether virtual currency (like FUD) will remain, but whether fiat currency rules will keep pace with seamless and transparent payments on the blockchain,” writes Farooqi. (Chander says that while Farooqi is not the first judge to use “FUD” – which stands for fear, uncertainty and doubt – in federal opinion, he could very well be the first to use it without definition, showing just how far the cryptocurrency has made its way into the mainstream. .)

Over the past year or so, the Treasury three Russian cryptocurrency exchanges appointed as a target of sanctions, and the Office of Foreign Assets Control (OFAC), which implements the sanctions regimes, acted on the assumption that cryptocurrencies are subject to sanctions, like fiat currencies.

“What really strikes me is that this opinion brings all these pieces together,” says Liu. “While all of these elements are already present in the Justice Department’s approach to law enforcement, this view really crystallizes it.” Liu believes there will be an increased focus on addressing the issue of using cryptocurrencies to circumvent sanctions, and with it the need for those who work with crypto platforms to keep their house in order. “This sentiment really highlights the importance of anyone who is involved in the cryptocurrency space, or any of the related spaces, having a very good compliance program,” Liu says, “and recognizing that they are in an area that can be exploited for problematic purposes. “. Otherwise, crypto companies could open up to civil and potentially criminal lawsuits.

It’s all part of what Redboard calls a “cat and mouse game”: payment platforms will come and go trying to avoid sanctions, but law enforcement will always try to catch them. “Instances like this send a signal to attackers that law enforcement can track and trace the flow of funds, and regulators like OFAC are going to continue to impose sanctions on unscrupulous organizations in space – and are clearly looking to prosecute unscrupulous organizations,” the report says. Redboard. “I think judges will see more and more warrants and they will see more and more cases.”


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