Sanctions List Compliance a Coming Blockchain Concern

July 2018
The blockchain is finding one more use, circumventing sanctions, which means the industry needs to be ready. Recently a number of websites reported that it appears the US government are preparing to formally add crypto assets to their sanctions list, representing a significant coming shift in the crypto eco-system. To be sure, wallet addresses have not been added yet, but seem to be on the horizon. Specifically what happened is the Office of Foreign Asset Control (OFAC) recently added definitions of crypto terms to their FAQ, and may begin specifically identifying wallet addresses:

The SDN is the ‘Specially Designated Nationals And Blocked Persons List’, which is in other words the US sanctions list. The list contains individuals, firms and assets the government does not want traded with or wants frozen, in efforts to control terrorism, organised crime, nuclear proliferation or just apply political pressure. The FAQ statements concludes by saying,

Persons including technology companies; administrators, exchangers, and users of digital currencies; and other payment processors should develop a tailored, risk-based compliance program, which generally should include sanctions list screening and other appropriate measures

Controlling cryptos is not without reason. The recent Venezuelan cryptocurrency appears to be an effort to develop a currency specifically to circumvent sanctions. All American parties are responsible to check the SDN and ensure they do not engage with individuals or entities on it, but more specifically who needs to comply?

Exchanges are the obvious point in the industry that will need to heed the list.

Every blockchain firm operating a wallet and many others will need to take heed. In the very strictest of scenarios, we could see miners not completing transactions from these addresses, or mining pools removing blacklisted addresses from participating. This list is updated as new information is gained, so firms need to remain on top of the additions to ensure they are compliant.

Crypto assets and wallets have their own quirks that make compliance different from traditional banking. Namely that new wallets can be created freely, and assets can be openly tracked through the blockchain. Sanctions could be avoided by simply created a new wallet address and moving or converting the assets there. While the SDN list has indicated only the specific wallet addresses will be controlled, the OFAC has indicated an expectation individuals on the list will not be engaged with. So as it gets easier and move convenient to send money with blockchain through developments like Ripple, Bitcoin Cash, or lighting networks, the need for firms identify the owners of wallets, and check those names against lists like the SDN will become more important.

Large exchanges will already have the capability in place to comply with the SDN list, but smaller firms and operations seem to be most at risk. Decentralised and small exchanges, ICOs, and novel utility token operations will need to manage and identify their users so they can comply and work the SDN list and stop their service being used to send assets and circumvent US sanctions. Every wallet address needs to be checked, but also broader efforts so that one firm does not find themselves to be the middleman in the transfer of funds to illegal activity.

While the practical implications of these changes are still be seen, it is another indicator of the shifting regulatory background of the blockchain ecosystem.