Avoiding sanctions via crypto a persistent problem, report warns

According to a growing body of evidence collected by Chainalysis, cryptocurrencies are being used to avoid financial sanctions. This is not a new problem, but the problem is escalating. A large part of the illegal funds in recent months have flowed between Binance and Iran’s largest crypto exchange, Nobitex. And most of the transactions were reportedly in the low-profile cryptocurrency Tron, which makes it easy for users to hide their identities.

Sanction Busters

A new JD Supra report highlights the worrying trend. It cites a Reuters article from last November that charges Binance with helping Iranian firms trade $8 billion. This happened in the face of US sanctions aimed at Iran.

According to Reuters (citing Chainalysis data), the flow of crypto transactions between Binance and Iran’s largest crypto exchange, Nobitex, enabled Iranian firms to circumvent the sanctions and trade around $8 billion. Also, three quarters of the funds were in the form of TRON. This “low-profile” cryptocurrency helps users stay anonymous and off the web. In short, it facilitates clandestine and criminal operations. (Binance has since removed TRON, whose founder Justin Sun is facing an SEC enforcement action.)

Other data collected by Chainalysis, and reported by Reuters, is alarming. Chainalysis stated in a recent preview of its 2023 Crypto Crime Report that last year illegal transactions involving crypto rose for the second consecutive year. In total, they reached 20.1 billion dollars. The highest number ever. And according to Chainalysis, 44% of total deal flow was activity involving sanctioned governments or organizations.

Some people value blockchain for its decentralized nature and its promotion of privacy in transactions. Unfortunately, as these numbers remind us, the permissionless systems that blockchain entails can be used for good or ill.

And since crypto exchanges mostly make their own rules, they can find themselves making deals that would normally be impossible.

Regulators target crypto addresses

Governments and enforcement agencies are not idle in the face of the problem, the JD Supra report makes clear. They are taking action against those who resent financial sanctions when using crypto-assets.

The US Office of Financial Asset Control (OFAC) has not only imposed sanctions on offenders. Recently, OFAC has expanded its operations to target cryptocurrency addresses linked to bad actors.

And in the UK, lawmakers have introduced regulations requiring crypto firms to report any violations of financial sanctions imposed by OFAC.

Strengthening of sanctions

As trends worsen, governments and other regulators may have revised their approach, the JD Supra report said. They will have to step up enforcement efforts to ensure that the sanctions have teeth. A tougher approach can help stem the flow of illegal transactions and money laundering.

But the report makes it clear that this will not be a quick and easy solution. The problem is complex and issues of regulatory overreach arise. Officials must be careful that, in their eagerness to go after sanctions violators, they do not trample on the rights of legitimate crypto users.

On the downside, we may see more restrictive regulation, as in OFAC’s decision to sanction Tornado Cash’s software protocol. This can create possible consequences for legitimate actors who interact with it.

The good news is that – according to Chainalysis – cryptocurrency services on balance are mostly cooperative in the face of government requests for help. The exchanges know that tarnishing the crypto name does not help them for sanctions-busting rogue states.

Regulating crypto to ensure compliance with financial sanctions is a complex task. It requires cooperation between authorities and regulators, as well as cooperation between crypto exchanges. Only then can we hope to curb the use of cryptocurrencies to avoid financial sanctions.