Much has been discussed in the media regarding sanctions in the context of the current war in Ukraine, but the link between crypto currency investment and the risk of breaching sanctions is often less understood. Sanctions remain the predominant tool used by governments around the world as a means of achieving their foreign policy and national security objectives. Sanctions, and other measures such as embargoes, are not just used to deter state actors from war; they are widely used to encourage changes of behaviour including in the areas of human rights, cybersecurity, prohibition of illegal goods, and corruption. The challenge for international businesses and investors is that they may find themselves inadvertently involved in sanctioned business activity, resulting in regulatory action and fines. Here we take a closer look at some of the potential risks of crypto service providers and investors breaching crypto market sanctions, embargoes and restrictions.
Authorities warn of the need for greater crypto sanction regulation
In the past two years, there have been several warnings about the potential for cryptocurrencies and assets to be used as a way to avoid sanctions. At the Aspen Institute’s Security Forum, Gary Gensler, the Chairman of the US Securities and Exchange Commission (SEC), underlined his intention to ratchet up federal crypto regulation and enforcement, particularly in relation to US financial sanctions. This followed similar concerns by the US Department of Justice (DOJ) in their new Cryptocurrency Enforcement Framework, which stated “cryptocurrency presents a troubling new opportunity for individuals and rogue states to avoid international sanctions and to undermine traditional financial markets, thereby harms the interests of the United States and its allies”. In the UK, more recently, a joint statement by financial regulatory authorities, warned against this type of activity, “The UK financial regulatory authorities reiterate that all UK financial services firms, including the cryptoasset sector, are expected to play their part in ensuring that sanctions are complied with”.
The risks of crypto anonymity
The main risk posed by cryptocurrencies when it comes to sanctions is the anonymity it affords. According to the Financial Stability Board (FSB), Decentralised Finance (DeFi) and Crypto-asset Trading Platforms often lack visibility and the verification of identities of counterparties. This makes it hard to trace the true source of transactions, increasing the risk of crypto platforms attracting illegal activities such as:
- Money laundering
- Terrorist financing, and
- Circumventing sanctions restrictions
The anonymity afforded by cryptocurrencies and crypto-asset transactions, means financial service providers and investors may inadvertently find themselves indirectly dealing with sanctioned regimes and/or breaching the Money Laundering Regulations 2017 and the Sanctions and Anti-Money Laundering Act 2018.
Section 3(1a) of the Sanctions and Anti-Money Laundering Act 2018 states that financial sanctions can be used to prevent “financial services from being provided to, or for the benefit of (i)designated persons, (ii)persons connected with a prescribed country, or (iii)a prescribed description of persons connected with a prescribed country”.
The challenge for financial service providers and investors
The challenge for financial service providers is knowing when and how to adhere to new sanctions as they are imposed. Likewise, the risk for investors is knowing who to trust.
The world’s largest cryptocurrency exchange, Binance, for example, stated its intention to deactivate the accounts of its major clients in Russia in accordance with the European Union’s fifth package of sanctions against the country. The European Commission stated on 8th April 2022, “The EU has also prohibited the provision of high-value crypto-asset services to persons and entities in Russia. This will contribute to closing potential loopholes”. Binance will still, however, permit clients with assets below the value of EUR10,000 to use the platform (assuming they are address verified) while those with greater amount are still permitted to withdraw their funds from the platform. Quite whether the rule changes by Binance adhere to the spirit of the EU sanctions remains to be seen.
According to UKTN, the UK’s FCA has clashed with several crypto firms regarding regulatory compliance, including Binance. In February 2022, the FCA expressed its concerns regarding a deal to provide Binance access to a large UK payments network. This followed previous warnings that the firm poses a “significant risk” to consumers.
While the FCA is doing all it can to ensure that crypto service providers in the UK adhere to AML and “know your customer” regulations, individual investors in the UK also need to they only deal with FCA regulated crypto-asset firms. The risk is that crypto investors place their funds into crypto asset firms that are operating in the UK illegally. As these entities are not adhering to the FCA’s regulations, there is a higher chance that funds invested may be lost and used to breach international sanctions unknowingly.
In light of the current conflict in Ukraine, crypto finance businesses in the UK and worldwide, and investors using these platforms are having to adjust to a rapidly changing regulatory landscape. New sanctions are regularly being introduced by the UK, EU, and US governments, hence legal adherence requires constant vigilance and a strong understanding of the regulatory requirements across various jurisdictions. If you require assistance to ensure that your crypto business interests or crypto investments do not breach sanctions, speak to a specialist in crypto asset and international sanction law as soon as possible.
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