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Foreign Economic Sanctions in a Digital Age

The United States’ ability to sanction foreign individuals and entities outside U.S. jurisdiction is a necessary tool in advancing its national security interests.[1] The Office of Foreign Assets Control (“OFAC”), within the Department of the Treasury, is responsible for enforcing economic and trade sanctions against foreign countries and individuals that threaten the national security, foreign policy, or economy of the United States.[2] The emergence of digital assets, such as Bitcoin, that utilize cryptography that can obfuscate financial transactions impedes OFAC’s ability to carry out this mandate. Bitcoin is a peer-to-peer digital asset that utilizes blockchain technology to facilitate monetary transactions.[3] Incoming and outgoing transactions to an individual’s Bitcoin wallet address are viewable on the Bitcoin public ledger.[4] However, the owner’s identity is unknown. As a result of this dichotomy, Bitcoin is pseudonymous in nature.[5] OFAC and the Department of the Treasury more broadly should significantly weigh Bitcoin traceability features when making legislative recommendations for digital-asset regulations.

There are two types of U.S. sanctions: primary sanctions that apply to activities within U.S. jurisdiction and secondary sanctions that target activities of foreign individuals and entities not covered by primary sanctions.[6] Foreign individuals engaged in threatening activity can be placed on the Specially Designated Nationals (“SDN”) list, which blocks their assets; U.S. citizens and corporations are then prohibited from dealing with them.[7] OFAC regulations block all “property” in which an SDN has an interest, including any present, future, or contingent interest.[8] Historically, the currency interests of SDNs only related to fiat currencies. For the first time, on November 28, 2018, OFAC targeted digital assets used as currency, sanctioning two Iran-based cyber criminals, identifying and publishing their digital Bitcoin wallet addresses, through which millions of dollars had been processed.[9] More recently, on August 21, 2019, OFAC sanctioned three Chinese nationals found to be manufacturing, selling, and distributing synthetic opioids;[10] OFAC identified eleven Bitcoin addresses related to those individuals and published them on the SDN list.[11] OFAC is able to identify owners of specific Bitcoin wallets by tracing the transaction records on the Bitcoin public ledger to either an exchange account[12] or an IP address.[13]

There are myriad legal questions OFAC has yet to encounter that will impact how OFAC can carry out its mandate. How will OFAC track SDNs who convert their Bitcoin holdings into digital assets that focus on greater anonymity, such as Zcash or Monero?[14] How will OFAC sanction individuals or entities that unknowingly transact with sanctioned Bitcoin addresses? Digital asset regulations are in their infancy. As these regulations develop, governments and law enforcement should prioritize the ability to identify true owners of Bitcoin addresses without creating regulations that provoke users to seek digital assets with more sophisticated anonymity.

Reid J.C. Carroll is a staff member of Fordham International Law Journal Volume XLIII.

This post is a student blog post and in no way represents the views of the Fordham International Law Journal.

[1] See OFAC FAQs: General Questions, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_general.aspx#basic (last visited Sept. 15, 2019).

[2] See Office of Foreign Assets Control - Sanctions Programs and Information, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/sanctions/pages/default.aspx (last visited Sept. 12, 2019). OFAC derives its authority from a number of U.S. statutes. See Resource Center, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/sanctions/Pages/statutes-links.aspx (last visited Sept. 19, 2019).

[3] See generally Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin.org/bitcoin.pdf.

[4] See Protect Your Privacy, bitcoin.org, https://bitcoin.org/en/protect-your-privacy (last visited Sept. 29, 2019).

[5] See Is Bitcoin Anonymous? Bitcoin Magazine, https://bitcoinmagazine.com/guides/bitcoin-anonymous (last visited Sept. 29, 2019).

[6] See Top 10 Things to Know About Expanded US Sanctions on Iran, Latham & Watkins, Llp (Nov. 6, 2018), https://www.lw.com/thoughtLeadership/lw-top-10-things-to-know-expanded-us-sanctions-iran.

[7] See Specially Designated Nationals And Blocked Persons List (SDN) Human Readable Lists, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx (last visited Sept. 13, 2019).

[8] See OFAC FAQs: Sanctions Compliance, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_compliance.aspx (last visited Sept. 3, 2019).

[9] See generally Treasury Designates Iran-Based Financial Facilitators of Malicious Cyber Activity and for the First Time Identifies Associated Digital Currency Addresses, U.S. Dep’t of the Treasury (Nov. 28, 2019), https://home.treasury.gov/news/press-releases/sm556.

[10] See generally Treasury Targets Chinese Drug Kingpins Fueling America’s Deadly Opioid Crisis, U.S. Dep’t of the Treasury (Aug. 21, 2019), https://home.treasury.gov/news/press-releases/sm756.

[11] See Kingpin Act Designations, U.S. Dep’t of the Treasury (Aug. 21, 2019), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190821.aspx.

[12] Bitcoin exchanges facilitate Bitcoin to fiat currency conversions. See Kira Egorova, Cyrpto Exchanges, Explained, Cointelgraph, https://cointelegraph.com/explained/crypto-exchanges-explained (Jul. 10, 2018). In the majority of jurisdictions, regulated Bitcoin exchanges are required to comply with Know Your Customer and Anti-Money Laundering rules and regulations. See Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, Financial Action Task Force, https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets.html (Jun. 21, 2019).

[13] See John Bohannon, Why criminals can't hide behind Bitcoin, Science (Mar. 9, 2016), https://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin.

[14] Zcash and Monero are privacy-oriented cryptocurrencies that configure their respective protocols in a manner so that transactions are effectively anonymous to a viewer. See generally Noah Adrian Burges, Zcash vs Monero: Which is the superior Privacy Coin?, Bank of Hodlers Blog (last modified Apr. 6, 2019), https://blog.bankofhodlers.com/zcash-vs-monero-which-is-the-superior-privacy-coin/.