US OFAC and Swiss SECO have confirmed Relevance of Crypto Currencies/Tokens for Sanctions Compliance.
A. Crypto Currencies, Tokens and Sanctions/Embargos
Both the US Office of Foreign Asset Control (OFAC) and the Swiss State Secretariat for Economic Affairs (SECO) have confirmed that transactions with crypto currencies and the use of tokens (e.g. in smart contracts) are subject to US and Swiss sanctions and embargo law.
Upon the request of the authors, the Swiss SECO confirmed in writing the relevance of crypto currencies for sanction compliance (1), and stressed that digital information units with potential value are to be considered as funds or economic assets with regard to sanctions. The prohibitions laid down in the different regulations and ordinances (in particular, bans on the provision of financing) must be complied with accordingly.
OFAC announced that it may add digital currency addresses (unique alphanumeric identifiers known as Public Key or wallet) to listed Specially Designated Nationals (SDNs) to alert the public of specific digital currency identifiers associated with the blocked person, including the digital currency to which the address corresponds (e.g. Bitcoin (BTC), Ether (ETH), Litecoin (LTC), Neo (NEO), Dash (DASH), Ripple (XRP), Iota (MIOTA), Monero (XMR), and Petro (PTR)).
Persons and entities subject to SECO and or OFAC jurisdiction, including users of virtual currency or smart contracts as well as crypto exchanges, will be responsible to ensure that they do not engage in trade or other transactions with blocked persons or assets, including by means of virtual currencies or tokens.
In March 2018, US president Trump expanded the scope of the Venezuelan sanction regime with an Executive Order (EO) prohibiting US persons from dealing in any digital currency (also known as virtual currency, or token) issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018. This action targets the "petro" and "petro gold", two blockchain-based virtual currencies issued by the government of Venezuela which, according to the US, could be used to circumvent US sanctions against Venezuela.
While this step expands an existing sanction regime, the EO shows that the OFAC is taking a closer look at the overall development of blockchain or distributed ledger technology (DLT), in particular the ability of virtual currencies to store and transfer value or property and the relevance for sanctions compliance.
In this context, OFAC has published a more detailed guidance on crypto currencies in a section of its Sanction Compliance FAQs entitled “Questions on Virtual Currency” (2). OFAC confirms that existing sanctions are applicable to all forms of virtual currencies, which are defined broadly as a digital representation of value that functions as
(i) a medium of exchange,
(ii) a unit of account, and/or
(iii) a store of value,
(iv) is neither issued nor guaranteed by any jurisdiction,
(v) and does not have legal tender status in any jurisdiction.
Additionally, OFAC clarifies that OFAC sanctions are also applicable to a sovereign cryptocurrency, virtual currency and a digital representation of fiat currency which are described as “digital currencies”. OFAC may therefore not only exercise jurisdiction over any form of decentralized crypto currency, such as Bitcoin or Ether, but also over digital currencies issued by third countries’ sovereign central bodies.
C. Impact for Swiss companies
Any Swiss company dealing with or involved in crypto currency transactions by receiving, storing, exchanging or transferring tokens must ensure compliance with the Swiss sanctions regime. Swiss companies must also consider compliance with US sanctions if their activities fall under US jurisdiction due to the involvement of US persons, US parts, US dollars or US infrastructure, even though the transaction may take place abroad. Under the Countering America's Adversaries Through Sanctions Acts (CAATSA), US sanctions go even further; US authorities may penalize non-US companies if they conduct significant transactions with US sanctioned persons, even if these transactions have no US nexus or connection. (More information here)
Companies must therefore review their exposure to crypto currencies and should develop necessary wallet screening capabilities as part of an internal risk-based compliance management program (ICP). Such screening may prevent the indirect involvement of sanctioned individuals who operate under the guise of a non-sanctioned individual or stolen identity that would otherwise pass compliance screening.
Likewise, the OFAC listing of wallets will provide a much-needed authoritative resource for the identification of prohibited wallets associated with sanctioned individuals. In particular, wallet screening service providers who automate compliance check should include the OFAC listing in their services, thereby further reducing the likelihood that the crypto community indirectly engage with sanctioned individuals and weakening the ability of sanctioned individuals to transact anonymously using virtual currencies.
It should be noted that the growing use of smart contracts in business transactions is usually not possible without the use of crypto currencies or tokens. Therefore, the corresponding functionalities regarding compliance with sanctions and embargos must also be examined in the context of the use of Smart Contracts.
While public keys have not yet been added to the SDN List, it can be assumed that the listing of public keys will become a standard instrument of OFAC and other regulatory bodies. We also assume that the rules regarding KYC and money laundering will soon be adapted to require a more explicit screening of source of crypto funds as part of a thorough KYC process. Both will probably converge, requiring companies to perform an end to end DLT screening when receiving virtual currencies.