A recent report claims that U.S. authorities have improved how they enforce sanctions against cryptocurrency.
Sanctions are put into effect by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). But in recent years, sanctioned individuals have begun to use cryptocurrency to get around their financial limitations.
Currently, OFAC has expertise dealing with crypto services that enable illegal transactions after two years. A recent Chainalysis article describes three use instances that help OFAC make judgements.
Coordinating Authorities
In one instance, a darknet market called Hydra, which also facilitated the sale of drugs, provided money-laundering services to online criminals. Although it had a Russian base, its servers were in Germany.
Following Hydra’s designation by OFAC in April 2022, German law police confiscated these servers in cooperation with American authorities. According to the study, the case shows how penalties may be very effective against organizations with significant operations in friendly states.
Inability To Cooperate
However, dealing with authorized entities headquartered in hostile regions has also given authorities experience. At the same time that OFAC sanctioned Hydra for related money laundering activities, Garantex was also a high-risk cryptocurrency exchange. The guarantee was not taken into custody after being designated, and it is still in existence, unlike the other Russian-based organization.
Guarantee, which has a large user base in Russia, is largely isolated from the compliant exchange ecosystem but is not affected by U.S. sanctions due to the Russian government’s lack of enforcement. This highlights the challenges of implementing sanctions in countries that need formal cooperation channels with OFAC.
Extra Difficult Issues
The technology enabling cryptocurrencies presented difficulties for OFAC in dealing with inconsistent cooperation in various jurisdictions. OFAC had only previously recognized centralized exchanges or individual wallets. However, when OFAC designated the decentralized mixing system Tornado Cash in August and November 2022, it was the first DeFi protocol.
After labeling Tornado Cash as a money laundering facilitator, OFAC took down its front-end website. However, the intelligent contract-based decentralized back-end is still in operation, casting doubt on the viability of enforcing DeFi standards and holding people responsible.
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The report suggests that sanctions are more effective than prohibition in discouraging the use of decentralized services. Following its classification, Tornado Cash’s inflows decreased by 68% in the 30 days.
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