As per a recent report, the authorities in the United States have made progress in enforcing sanctions concerning cryptocurrencies.
In the US, the Office of Foreign Assets Control (OFAC) of the national Department of the Treasury is responsible for implementing sanctions. However, over the past years, those under sanctions have started using cryptocurrencies to dodge their financial restrictions.
While the OFAC, over the years, has gained experience in dealing with illegal transactions, recent reports from Chainalysis, an on-chain analytics firm, highlighted the use cases that have helped the authorities regarding sanctions.
The first case mentioned was of Hydra, a darknet market offering money laundering services to cyber criminals and facilitating drug sales. While the entity was based in Russia, its servers were in Germany.
Sources reveal that in coordination with the US authorities, the German law enforcement agency eventually seized these servers once OFAC designated Hydra in April last year. According to the report, the case demonstrates that “sanctions can be extremely effective against entities with key operations in cooperative jurisdictions.”
Another case highlights that authorities have gained experience dealing with designated entities based in uncooperative areas. For example, around the same time as the case of Hydra, OFAC sanctioned high-risk crypto exchange Garantex for similar money laundering charges. However, in this case, Garantex was not seized following its designation and continues its operations.
Reportedly Grantex has been largely cut off from the compliant exchange ecosystem but still maintains a large user base in Russia. Unfortunately, the Russian government has been disinclined to enforce the US sanctions; hence this case highlights the difficulties in implementing sanctions in countries that don’t have formal channels with OFAC.
Sources reveal that OFAC was also challenged by the technology facilitating cryptocurrencies and dealing with varying cooperation in different jurisdictions. Until recently, OFAC had only designated centralized exchanges or personal wallets. Tornado Cash, the decentralized mixing service, became the first decentralized finance (DeFi) protocol after being designated by OFAC in August and November last year.
OFAC, after designating Tornado Cash primarily for facilitating money laundering, the authoritarian body managed to take down its front-end website. However, with its decentralized back-end utilizing smart contracts that run indefinitely, it is still unclear how the operations could be effectively seized.
In addition, it has raised questions about the feasibility of sanctioning DeFi protocols and the respective authorities that could be held responsible.
The report also suggested that sanctions act more like a tool against decentralized services to disincentivize their use instead of complete prohibition. Reportedly, in the case of Tornado Cash, this appears to have been effective, as data revealed that its inflows fell by almost 68% in the 30 days following its designation.