The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) has been active in exerting control over digital assets. So what can cyber currency users, hosts and financial institutions do to stay on the right side of the law?

The recent 2019 Congressional hearings and regulatory scrutiny on cryptocurrency highlighted the provocative nature of the innovation. And, while federal authorities from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) continue to test competing theories over whether this technological medium is a security or a medium, other agencies are pressing ahead with traditional applications of longstanding law.

The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) has been active in exerting control over these digital assets and has taken some noteworthy action. OFAC administers approximately 30 unique economic and trade sanctions programs in order to keep funds and resources away from terrorists, drug traffickers, oppressive government regimes and other entities that are involved in activities that the U.S. views as a threat. 

For example, OFAC responded to the issuance of Venezuela’s state-sponsored digital coin, the petro, as well as the public’s growing concern as to how OFAC would treat digital currency by publishing a number of “FAQs” on its website. In its FAQs, OFAC assures the public that sanctions obligations are the same, regardless whether a transaction is completed in traditional or digital currency.

Companies in the digital currency industry have also been hearing privately from OFAC about transactions that potentially violate sanctions. In its FAQs, OFAC has specifically reminded digital currency platforms that “persons that provide financial, material, or technological support for or to a designated person may be designated by OFAC under the relevant sanctions authority.” This means that cryptocurrency platforms under OFAC jurisdiction are prohibited from allowing OFAC restricted parties use of the platform or the currency. Adding to the complexity is that OFAC sanctions apply not only to the directly listed party, but also to any parties owned or controlled by an SDN.

What can cyber currency users, hosts and financial institutions do to stay on the right side of the law?

Understand whether OFAC rules apply to your company. OFAC employs long arm jurisdiction over many entities that are not directly based in the U.S., and those that have U.S. ownership or control, transact in U.S. goods or U.S. currencies, or even those who cause U.S. persons to violate OFAC rules. 

Improve internal compliance. OFAC specifically recommends that parties involved with cryptocurrencies “develop a tailored, risk-based compliance program, which generally should include sanctions list screening and other appropriate measures.” Companies should have internal cross-department trainings that discuss the new OFAC programs and the risks. 

Report to OFAC when a transaction is blocked or rejected as OFAC’s new reporting requirement has also implemented a new rule requiring U.S. persons to file reports. 

OFAC has made it clear that it is, and will continue to prioritize the regulation of cryptocurrencies. In late 2018, for the first time OFAC added two Bitcoin addresses to the Special Designated Nationals (SDN) list, a list of entities with whom no U.S. parties may transact. The addresses were associated with Iranian nationals who were sanctioned for ransomware cyberattacks. In August 2019, OFAC added two additional bitcoin addresses to the SDN list, this time the addresses were associated with Chinese drug traffickers.

In 2019 alone, OFAC issued more than $1 billion in fines. Those fines ranged from anywhere from about $13,000 to over $650 million. Being listed on OFAC’s SDN list will immediately cut a company off from all U.S. businesses, and from most of the world’s banking industry. So, as we continue to learn just how the regulation of digital currency will play out, ensure that your company knows what rules apply and has a plan to play within the lines.

Reprinted with permission from the February 19, 2020, edition of Legaltech News.

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