Crypto Wallets Linked to Sanctioned Entities: A Growing Concern
The US Office of Foreign Assets Control (OFAC) has started including digital wallet addresses in its sanctions designations, highlighting the unique challenges posed by cryptocurrency transactions. This development has significant implications for financial institutions and virtual asset service providers (VASPs), which must navigate complex compliance requirements to avoid falling foul of the law.
A Growing Concern
According to a recent report, OFAC has included over 100 cryptocurrency addresses as identifiers in its designation of Hydra, a darknet market. However, blockchain analytics firm Chainalysis estimates that there are actually millions of wallet addresses affiliated with the now-defunct entity. This staggering disparity underscores the need for sophisticated screening tools and risk assessment strategies to identify potential sanctions violations.
Direct vs. Indirect Exposure
In traditional financial institutions (TradFi), only direct transactions between a client and their counterparties are reviewable. In contrast, cryptocurrency analytics can reveal indirect exposure, allowing analysts to track interactions between clients, third-party intermediaries, and sanctioned entities.
- For example, if an exchange customer sends funds directly to Garantex, an OFAC-designated entity, the transaction is clearly a sanctions violation.
- However, what about cases where intermediaries are involved? A consistent approach is needed to assess relationships between these parties and ensure compliance with regulations.
Continuous Data Improvements
Blockchain analytics firms are constantly enriching their entity and asset coverage, identifying new data and uncovering previously unknown connections. This means that even unidentified parts of services may exist on the blockchain, waiting to be discovered.
Taking Context into Account
VASPs must take context into account when assessing sanctions risk. Transactions from sanctioned entities to VASPs may appear to violate regulations at first glance, but may have been frozen and reported to OFAC before reaching a customer’s account. Similarly, outbound transactions involving sanctioned entities must be evaluated in light of the date of designation and the date those addresses were flagged in blockchain analytics.
Industry Coordination
Private-public partnerships are crucial for advancing regulation and guidance in the cryptocurrency space. By working together, VASPs, TradFi institutions, blockchain analytics companies, regulators, and law enforcement can create a safer ecosystem.
The Crypto Advantage: Looking Forward
While sanctions compliance poses unique challenges in the crypto world, automation and efficiency offer endless opportunities. With the help of education, regulation, blockchain analytics, and industry coordination, companies in this space can work together to build a safer ecosystem.
As Andrew Fierman, Head of Sanctions Strategy at Chainalysis, notes, “Thanks to the transparency and immutability of the blockchain, all companies in this space can work together and build towards a safer ecosystem.”