Iran, Cuba, and Belarus embrace Bitcoin. What Should Banks Do About Sanctions?


Financial crimes and compliance expert Daniel Wager has answered questions from major banks on cryptocurrencies with his own questions.

A recent example: if a customer has a digital asset in their wallet that was created on a distributed ledger 10 years ago, made 100 transactions, and was in the wallet of a child trafficker seven transactions prior to doing so. reach the customer, should they be blocked from trading that asset? What if you knew it had been mined by a company in a country subject to US sanctions?

These are kind of trick questions, according to Wager, vice president of financial crime compliance at LexisNexis.

By the time digital assets reach banks, they are only accompanied by the ID of the wallet that sent them. Even if a bank or regulator decided where to draw the line in the previous two scenarios, that would be inapplicable.

“You can see all day long what’s going on with a coin, a fraction of a coin, what wallets it’s in,” Wager told Crypto Investor. “But the only people who see a physical identity attached to [those wallet IDs] are crypto exchanges and people involved in hand-to-hand physical wallet transactions.

Wager previously held compliance positions at Duff & Phelps, HSBC and TD Bank. Prior to that, he worked as a special agent for the US Department of Homeland Security, the US Customs Service, and the Department of the Treasury.

Even though he advises banks that they don’t have the data they need to enforce sanctions on cryptocurrency transactions the same way they would with fiat, that hasn’t stopped them from revisiting the topic. . This is thanks, in part, to recent news.

Iran has been the subject of US sanctions for decades. This means that banks and payment processors are responsible for blocking transactions from people or entities in the country. But that hasn’t stopped Iran from generating nearly $ 1 billion a year from Bitcoin mining, which is roughly 4.5% of global cryptocurrency mining.

It is impossible to differentiate Bitcoin mined in Iran from any other Bitcoin.

So when Belarusian President Aleksandr Lukashenka encouraged his citizens to start mining Bitcoin just weeks after the Biden administration added 44 people and companies associated with his regime to the existing sanctions against the country, it seemed like he had borrowed money. a page from Iran’s sanctions mitigation manual.

The same can be said of Cuba, another country on the Office of Foreign Assets Control (OFAC) sanctions list. In August, the Cuban central bank announced that it would recognize and regulate cryptocurrencies for “reasons of socio-economic interest.”

One of the many criticisms of El Salvador making Bitcoin legal tender alongside the dollar has been that it is an attempt to deflect attention from growing allegations of authoritarianism against the government.

According to Wager, there is a scenario that justifies the time, effort, and disclosure needed to determine the origin of cryptocurrencies: when banks become the custodians of their customers’ digital assets.

“If you hold people’s crypto in internal wallets, this is a full scenario where you need to have the highest level of due diligence,” he said. “If not, are you really figuring out what people are doing with their crypto?”

Julie Myers Wood, CEO of compliance firm Guidepost Solutions and former federal prosecutor, defense attorney and investigator, said if regulators were to take a hard line on cryptocurrency sanctions, it would likely be for larger transactions.

“From a regulator’s perspective, they expect everyone who interacts to know. And so if there is a significant transfer from crypto to fiat currency, they want both parties to do the right kind of verification, ”said Wood. “And while the exchanges are in a good position to take the exams – many of them have really stepped up their KYC, AML, and sanctions programs over the past couple of years – mainstream financial institutions need to pay attention to that as well.”

Successful trading with financial institutions and traditional regulators can be essential for crypto exchanges.

After a series of investigations and scrutiny from regulators, Binance, the world’s largest cryptocurrency exchange, has announced a reorganization that will make it a centralized entity in a location yet to be named. . This decision will facilitate compliance when, for example, the company must register in the jurisdictions where it operates.

His recent hires bear witness to his intentions. Greg Monahan, a former US Treasury criminal investigator, has been appointed global head of money laundering reports. Nils Andersen-Roed, a former Europol dark web specialist, has joined the audit and investigation team. And Aron Akbiyikian, a former California detective who led investigations at Chainalysis, has become director of audit and investigations at Binance.

Still, Wood said she has informed banks that the methods of hiding who someone is on the blockchain, even from exchanges and wallets, have become more sophisticated. This is a complex and rapidly evolving risk to follow.

“You are better protected if you partner with an exchange that has strict controls and can demonstrate those controls,” she said. “As you would with a correspondent bank or whatever type of relationship you have. This transfers those same types of questions to the crypto world. “


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