.jpg)
As anticipated, the Department of Treasury's Office of Foreign Assets Control (OFAC) has begun to pull back the covers on its views toward cryptocurrencies (also known as "virtual currencies") within the existing regulatory landscape of US sanctions. Virtual currencies are “digital representations of value” that can function as a means for online payments. These transactions are often secured and verified by encryption and thus referred to as “cryptocurrencies.” With the increasing ubiquity of virtual currencies like Bitcoin, questions have emerged as to their status under existing OFAC rules.
This week, OFAC published clarifications as part of its "frequently asked questions" (FAQ) explaining its view that existing regulations will apply equally to all forms of digital currency, which includes sovereign cryptocurrency, virtual currency (non-fiat), and digital representations of fiat currency. OFAC also took steps on the same day to prohibit transactions involving the Government of Venezuela's effort to develop a cryptocurrency.
The OFAC announcement is part of a government-wide effort to address the risks of criminal transactions that rely on digital currencies and a larger concern about the potential abuses of virtual currency as a payment mechanism. In particular, the US government’s goal is to deter attempts by malicious actors to circumscribe regulation of financial transactions through these semi-anonymous digital currencies.
For clients with existing OFAC compliance programs and that are dealing with virtual currencies, whether as means of payment or offering cryptocurrencies in the market, the risks raised in the OFAC guidance should be managed through enhanced screening. The focus of the screening should be to ensure that any activities involved in facilitation or engaging in online commerce or to process transactions using digital currency do not result in unauthorized transactions prohibited by OFAC. In particular, clients operating in this high risk area should confirm that they are not engaging in transactions with persons or entities on the official sanctions list. Screening should be done to ensure that the process will address the wide scope of OFAC's prohibitions on transactions with “blocked persons” or any entities owned by a blocked person. These apply equally for any entity owned “in the aggregate, directly or indirectly, 50 percent or more, by one or more blocked persons.” Additionally, persons or entities that provide financial, material, or technological support for or to a person on the Specially Designated Nationals (SDN) list may be designated by OFAC under the relevant sanctions authority.
In its FAQ, OFAC noted the especially high compliance risks for technology companies, administrators, exchangers, and users of digital currencies, and payment processors. Clients in these areas that do not already have one in place, should develop a tailored, risk-based compliance program. As OFAC notes, there is no single compliance solution for every situation and thus an adequate compliance policy will depend on a variety of factors, including the type of business involved.
OFAC also previewed some additional elements of its approach to crypto-currencies going forward. For instance, OFAC has indicated that it may publish the digital currency addresses corresponding to illicit transactions on the SDN and Blocked Persons List. A digital currency address is a unique identifier assigned to each potential destination of a currency transfer. The aim is to alert the public of specific digital currency identifiers associated with a blocked person. Additionally, anyone who identifies a blocked digital currency identifier should file a report with OFAC. Publishing the list of known blocked cryptocurrency addresses would improve clarity for individuals and companies dealing in digital currencies. However, this list is unlikely to be exhaustive. As a result, clients should make sure that their compliance programs include regular OFAC sanctions screening.
