Last month, the U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC), the agency that enforces U.S. sanctions, announced it had reached a half a million dollar settlement with cryptocurrency payment processor firm BitPay, a U.S. company. OFAC had been investigating BitPay for allegedly processing payments to merchants from customers in sanctioned jurisdictions. This announcement got scant public attention, even among cryptocurrency industry watchers, but it is a glimpse into thorny regulatory challenges ahead as large, mainstream corporations are jumping into the crypto space and pushing for more people to use digital assets in commerce. Much of this steady rush into retail crypto activity is occurring without a check of the regulatory blindspots ahead.
The BitPay settlement also points to how illicit actors might adjust their strategies to circumvent anti-money laundering, combatting the financing of terrorism (AML/CFT) and sanctions compliance requirements. As people’s lives become more digital and businesses become more open to cryptocurrencies, U.S. law enforcement and national security personnel may find that illicit financial activity increasingly involves crypto payments.
Much of this steady rush into retail crypto activity is occurring without a check of the regulatory blindspots ahead.
The business model for cryptocurrency payment processors like BitPay is straightforward. These companies provide software allowing retail merchants to accept cryptocurrencies as payment online or in brick-and-mortar establishments. The merchants do not need to handle cryptocurrencies directly. The payment processor owns the software wallets with which customers pay using Bitcoin or some other cryptocurrency, and then the processor converts those funds into regular fiat currency. The processor company then sends those converted funds to the merchant, minus a commission. This financial activity makes the payment processor a money transmitter under U.S. law and obligates it to follow all AML/CFT and sanctions regulations.
According to OFAC, BitPay failed in sanctions compliance. While BitPay screened its merchant clients to ensure they were not on the U.S. sanctions list or operating in sanctioned countries, the company for five years did not prevent individuals in sanctioned locations such as Crimea, Cuba, Iran, North Korea, Sudan and Syria from purchasing from U.S. merchants via BitPay’s crypto payment platform. Thus, it enabled customers in these locations to evade sanctions and transact with U.S. businesses.
Read the full article from Lawfare.
More from CNAS
Sharper: Critical Technology
Critical technologies promise to upend traditional understandings of national security, economic prosperity, and everyday life. Artificial intelligence, semiconductors, quantu...
By Anna Pederson & Sam Howell
Why the Cloud Will Be Critical to U.S. Competitiveness in World Finance
The Russo-Ukrainian war has bred an opportunity for stablecoins to be used as a store of illicit value as well as a store of legitimate value for people interested in maintain...
By Michael Greenwald
The Chatter Podcast: Financial Intelligence, Fact and Fiction with Yaya Fanusie
David Priess spoke with Yaya Fanusie, CNAS Adjunct Senior Fellow, about his path to the CIA and NCTC, what analytic work on international economics and financial intelligence ...
By Yaya J. Fanusie
On LNG, Canada Turned Away Germany, Then Japan—This Country Cannot Keep Doing That
Canada has an opportunity to insist producers invest in the cleanest LNG supplies...
By Rachel Ziemba & Leslie Palti-Guzman