March 24, 2021

Merchant Crypto Payments: A New National Security Frontier

By Yaya J. Fanusie

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.

  • Commentary
    • National Interest
    • June 9, 2021
    Why Biden Should Extend Vaccine Diplomacy to Sanctioned States Like Venezuela, Iran, and North Korea

    Extending vaccine diplomacy to heavily sanctioned countries will allow Washington to both hedge against growing Chinese-Russian influence abroad and help alleviate global huma...

    By Jason Bartlett

  • Commentary
    • DecipherGrey
    • May 26, 2021
    How Meeting North Korean Defectors Changed My Life

    All I brought to Korea was genuine curiosity and a humble interest to learn, and I was met with kindness from the most unlikely of people....

    By Jason Bartlett

  • Podcast
    • May 21, 2021
    Analyzing Biden's New Approach to Sanctions

    Sanctions are becoming an increasingly important part of the Biden administration's foreign policy toolkit. Carnegie Council Senior Fellows Nick Gvosdev and Tatiana Serafin di...

    By Rachel Ziemba

  • Reports
    • May 4, 2021
    Sanctions by the Numbers

    Cyberattacks pose a serious threat to U.S. national security and the integrity of the global commerce and financial system, especially when state-sponsored actors conduct and/...

    By Jason Bartlett & Megan Ophel

View All Reports View All Articles & Multimedia