March 24, 2021
Merchant Crypto Payments: A New National Security Frontier
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
-
CNAS Insights
Defense / Indo-Pacific Security / Transatlantic Security / Middle East Security / Energy, Economics & Security
CNAS Insights | National Security Agenda in the New Congress: A 10-Item To-Do ListWhen Democratic majorities sweep into Congress in January, Washington will return to divided government. The prospect of stalemate will be real, with Democrats prone to opposi...
By Richard Fontaine
-
What Would a Democrat Midterm Win Mean for U.S. Foreign Policy?
Video
The midterms will shape the direction of US foreign policy in the next two years with pressures from competition with China, to Israel and the war with Iran. Liza Tobin [adjun...
By Liza Tobin
-
Getting U.S. Trade Deals To Spur Economic Security Co-Operation
Commentary
One lesson is that simply writing a binding promise to align with US economic security measures into a trade deal provides no guarantee of on-the-ground policy alignment....
By Geoffrey Gertz
-
Is This How a Europe-China Trade War Starts? With Tobias Gehrke
Podcast
Tobias Gehrke joins Emily and Geoff to debrief on the latest news on EU-China trade tensions. They discuss the EU-China deal on hybrid vehicles, the potential for further esca...
By Emily Kilcrease & Geoffrey Gertz
