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OFAC adds cryptocurrency data to subject information

Nigel Morris-Cotterill

On 19th March, the USA's Office of Foreign Assets Control, a division of the US Treasury, which publishes lists of persons sanctioned under trade and economic policies, under policies that are political including but not limited to national security plus those under the USA PATRIOT Act announced that it was to include, where it has it, cryptocurrency data relating to subjects. Just what are they planning and what will it mean for crypto-currency holders and exchanges and businesses such as online auctions and advertising platforms?

Effect on cryptocurrency exchanges

This is the big one: if we consider the ultimate purpose of financial sanctions is to freeze the assets of those listed and to prevent funds reaching them, then in terms of cryptocurrencies, the exchanges are on the front line. While the data is distributed across the network, there is an organiser and that organiser is the one who makes the money out of transfers of cryptocurrencies.

In fact, one of the obstacles to the widespread adoption of cryptocurrency is the speed and cost of funds transfers. No matter what the evangelists say, cash remains the most viable option for the vast majority of transactions simply because there is no one creaming off a share, because no intermediary is necessary, the point that will, ultimately, have to be addressed by all payment systems services providers as the backlash that has started with Uber food delivery starts to expand across, initially, micro-businesses.

It is that function of operating the initial point of contact and charging a fee for it that is the point of focus for regulation. In a truly peer-to-peer function with no control authority regulation would be impossible. Exchange businesses are identifiable and, like banks, they are the isthmus through which all traffic flows and can, therefore, be more easily identified.

Therefore, while the integrity of the data is protected by the principles of blockchain, the accessibility of data is concentrated at that single point which explains why exchanges can be hacked and widespread havoc wreaked across the network, including the "theft" of funds.

It is here, then, that the effects of the OFAC ruling might be most keenly felt except for one thing: again, it's only a single, additional field. It creates no additional classes of persons subject to OFAC and it creates no additional actions required. It's an incremental, fully automated, data analysis step. It turns out that, for those crypto-currency exchanges that already meet their obligations, the new news isn't big news at all. All they have to do is freeze accounts that are listed and report them, and to report any attempt to make payments to or from them. The only difference is that now they have account numbers to help them in addition to a list of names that probably do not bear any relevance to the names in which subjects hold accounts.

Effect on ordinary people

OFAC does not, ordinarily, have any impact on people in their private lives unless they are the subject of an entry. There is no general obligation to check if the person you are buying from on, for example, eBay is listed on OFAC.

Effect on independent businesses

The first business area which is likely to be affected is selling platforms such as eBay, Lazada, Alibaba, Weibo and others. Their exposure to OFAC differs depending on their areas of operations and, importantly, their payment platforms are likely to bring the non-US businesses under OFAC in a number of complex ways that are beyond the scope of this article. However, it is unlikely that they will be entirely able to escape the impact of the newly announced approach. What it means is that those platforms which permit payment by cryptocurrency will need to monitor for the accounts that are listed on its pages. This is a simple data task but some platforms struggle with data collection and analysis from within text fields. This specific requirement is actually very simple to rectify but, given the problems some platforms have with easy tasks, one has to wonder if they will claim that this is, also difficult.

Advertising platforms, be it newspapers or otherwise, will find that they, too, will be expected to monitor for cryptocurrency account information.

Search engines will, until Governments begin to compel their compliance with financial crime laws in general, escape and that's a major weak spot because criminals will, simply, put payment link pages on the web so as to avoid exposing them to platform operators. Search engines are in at least as strong a position as banks and cryptocurrency exchanges when it comes to "seeing" exactly the data that OFAC wants to be collected and reported.

Why is no Rule necessary to bring this into force?

That's both easy and difficult to answer. The difficult part of the answer is that it is possible because the USA has not, in the case of OFAC, done as it usually does and over-prescribed, in minute detail, what "assets" are. Therefore (here's the easy bit) the Treasury can simply say "virtual currency holdings are assets and therefore already covered." In short, it's not a new provision, it's a statement of the existing position for those who have hitherto been thinking too narrowly. Simply adding a new data class to the lists is not adding a new principle and, therefore, no Rule is required. That's why the statement slipped out almost unnoticed, in an update to the OFAC FAQ page on the US Treasury website. Put simply, because it did not go into the Federal Register, an unintended consequence is that it missed the media machine that brings those entries to public knowledge.

Further reading: The US Treasury statement as to what OFAC will do is to be found at https://www.treasury.gov/resou....