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US Office of Foreign Assets Control uses blockchain technology to surveil entities behind cryptocurrency activities

US Office of Foreign Assets Control makes use of blockchain surveillance technology to understand the real-world entities behind cryptocurrency activities

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Published 28 June 2021

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The Office of Foreign Assets Control (OFAC) is subscribing to use blockchain surveillance tools developed by New York headquartered firm, Chainalysis.

OFAC is responsible for administering and enforcing economic sanctions in the United States, based on foreign policy and national security objectives.

OFAC has indicated that it will make use of Chainalysis’ technology, which helps government agencies and financial institutions to understand the real-world entities behind cryptocurrency activities.

OFAC says that it “requires a commercial online blockchain tracing web-based application tool to equip investigators in its Office of Global Targeting (OGT) to analyze and track virtual currency transactions e.g. Bitcoin, in order to gather attribution information on involved parties that OGT may put on the [Specially Designated Nationals and Blocked Persons] List.”

Although persons transacting in cryptocurrencies can sometimes remain anonymous, every single transaction is recorded on a tamper-proof public blockchain ledger. One can therefore be entirely certain about the origination and transaction history of any particular wallet and where the cryptocurrency in that wallet came from. If the wallet is linked to a regulated exchange that conducts rigorous anti-money laundering due diligence, then it may also be possible to identify the real-world entity that sits behind it.

Even so, in the context of sanctions regulations, the pseudo-anonymity of crypto dealings will continue to cause headaches for firms who transact in digital currencies or offer payment processing services.

Earlier this year, BitPay paid over $500,000 to settle its potential civil liability for 2,102 apparent violations of multiple US sanctions programs. The firm, based in Atlanta, Georgia, had developed a payment processing solution for merchants to accept digital currency as payment for goods and services. OFAC’s investigations uncovered that persons in Crimea, Cuba, North Korea, Iran, Sudan, and Syria were able to use to BitPay’s platform to transact with merchants in the United States and elsewhere using digital currency.

Whilst BitPay had screened its direct customers (i.e. the merchants) against OFAC’s List of Specially Designated Nationals and Blocked Persons and conducted due diligence on their locations, it failed to screen any location data that it obtained about its merchants’ buyers, some of whom were located in sanctioned jurisdictions.

As more payment services providers and other fintechs begin to diversify into the digital assets space and government agencies develop increasingly powerful tools to deanonymise crypto transactions, there is bound to be an increase in sanctions investigation and enforcement activity over the coming months.

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Shorter Reads

US Office of Foreign Assets Control uses blockchain technology to surveil entities behind cryptocurrency activities

US Office of Foreign Assets Control makes use of blockchain surveillance technology to understand the real-world entities behind cryptocurrency activities

Published 28 June 2021

Associated sectors / services

  • FinTech
  • Financial regulatory
  • Financial services
  • Financial services

Authors

The Office of Foreign Assets Control (OFAC) is subscribing to use blockchain surveillance tools developed by New York headquartered firm, Chainalysis.

OFAC is responsible for administering and enforcing economic sanctions in the United States, based on foreign policy and national security objectives.

OFAC has indicated that it will make use of Chainalysis’ technology, which helps government agencies and financial institutions to understand the real-world entities behind cryptocurrency activities.

OFAC says that it “requires a commercial online blockchain tracing web-based application tool to equip investigators in its Office of Global Targeting (OGT) to analyze and track virtual currency transactions e.g. Bitcoin, in order to gather attribution information on involved parties that OGT may put on the [Specially Designated Nationals and Blocked Persons] List.”

Although persons transacting in cryptocurrencies can sometimes remain anonymous, every single transaction is recorded on a tamper-proof public blockchain ledger. One can therefore be entirely certain about the origination and transaction history of any particular wallet and where the cryptocurrency in that wallet came from. If the wallet is linked to a regulated exchange that conducts rigorous anti-money laundering due diligence, then it may also be possible to identify the real-world entity that sits behind it.

Even so, in the context of sanctions regulations, the pseudo-anonymity of crypto dealings will continue to cause headaches for firms who transact in digital currencies or offer payment processing services.

Earlier this year, BitPay paid over $500,000 to settle its potential civil liability for 2,102 apparent violations of multiple US sanctions programs. The firm, based in Atlanta, Georgia, had developed a payment processing solution for merchants to accept digital currency as payment for goods and services. OFAC’s investigations uncovered that persons in Crimea, Cuba, North Korea, Iran, Sudan, and Syria were able to use to BitPay’s platform to transact with merchants in the United States and elsewhere using digital currency.

Whilst BitPay had screened its direct customers (i.e. the merchants) against OFAC’s List of Specially Designated Nationals and Blocked Persons and conducted due diligence on their locations, it failed to screen any location data that it obtained about its merchants’ buyers, some of whom were located in sanctioned jurisdictions.

As more payment services providers and other fintechs begin to diversify into the digital assets space and government agencies develop increasingly powerful tools to deanonymise crypto transactions, there is bound to be an increase in sanctions investigation and enforcement activity over the coming months.

Associated sectors / services

  • FinTech
  • Financial regulatory
  • Financial services
  • Financial services

Authors

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