The Treasury Department continues to investigate sanctions violations by crypto exchange companies in whether their crypto exchange allows users in sanctioned countries to buy and sell digital tokens.
For example, The Treasury Department’s Office of Foreign Assets Control has been investigating Kraken since 2019 as reported by NY Times. It appears that Kraken would be the largest U.S. crypto firm to deal with an enforcement action from O.F.A.C. in their possible transactions with the crypto exchange in Iran. Sanctions against Iran, which the United States enacted in 1979, prohibit the export of goods or services to people or entities in the country.
In the last few years, the federal government has increasingly applied pressure on crypto companies, which are lightly regulated, as the market for digital currencies has expanded.
The federal government enforcement actions is seen with Tether, a stable coin company, was fined by the Commodity Futures Trading Commission for misstatements about its reserves last year, while the Justice Department brought insider-trading charges this month against an ex-employee of Coinbase, the largest U.S. crypto exchange and several companies, such as Voyager Digital and Celsius Network, collapsed.
Kraken is a private company and is valued at $11 billion, and allows users to buy, sell or hold various cryptocurrencies. The company has previously faced various regulatory actions. A Treasury spokeswoman said the agency “does not confirm or comment on potential or ongoing investigations” and was committed to enforcing “sanctions that protect U.S. national security.”
Sanctions are some of the most powerful tools the United States has to influence the actions of nations it does not consider allies. But to the federal government and many members of congress feel strongly that cryptocurrencies pose a threat to sanctions because the digital coins don’t flow through the traditional banking system, making the funds harder for the government to control.
In October of 2021, the Treasury Department warned that cryptocurrencies “potentially reduce the efficacy of American sanctions.” It released a 30-page compliance manual that recommended cryptocurrency companies use geolocation tools to weed out customers in restricted regions.
“The fact that crypto can move without a bank or intermediary means that exchanges are responsible for certain types of financial regulatory compliance,” said Hailey Lennon, a lawyer at Anderson Kill who handles regulatory issues in crypto. Additionally, Kraken and the issue of sanctions surfaced in a November 2019 lawsuit by a former employee from the finance department, accused the start-up of generating revenue from accounts in countries that were under sanctions. The ex-employee stated he had taken the matter to Kraken’s chief financial officer and top compliance official in early 2019, according to legal filings. (The suit was settled last year.)
In 2020, O.F.A.C. fined BitGo, a digital wallet service with an office in Palo Alto, Calif., more than $98,000 in 2020 for 183 apparent sanctions violations. Also, in 2021, it fined BitPay, an Atlanta-based crypto payment processor, more than $500,000 for 2,102 apparent violations. Coinbase also disclosed in a 2021 financial filing that it had sent notices to O.F.A.C. flagging transactions that may have violated sanctions, though the agency hasn’t taken any enforcement action.
Sanctions are some of the most powerful tools the United States and European countries have to influence the behavior of non-allied countries. The United States in particular is able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and used in payments worldwide. But American government officials are increasingly aware of the potential for cryptocurrencies to reduce the impact of sanctions and are stepping up their examination and regulatory oversight of digital assets.
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