Opinion Is the Crypto Space being used to Circumvent Sanctions?

Is the Crypto Space being used to Circumvent Sanctions?

October 13, 2018

Among the multitude of aspects of cryptocurrencies, there is also a negative prevalent one which states that they are used for criminal activities. The same narrative has often appeared and then disappearing from the public debate about this form of fintech, but in any case, it is described as mostly focused on the low-scale criminal activity.

At worse, stories like this would include suggestions of criminal enterprises that employ crypto, like it supposedly the case with WannaCry hijack virus which used bitcoin as the main ransom currency. Recently, however, there is a new narrative growing related to the cryptocurrencies and their illegal use, but this one is on a much larger scale. This particular use is focused on the idea of countries using cryptocurrencies, both domestic and international, to circumvent international sanctions.

This seems like a very worrying prospect and something that is becoming more prominent in the public consciousness. However, is the same idea really that relevant and can crypto be used to completely change the landscape and effectiveness of financial sanctions?

FinCEN Report

The debate about this has been restarted once more with a recent report of a US regulatory agency. Its name is the Financial Crimes Enforcement Network (FinCEN) and it urged domestic cryptocurrency exchanges to help the government in stopping the regime of Iran from using crypto as a tool. Here, the agency is directly referencing the concept of the crypto application as a way to negate the effects of sanctions.

The report came out last Friday and it states that Iran’s government and agencies are employing the malign and illicit use of cryptocurrencies. Through this, they are exploiting the financial system and currently go through bitcoin transactions worth almost $4 million on a yearly basis. The same trend is, on the other hand, missing in the country itself when it comes to domestic transactions.

Iran’s Domestic use of Crypto

FinCEN is claiming that all virtual currency use is relatively small compared to the international pipelines leading to the country. On the national level, the country is expanding the use of crypto as a payment system that could provide avenues for individuals but also organizations to evade sanctions.

Because of that, FinCEN is urging that the institutions in the US should consider reviewing and assessing the use of blockchain ledgers that might start or end in Iran. The same activities, which are very dynamic and could eventually grow far beyond $4 million could leave little footprint or prior notice.

With this, the agency provided a warning that is not focusing on the current level of the transaction, but its potential to become much higher with the passing of time. Ultimately, as FinCEN is underlying, the effects of far larger transactions would be as invisible as the current ones, which is one of the unique features of cryptocurrency use in general.

The US-Iran Tensions

The flare-up between the two hostile nations began when the Trump administration decided in May to withdraw from the 2015 nuclear agreement with Teheran. This led to the reimposing of US sanction which restricts the government of Iran’s ability to access US dollars, among other economic penalties. This executive order went into effect at the start of August.

Now, FinCEN is claiming that while the Tehran government is working with the Central Bank of Iran to ban all domestic banks from working with crypto, individual and organizations could still access crypto trading platforms in the US or Iran, as well as a platform supporting P2P exchanges. The agency also stated that any US domestic crypto exchanges have an obligation to employ any necessary mechanism to stay compliant with the requirements of the sanctions.

Iran’s Response to Sanctions

After the sanctions came back on the table, the Iran government began developing countermeasures. Among these, as reported in July, was the option of starting a local cryptocurrency that was under the direct regulation of the Tehran government. This would be a move that would mirror the Venezuelan creation of the petro, which is an oil-backed cryptocurrency that started working in February. Since then, it was proven to be highly controversial and many are openly wondering is it able to do any of the things it was designed to do.

But so far, Iran seems to have put the same plan on the backburner. If the FinCEN report is accurate, the country has instead decided to use the existing cryptocurrency, mainly bitcoin as a medium of value transfer. Also, so far, the same setup appears to be working fine, at least on the modest level of several million USD. The report has not mentioned or defined where the money is coming from and who would send it to the Tehran government.

However, with the really small amounts for a country of 80 million inhabitants and an important geopolitical role, it can be said with certainty that no other government is sending it – any support from a friendly nation would have to be in hundreds of millions of USD to be meaningful. Because of that, it is more likely that Iranian companies close to the government or the military are experimenting with the possibilities of utilizing cryptocurrencies as something that is invisible to the sanctions.

The Medium of Crypto

The US government is clearly determined to better understand crypto in all of its shapes and forms. But, currently, the idea of governments like those of Iran using crypto on a large scale still seems far-fetched. The reason for this is that Iran already has plenty of other avenues for approaching this problem.

After all, the country has been under sanction for decades before the Obama-era deal. For example, using material goods for barter is the main way how the Iranian steel industry survived and even thrived over the years.

The same is true for any other country in the world, especially when other digital-based options are examined. Today, as the world is in an age of social media, esports, and many other digital-only ventures, the possibilities for avoiding any sanctions are numerous and ever-growing. Yet, the main factor that puts doubt on the idea of crypto becoming prevalent in this purpose is political.

With the slow but evident decline in Western power, the sanctions are no longer that drastic for any other country in the world, especially those leaning to another global power center. Nations like China or Russia do not care about US sanction, which is why using any special mechanism for avoiding them will likely become less and less necessary.