Posted on Categories fintech

Cryptocurrencies and sanctions

New applications for blockchain, such as decentralised exchanges and unique tokens, bring new legal challenges. But sometimes even well-known uses of this technology present interesting legal issues never raised before or for some reason overlooked in the legal debate.

Undoubtedly cryptocurrencies and other crypto assets will not remain outside the legal system for long. Although they cannot be directly tied to many existing regulatory regimes, as we discussed in 2014 in our virtual currencies report, this does not mean that activity involving crypto assets will never be regulated. This is evident from the example of blockchain tokens, which in certain situations may be regarded as financial instruments.

The hotly debated tax regulations offer another example. Although in practice there are numerous disputes over taxation of crypto assets, no one claims that they are located entirely beyond the sphere of the existing tax system. Similarly with cryptocurrency exchanges. Several months ago the Polish Financial Supervision Authority notified prosecutors of the suspicion that two exchanges had committed the offence of unauthorised operation of payment services. This clearly indicates that even though intermediation in the exchange of crypto assets is not directly regulated as such, in certain instances it may run afoul of regulations governing payment services.

The first regulations are also being adopted directly addressing cryptocurrencies, in the form of new provisions on money laundering and terrorist financing, as we report here.

Recently increasing attention has been drawn to related provisions involving sanctions. And not without cause, as the media are full of reports on attempts to use cryptocurrencies by persons and states affected by international sanctions. For obvious reasons, such as anonymity and the lack of intermediaries, crypto assets potentially offer a powerful tool for avoiding restrictions imposed through international sanctions.

Probably the greatest action of this type is the issue of the digital currency Petro by Venezuela, a country currently subject to sweeping sanctions. Some claim that many other countries are also exploiting cryptocurrencies to skirt sanctions. Iran and Russia are most frequently cited in this context.

We already know the position on this matter of the US Office of Foreign Assets Control. According to the OFAC, the obligation to comply with restrictions pursuant to the imposition of sanctions is the same regardless of whether traditional currency or cryptocurrency is used. The OFAC has also stated that public addresses of cryptocurrencies (expressly including such currencies as BTC, ETH, LTC, NEO, DASH and XMR) may be added to the list of sanctions in order to provide notice that they may be exploited by entities covered by sanctions. A similar position was issued by SECO in Switzerland.

Polish businesses are not formally subject to OFAC requirements, but in practice the ramifications of violating them, particularly by financial institutions, can be very serious. The numerous regulations and decisions of the Council of the European Union involving sanctions, as well as sanctions imposed by the UN Security Council, which are controlling in Poland, must also be taken into consideration.

A fundamental measure that should be taken to avoid the risk of allegations of operating in violation of applicable sanctions is to “know your customer” and to examine the nature of specific transactions (their aim, economic justification, etc). This is the first and most important step toward ensuring compliance with existing sanctions, but the list of essential measures does not end here, and also includes for example the use of appropriate provisions in contractual documents. Measures of this type should be considered by all entities involved in any manner in the trading of crypto assets.

Jacek Czarnecki