Using Cryptocurrencies for International Payments to Circumvent US Sanctions
Foreign online stores do not accept Paypal and credit cards if you live in one of the almighty US’s sanctioned countries. That’s not just a problem for you; that’s a problem for your distant cousin who lives in Chile and desperately wants the 2-year-old, $200 version of Pokemon Yellow for Game Boy Colour she saw on eBay.
It is where cryptocurrencies come in. Using cryptocurrencies for international payments allows you to transact business with anyone worldwide without violating US sanctions. At least, in theory.
The Role Of Cryptocurrencies in International Payments
Cryptocurrencies are slowly becoming viable for international payments, especially for cross-border business-to-business (B2B) transactions. The technology for using cryptocurrencies for international payments is still relatively new and underdeveloped. Still, it offers several advantages over traditional payment methods, making them an attractive option soon.
Makes Transactions Quicker and Easier
Cryptocurrency transactions take place in real-time. Anyone can make a transaction, receive funds and use them immediately. Unlike banks, cryptocurrency exchanges don’t have long queues or spend days processing international payments.
Less Expensive than Regular Payments
While using cryptocurrencies for international payments, the cryptocurrency wallets automatically takes care of the currency conversion, so you know exactly how much the currency will convert into and what you can expect to receive in return. You’re not only saving time but also money, as there are no additional fees on top of what you’re already paying.
Unique Security Features
Cryptocurrencies run on blockchain technology, which uses cryptographic signatures and public-key cryptography. A unique digital signature appears when users use their private key to sign a transaction request digitally. Thus, the receiver of that request can verify that the signature belongs to the person who owns the private key and that no one has tampered with it.
Blockchain technology is anonymous and not controlled by any government or regulatory body. Therefore, it’s not subject to third-party interference. Using cryptocurrencies for international payments ensures that the identity is confidential across borders.
All transactions exist on a public ledger called blockchain technology, and anyone can see them at any time without having special privileges or access rights (unlike banks). No one can tamper with the account details without getting caught. Suppose someone tries using login credentials without permission. In that case, it won’t work since they cannot enter another person’s account without having their private keys – which only belong to the owner alone!
Sanctions Compliance Issues for the Cryptocurrency Industry
Sanctions compliance is a broad term that refers to the policies, procedures, and controls an organization puts in place to ensure it does not violate sanctions laws. To comply with sanctions compliance rules for using cryptocurrencies for international payments, wallets associated with these blacklisted addresses need to mark them off-limits for sending or receiving funds. In addition to this blocklisting, any other transactions that may appear related to these entities must also be blocked to avoid fines or other penalties.
Generally, the risks associated with using cryptocurrencies for international payments are not limited to the US. For example, some countries have regulated cryptocurrencies as a commodity or a form of property, while others have explicitly banned their use. Whatever the case, crypto traders worldwide aren’t having it easy.
OFAC Sanctions Considerations for the Cryptocurrency Sector
OFAC’s financial translation to the cryptocurrency industry is simple. Whether they are a traditional financial institution or a cryptocurrency company, they violate US sanctions laws if they do business with a sanctioned person or entity and do not have a license from OFAC permitting this activity.
Initially, cryptocurrency may seem exempt from these rules since they cannot exchange it for fiat currency directly. However, this is only true in theory. Any transaction processed through a U.S. based bank will pass through the US financial system and therefore be subject to regulation by OFAC.
It’s here that things get tricky. Suppose an international company wants to transact in US dollars. Suppose they do not hold a license from OFAC permitting this activity. In that case, they will be subject to penalties of up to $1 million per violation plus possible jail time for employees of the sanctioned entity who knowingly engaged in this conduct.
The Department of Justice has also taken action against individuals allegedly using cryptocurrencies for international payments by charging them with conspiracy to commit money laundering and operating an unlicensed money transmitting business.
Potential Use of Cryptocurrency by Russia to Circumvent Sanctions
On 11 July, the TASS news agency reported that the bank of Russia plans to issue its cryptocurrency, the cryptoRuble. The creation of the financial instrument was presented as a measure to “counter-sanctions and the consequences of international restrictions.”
The financial times and other mainstream media outlets picked up the report, rushing to conclude that Russia could evade western sanctions by following the lead in using cryptocurrencies for international payments.
As governments or central banks do not govern crypto, they don’t fall under US authority, allowing those using cryptocurrencies for international payments, like Russia, to avoid trade restrictions.
From a practical point of view, it is unclear how the cryptoruble could serve its purpose since the cryptocurrency market is highly volatile and has no ties with the local economy.
Additionally, cryptocurrencies are not entirely anonymous. However, there’s no way to tie a crypto address to an individual while using cryptocurrencies for international payments. Some wallets and exchanges require users to provide information about themselves to use the platform. It could allow sanctions enforcers to establish a connection between a given account and an individual.
However, suppose Russia creates state-backed crypto that can bypass these sanctions and make transactions anonymous. In that case, it will give them a significant advantage over their enemies without risking military action or another round of sanctions (which might end up being worse than the current ones).
How Does Iran Use Bitcoin Mining to Evade Sanctions?
Bitcoin mining involves computer algorithms that verify transactions on the bitcoin blockchain using mathematical equations. The first person to solve an equation gets paid for their work in bitcoins. Instead of operating under government regulations, bitcoin uses blockchain technology which relies on electricity supply, to facilitate transactions.
Thanks to its large petroleum production, electrical energy is relatively inexpensive in Iran. However, Iran cannot convert those petroleum reserves into cash on the international market because it is under sanctions from the US. So how are they able to pay for goods and services internationally? By using cryptocurrencies for international payments through Bitcoin and Ethereum to circumvent the sanctions.
When Iranian companies convert their petroleum into electricity and mine these cryptocurrencies, they can start using them for international payments. This scheme keeps sellers and buyers of these goods safe from the US sanctions – after all, if the US were to freeze the crypto assets of Iranian companies, no one would be able to access that money anyway.
Are there any Specific Penalties for Crypto Use to Circumvent Sanctions?
Transactions that use or involve cryptocurrencies banned in a country may be penalized. The United States, for example, has laws prohibiting business with particular persons, including those listed on the OFAC specially designated nationals (SDN) List or the foreign sanctions evaders (FSE) List. Enforcement of these laws occurs through civil penalties and criminal prosecution by the Department of Justice’s (DoJ) Office of OFAC.
The DoJ can impose civil and criminal penalties against violators who fail to comply with OFAC regulations. Such penalties include fines up to $20 million per violation or a jail term of up to thirty years. Financial institutions can also pay hefty penalties if they provide services to members of the SDN or FSE lists. However, the penalties are not always straightforward and can vary from case to case. So, it’s best to avoid any negative consequences by being aware of which countries have sanctions placed on them before using cryptocurrencies for international payments.
Drawing up plans on the fringes of existing economic commerce, it is a matter of time before using cryptocurrencies for international payments starts affecting the conventional way of processing cross-border business transactions. It will be interesting to see whether additional sanctions go into effect against other nations and how they respond by using cryptocurrencies for international payments to circumvent such sanctions.