September 17, 2019

September 17, 2019

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September 16, 2019

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U.S. Bans Venezuela’s Oil-Backed Virtual Currency, “Petro,” and Announces Plans to Publish SDNs’ Virtual Currency Addresses

Last week, President Donald Trump issued an Executive Order banning “all transactions” and “dealings” by any individual or entity in the United States that involve “any digital currency, digital coin, or digital token” issued by Venezuela.  This Executive Order was instituted just under a month after President Nicholas Maduro launched the pre-sale of “petro,” a cryptocurrency backed by the Venezuelan government’s crude oil reserves.  Since its inception, the petro has been met with deep skepticism by both the market and the Venezuelan legislature, but President Maduro—through petro’s official website—claims it has raised over $735 million in its pre-sale.  The opposition in the Venezuelan legislature has denounced petro as an illegal issuance of debt.

We previously have blogged about alleged money-laundering violations by Venezuelan oilmen and OFAC’s designation of the Vice President of Venezuela as a Specially Designated Narcotics Trafficker.  This is only the most recent in a long line of sanctions targeting the Venezuelan government and its state-controlled oil industry.

On the back of this new Executive Order, the Office of Foreign Assets Control (“OFAC”) has issued new FAQs relating to virtual currency, both to regulate the petro and assert its power in the virtual currency space.  As one might suspect, OFAC has decided to treat virtual currency in the same way it treats fiat currency and other property: if the individual is on Specially Designated Nationals (“SDN”) list, transactions are barred no matter what form of currency is used.  If a United States citizen or entity is involved, or is otherwise subject to United States jurisdiction, they “are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions.”  The OFAC FAQs specifically request “technology companies; administrators, exchangers, and users of digital currencies; and other payment processors” to develop compliance plans.  Obviously, these compliance plans would have to take into account blockchain and virtual currency technology that is constantly evolving.

OFAC plans to aid business in dealing with the rise of virtual currency by adding a new piece of information for SDNs: their digital wallet address.  This will include the specific alphanumeric wallet address as well as the digital currency that is stored there.  OFAC is specifically targeting transactions in Bitcoin, Ether, Litecoin, Monero, and Petro, among others.  It seems the strategy is to target highly-traded (thus highly-valued) cryptocurrency to choke off access to mainstream virtual currency markets.  Although this is a promising development for OFAC’s mission to cut off all avenues into the United States for SDNs, it does have limitations.

OFAC plans to aid business in dealing with the rise of virtual currency by adding a new piece of information for SDNs: their digital wallet address.  This will include the specific alphanumeric wallet address as well as the digital currency that is stored there.  OFAC is specifically targeting transactions in Bitcoin, Ether, Litecoin, Monero, and Petro, among others.  It seems the strategy is to target highly-traded (thus highly-valued) cryptocurrency to choke off access to mainstream virtual currency markets.  Although this is a promising development for OFAC’s mission to cut off all avenues into the United States for SDNs, it does have limitations.

On one hand, it seems that a list of suspect virtual currency addresses published by the Treasury Department will help businesses avoid transactions with individuals or entities that are currently subject to U.S. sanctions.  This obviously limits SDNs’ ability to enter the United States financial system.  For those financial institutions interested in virtual currency—which is by its nature global—this new information will at least provide guideposts in foreign territory, both digital and geographic.  On the other hand, the relative ease with which an individual could potentially create a digital wallet on a foreign virtual currency exchange (a place for buying and selling virtual currency) without disclosing their identity may make the list outdated upon inception.  Once SDNs sees their wallet address listed, they will likely change their address or change their currency.  These changes could happen almost instantaneously, making transfers difficult to track.  In other words, these guideposts may become misleading as quickly as they are created.

Ultimately, the nature of blockchain technology, a public, decentralized ledger of transactions in a given virtual currency, may also aid the government and financial institutions in weeding out SDN-related transactions. In its earliest inception, virtual currency was used, in some instances, to fund illicit activity over the internet.  A prime early example was the Silk Road, which allowed users to anonymously buy illegal drugs—among many other things—with virtual currency.  To a certain extent, this technology still allows criminals to sidestep traditional depository institutions and send value around the world instantly and without cost.  But, some of the anonymity of virtual currency has disappeared.  Exchanges—regarded by FinCEN as money services businesses subject to the Bank Secrecy Act—require with increasing frequency users to complete a “Know Your Customer” intake process.  Moreover, since all transactions are noted in a public ledger, only a thin alphanumeric layer—the wallet address—lies between anonymity and publicity.  Once a wallet address is linked to an SDN, it may lead the government to other bad actors working in concert with SDNs and help fortify information on the SDN list.  Very few virtual currencies are completely anonymous today and OFAC has clearly signaled its intent to further thwart attempts at anonymity.

How this new development at Treasury will impact virtual currency markets and the increasing number of businesses that have embraced virtual currency remains to be seen.  There is still no indication of how many SDNs use virtual currency, as opposed to more traditional methods, to enter the United States financial system.  But, we do know that OFACs call for entities dealing in virtual currency to develop compliance plans is easy in theory, but difficult in practice.  Virtual currency companies will have to quickly develop and rigorously maintain compliance plans to fit with ever-evolving technology and ever-changing wallet addresses.

Copyright © by Ballard Spahr LLP

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About this Author

Andrew D'Aversa, Ballard Spahr, Philadelphia, Litigation White Collar Attorney
Associate

Andrew N. D'Aversa is an associate in the Litigation Department and was a summer associate with the firm in 2016. He focuses his practice on white collar defense. He has experience in matters involving money laundering and the application of state money services statutes and regulations to virtual currency and related products. Andrew maintains an active pro bono practice working with the Pennsylvania Innocence Project. Andrew is a frequent contributor to Money Laundering Watch, Ballard Spahr’s blog focused exclusively on money laundering issues.

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