More than 15 million crypto addresses have been linked to criminal activity with a nexus in Russia, a new GDF report says.
GDF (GBBC Digital Finance) has issued a new report outlining efforts by the crypto industry to comply with sanctions, and offering recommendations to policymakers to further mitigate sanctions evasion risks.
The report says Russia’s invasion of Ukraine has accelerated public policy discussions about the potential role of cryptoassets in facilitating sanctions evasion.
Industry response
In March 2022, GDF convened an Emergency Sanctions Summit, bringing together the global crypto and digital assets community as well as policymakers to plan for and prepare the industry response to the sanctions imposed by agencies across the globe.
A key theme of the summit was overcoming the misconception of many, that the cryptocurrency ecosystem would be used to significantly avoid sanctions by Russian banks, institutions, and targeted individuals. Whilst the size of the crypto market and transparency of the ecosystem renders it unsuitable for large scale sanctions evasion, the industry “has been vigilant in the enforcement of sanctions”, GDF says.
A GDF Sanctions Working Group was mobilised with the aim to engage with agencies on the industry’s needs, as well as to communicate the ways in which the industry is “well-equipped and has responded effectively” to deal with sanctions evasion risks.
GDF’s crypto market analysis members have meanwhile worked to understand the full extent of crypto activity in Russia and have provided knowledge and education, analysis and reports, and free sanctions screening tools to the industry. More than 15 million crypto addresses have been linked to criminal activity with a nexus in Russia, the report says.
Regulatory frameworks
The report provides an overview of existing legal and regulatory requirements affecting crypto assets, describes sanctions compliance capabilities in the sector, and summarises actions undertaken by the public and private sectors to disrupt potential sanctions evasion risks related to crypto assets.
The report says existing legal and regulatory frameworks are “generally sufficient” to mitigate the risks of cryptoassets being abused for sanctions evasion, but that frameworks should be reassessed periodically to ensure they remain fit for purpose.
Emphasis should also be placed on ensuring that existing frameworks are enforced effectively, and that public sector agencies are sufficiently resourced to address emerging risks and investigate potential cases of sanctions evasion.
The report emphasises that the transparency of crypto transactions acts as a “powerful mitigant” that limits their utility for sanctions evasion, in part because it exposes sanctioned actors to potential identification.
Sanctions enforcement
“The open, public nature of cryptoasset blockchains ensures that transactions are transparent and traceable,” GDF says, adding that agencies responsible for sanctions enforcement can leverage this traceability to counter attempted circumvention.
Agencies enforcing sanctions should be provided with enhanced funding, resources, training, and access to crypto-specific investigative capabilities, the report recommends.
In addition, they should establish appropriately skilled, dedicated points of contact responsible for liaising with the private sector on crypto-specific topics, given the highly technical nature of cryptoassets and related sanctions compliance issues.
“This can enable a more fluid channel of communication and will assist public sector agencies in synthesising learnings and insights from the cryptoasset industry.”
Countries should also pursue a ‘whole-of-government’ approach to addressing sanctions evasion risks that leverages not just regulatory capacity, but also law enforcement and national security agencies as well.
Technical solutions
The report also notes that the crypto industry has developed technical solutions that enable compliance with sanctions measures, though noting that the use of these solutions across is still “uneven” – due in part to insufficient regulatory clarity and enforcement gaps.
Solutions are available to detect potential sanctions evasion, including by identifying sanctioned counterparties in transactions, addresses belonging to sanctioned parties, and transactions involving entities in sanctioned jurisdictions.
Solutions also exist for enabling compliance with the Travel Rule, which requires identification and sanctions screening of transaction beneficiaries and originators. Closing Travel Rule implementation and enforcement gaps is “critical to ensuring that sanctioned actors cannot exploit cryptoassets successfully,” the report says.
The report says further adoption of these solutions across the industry can be facilitated through accelerated implementation of regulation and more robust regulatory guidance.
Intelligence sharing
“Where sanctions evasion risks do exist, these can be countered through focused efforts by public and private sector stakeholders,” GDF says, noting successes already demonstrated by the industry and the public sector in disrupting attempted sanctions evasion through crypto.
“These efforts can be enhanced by deepening public-private intelligence sharing, education, and communication partnerships.”
The report calls on governments to work with the crypto industry to establish public-private partnerships to share actionable intelligence, insights, and best practices on crypto and sanctions issues.
The public sector should also leverage regulatory sandboxes and “tech sprint” initiatives to identify opportunities alongside the private sector for enhancing responses to sanctions challenges.
Public sector agencies should also look to provide the crypto industry with “more robust and forward-looking regulatory guidance” on crypto-specific technical compliance challenges related to sanctions, including to address uncertainties regarting DeFi, NFTs and cryptoasset mining.
The full report is published here.
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The GDF is the world’s largest industry association for the blockchain technology and digital assets ecosystem, following a merger between the Global Blockchain Business Council and Global Digital Finance announced in May.
