Bad News for Fraudsters as US Boosts Crypto-Crime Toolkit

The U.S. Treasury Department is flexing its cryptocurrency enforcement muscles as industry attention grows.

The turbulent crypto sector has historically suffered from the perception that its anonymous and decentralized technical architecture provides a haven for money laundering and other illicit activities around the globe.

“2022 was a really big year for sanctions,” Andrew Fierman, head of sanctions strategy at leading blockchain intelligence and data platform Chainalysis, told PYMNTS, noting the shift towards larger services and operations coming into focus.

“Historically we were looking at singular ransomware actors, now we are looking at entire exchanges, darknet markets, and a lot more aspects of crypto-crime related activity,” he added, while also referencing other findings in the company’s soon-to-be-released “Crypto Crime Report.”

Playing a starring role in broadening crypto oversight is the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), a financial intelligence and enforcement agency that administers and enforces economic and trade sanctions, and now the Financial Crimes Enforcement Network (FinCEN).

For example, PYMNTS reported last week (Jan. 18) the Hong Kong-based cryptocurrency exchange Bitzlato had assets seized and its Russian national founder arrested in Miami.

“Whether you break our laws from China or Europe — or abuse our financial system from a tropical island — you can expect to answer for your crimes inside a United States courtroom,” said U.S. Deputy Attorney General Lisa O. Monaco in a release announcing the charges.

Building Out the Crypto Crime Toolkit

Fierman says that he sees 2023 as being ripe for more crypto sector sanctions and FinCEN identifications as agencies begin to strategically use and add to the regulatory weapons in their arsenal.

“Just last week FinCEN utilized a new action under their Section 9714 Authority to put Bitzlato on essentially a ‘do not use’ list,” he told PYMNTS. “Not quite sanctions, but it’s a new power that the U.S. government can use to cut out illicit activity from the blockchain. So in addition to OFAC, we now have this authority through FinCEN, and it just expands the Rolodex of tools the U.S. government has to identify illicit actors operating on the blockchain.”

The fact that the blockchain is inherently transparent, with transactions across it being logged on an immutable ledger, gives regulatory bodies unique insights that aren’t necessarily accessible in traditional finance.

“For entities that OFAC has put on their ‘Specially Designated Nationals And Blocked Persons’ [SDN] list, it essentially means you can’t do business with them — if you were to receive funds or be part of a transaction, those funds would have to be blocked and essentially custodied by that service and not processed onward,” while Fierman added, when it comes to the new FinCEN order, “you have to reject them essentially and return them back to the source of where they came from,” adding that this cuts the funds out from the use of the U.S. financial system but does not constitute a full asset freeze.

Year in Review — 2022’s Big Three Cases

OFAC sanctioned a somewhat balanced list of individuals and different types of entities in 2022, per Chainalysis data, citing activity such as cybercrime, drug trafficking, money laundering, and even participation in Russia’s invasion of Ukraine.

“You’re looking at everything from multibillion-dollar services to small militia groups. But it just goes to show how comprehensive the sanctions actions have been this year for OFAC,” Fierman said.

Compared to OFAC’s 2018-2021 designations — which were mainly against individuals and were comprised, at the blockchain level, of a small number of personal wallets — 2022’s actions represent a huge change in the agency’s focus and reach.

Chainalysis highlights three notable cases: darknet market Hydra, decentralized mixer Tornado Cash, and Russia-based cryptocurrency exchange Garantex. Each underscores a unique challenge of enforcing sanctions against different types of crypto entities and highlight the impact those sanctions can have.

“What we really wanted to look at is the impact of those regulatory designations. Garantex, which is a Russian exchange — they’ve continued to operate despite being sanctioned — whereas Hydra, the darknet market, had a law enforcement takedown,” Fierman told PYMNTS. “A law enforcement takedown combined with sanctions is a really effective way of nullifying bad behavior.

“Tornado Cash is a smart contract-based mixing service that was sanctioned by OFAC for engaging in over $455 million of laundered proceeds and stolen funds from North Korea. Once it was sanctioned, U.S. users were essentially disincentivized from using the service, and we saw a dwindle-down effect where the service was used less and less over time, even though it couldn’t necessarily be shut down. So these sanctions can certainly stop U.S. persons, or just those more generally who don’t want to be tied to violating sanctions, from using that service,” Fierman said.

Cybercriminals are going to choose those services that have fewer requirements to get onto the platform, he added, emphasizing that by shutting down services like Bitzlato agencies are able to purge bad actors out of the crypto ecosystem, or at the very least give them one less avenue to cash out or launder their illicit gains.

As for what role he sees Chainalysis playing in the future?

“We have to look at the industry and understand what’s going on in the entire ecosystem. Our job is to identify who these actors are and then share that with the ecosystem.”