Bad News for Fraudsters as US Bolsters Crypto-Crime Toolkit

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

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

“2022 has been a very big year for sanctions,” Andrew Fierman, head of sanctions strategy at leading blockchain data and intelligence platform On-chain analysistold PYMNTS, noting the move toward larger services and operations.

“Historically, we looked at singular ransomware actors, now we look at entire exchanges, darknet markets, and many other aspects of cryptocurrency-related activity,” he added, while also referencing to further findings in the company’s next report. -released “Crypto Crime Report.”

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) plays a leading role in expanding crypto surveillance, a financial intelligence and law enforcement agency that administers and enforces sanctions Economics and Trade, and now the Financial Crimes Enforcement Network (FinCEN).

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

“Whether you’re breaking our laws from China or Europe – or abusing our financial system from a tropical island – you can expect to answer for your crimes in US court,” the US Deputy Attorney General said. Lisa O. Monaco in a Release announcing the charges.

Building the Crypto Crime Toolkit

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

“Last week, FinCEN used a new action as part of their Section 9714 Authority to essentially put Bitzlato on a ‘do not use’ list,” he told PYMNTS. “Not quite sanctions, but it’s a new power that the US government can use to weed out illicit blockchain activity. So, in addition to OFAC, we now have that authority through FinCEN, and that only expands the Rolodex of tools available to the US government to identify illicit actors operating on the blockchain.

The fact that the blockchain is inherently transparent, with transactions recorded on it on an immutable ledger, gives regulators unique insights not necessarily accessible in traditional finance.

“For entities that OFAC has put on their ‘Specially Designated Nationals and Blocked Persons’ [SDN] list, that basically 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 held by that service and not further processed,” while Fierman added, regarding the new FinCEN order, “you basically have to reject them and return them to the source where they came from,” adding that this cuts off funds from using the US financial system but does not constitute a total asset freeze.

Year in Review – The Three Big Cases of 2022

OFAC sanctioned a somewhat balanced list of individuals and different types of entities in 2022, per On-chain analysis dataciting activities such as cybercrime, drug trafficking, money laundering and even participating in the Russian invasion of Ukraine.

“You look at everything from multi-billion dollar services to small militia groups. But it shows how comprehensive the sanctions have been this year for OFAC,” Fierman said.

Compared to OFAC’s 2018-2021 designations – which were primarily against individuals and included, at the blockchain level, a small number of personal wallets – the 2022 actions represent a huge shift in the focus and scope of the agency.

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

“What we really wanted to examine was the impact of these regulatory designations. Garantex, which is a Russian exchange – they continued to operate despite sanctions – while Hydra, the darknet market, was taken down by law enforcement,” Fierman told PYMNTS. “A law enforcement withdrawal combined with sanctions is a really effective way to undo bad behavior.

“Tornado Cash is a contract-based smart mixing service that was sanctioned by OFAC for engaging in over $455 million in proceeds laundered and stolen funds in North Korea. Once it was sanctioned, US users were essentially discouraged from using the service, and we saw a waning effect where the service was used less and less over time, even though it could not necessarily be shut down. So these sanctions can certainly prevent US citizens, or just those who don’t want to be tied to sanctions violations, from using this service,” Fierman said.

Cybercriminals will choose services that have fewer requirements to access the platform, he added, pointing out that by shutting down services like Bitzlato, agencies are able to purge bad actors from the crypto ecosystem, or at the very least give them one less. ability to cash out or launder their illicit gains.

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

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