Bad News For Fraudsters As U.S. Expands Crypto-Crime Toolkit
As business interest develops, the U.S. Treasury Department is enforcing cryptocurrency laws.
Due to its anonymous and decentralized technical design, the volatile crypto industry has long been viewed as a sanctuary for money laundering and other illegal activities.
“2022 was a really big year for sanctions,” Andrew Fierman said, head of sanctions strategy at leading blockchain intelligence and data platform Chainalysis, noting the shift towards more effective 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 referencing other findings in the company’s soon-to-be-released “Crypto Crime Report.”
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) is leading crypto supervision expansion (FinCEN).
In Miami, Bitzlato’s Russian founder was detained, and its assets confiscated.
“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.
Cryptocrime Toolkit Development
Fierman expects additional crypto sector sanctions and FinCEN identifications in 2023 as agencies strategically deploy and increase regulatory weapons.
“Just last week, FinCEN utilized a new action under their Section 9714 Authority to put Bitzlato on essentially a ‘do not use’ list,” he said.
“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 blockchain’s transparent, unchangeable ledger provides regulatory authorities with information that traditional finance can’t offer.
“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 complete asset freeze.
The Big Three Cases of 2022
According to Chainalysis statistics, OFAC sanctioned a balanced list of persons and businesses in 2022 for cybercrime, drug trafficking, money laundering, and 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.
2022’s OFAC designations constitute a significant shift from 2018-2021’s, mainly against people and consisting of a few personal wallets on the blockchain.
Chainalysis features Hydra, Tornado Cash, and Garantex. Each illustrates the difficulty of imposing penalties against different crypto entities and their effects.
“What we 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. “A law enforcement takedown combined with sanctions is an 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 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.
He noted that by shutting down businesses like Bitzlato, authorities might cleanse bad actors from the crypto ecosystem or offer them one less way to cash out or launder their unlawful riches. Cybercriminals would select services with fewer restrictions to join.
Chainalysis’ future role?
“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.”
