On August 8, 2022, the US Division of the Treasury’s Workplace of Overseas Property Management (OFAC) introduced the imposition of sanctions on the decentralized digital asset mixer Twister Money. The motion marks the primary time OFAC has focused an on-chain decentralized protocol. Up to now, OFAC has not issued any steerage particular to decentralized finance (DeFi) as a part of its broader sanctions steerage for the “digital forex” trade, however the Twister Money motion lays down an necessary marker and makes clear that OFAC will goal tasks or protocols engaged in illicit exercise no matter their centralized or decentralized standing. (Our prior weblog submit on OFAC’s common digital forex steerage is on the market right here).
In accordance with OFAC, Twister Money was “used to launder greater than $7 billion value of digital forex since its creation in 2019,” together with over $455 million stolen by the Lazarus Group, a North Korean-backed hacking group that was beforehand focused by OFAC sanctions. In asserting the motion, Below Secretary of the Treasury for Terrorism and Monetary Intelligence Brian Nelson defined, “Regardless of public assurances in any other case, Twister Money has repeatedly did not impose efficient controls designed to cease it from laundering funds for malicious cyber actors regularly and with out fundamental measures to deal with its dangers.”
What Occurred
Twister Money was added to OFAC’s Checklist of Specifically Designated Nationals and Blocked Individuals (SDN Checklist) pursuant to Govt Order (EO) 13694, “Blocking the Property of Sure Individuals Partaking in Vital Malicious Cyber-Enabled Actions.” The property and pursuits in property of an SDN should be blocked (i.e., frozen) when inside the USA or inside the possession or management of a US particular person, and US individuals are usually prohibited from coping with SDNs.
As well as, EO 13694 authorizes the SDN designation of any particular person decided to have “materially assisted, sponsored, or supplied monetary, materials, or technological assist for, or items or providers in assist of … any particular person whose property and pursuits in property are blocked pursuant to this order.” Whereas use of so-called “secondary sanctions” of this nature is discretionary, this provision signifies that any particular person, together with a non-US particular person appearing exterior the USA, is at potential threat in the event that they proceed to interact in dealings with Twister Money.
What it Means for Builders
The motion has necessary implications for builders of decentralized platforms. Specifically, it makes clear that decentralized tasks that launch with out contemplating sanctions compliance measures could threat designation by OFAC, threatening the undertaking’s viability and creating authorized dangers for these interacting with it, together with the builders. Whereas quite a lot of questions stay with respect to OFAC’s method to DeFi, the Twister Money motion sends a transparent message that OFAC will goal tasks engaged in illicit exercise no matter their centralized or decentralized standing.
Decentralized protocols have traditionally struggled to implement or implement sanctions compliance measures. Nevertheless, builders are more and more in search of artistic options, together with constructing sure consumer screening mechanisms into the protocol code. That may be a pattern that will proceed as builders search for methods to safeguard their tasks from future OFAC motion. Below Secretary Nelson’s feedback on the Twister Money designation recommend that the Treasury Division believes sure fundamental compliance measures are achievable.
What it Means for Prospects and Counterparties
The Twister Money designation highlights the significance of rigorously contemplating the controls in place at digital asset platforms earlier than utilizing the platform or interacting with the platform in one other method (e.g., sending tokens to or receiving tokens from the platform on behalf of a buyer). Sanctions compliance measures differ significantly throughout digital asset platforms and that variance is especially pronounced in decentralized contexts the place it may be harder for the platform to implement measures and harder for third events to acquire info on the measures in place. Happily, there are an rising variety of instruments, together with blockchain analytics, out there to help trade in assessing the relative dangers related to a given platform, together with decentralized platforms.
As famous above, OFAC has additionally issued steerage outlining its expectations with respect to sanctions compliance measures for the “digital forex trade.” The steerage outlines quite a lot of measures that must be integrated into a strong compliance program. Amongst different measures, firms coping with digital property ought to conduct an in depth threat evaluation that takes into consideration the platforms with which they work together, implement measures to determine and mitigate dangerous relationships, make the most of transaction monitoring and investigation instruments, and implement procedures to determine and act on threat indicators and crimson flags, a few of that are enumerated within the steerage. Whereas OFAC’s steerage doesn’t particularly tackle decentralized platforms, the Twister Money motion highlights the significance of implementing a strong sanctions compliance program throughout all facets of the digital asset ecosystem.
Corporations looking for additional details about financial sanctions compliance obligations within the digital asset house ought to contact a member of Steptoe’s Financial Sanctions Apply Group or Blockchain and Cryptocurrency Apply Group.