Geopolitical Monitoring Report | November 4, 2022
Cryptocurrencies Seeing Mass Adoption, as Sanctions-Busting Tools.
Binance – one of the world’s largest crypto exchanges – is under fire after it has been revealed that approximately $7.8 billion in funds have been moved between the company and Iranian crypto exchange Nobitex since the US reinstituted sanctions on Tehran in 2018. Nobitex also provides guidance for users on how to evade Western sanctions on their website.
Approximately 75% of the funds that flowed to and from Iran were sent using an obscure cryptocurrency called Tron, which allows users to conceal their identity and was also not tracked by major blockchain analysis firms until recently. This provided an extra layer of anonymity to Iranian users and those violating sanctions. The news comes as Iran recently made its first “official” cryptocurrency import back in August with the goal of giving the country the ability to “circumvent” Western sanctions.
Iran is also reportedly providing subsidies to cryptocurrency miners and adopting regulations to streamline crypto adoption for international trade. However, with the increased effort by the West to enforce sanctions and disrupt the illicit flow of funds to Iran, it remains to be seen if Tehran’s sanctions-busting cryptocurrency international trade schemes will be effective. For example, the US Treasury Department just announced they were fining US-based crypto exchange Bittrex $29.3 million for violating sanctions and accepting customers from the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria. With the revelations that Binance has enabled similar transactions on its network, it is unlikely that Bittrex will be the last company that falls under Treasury Department scrutiny.
While individuals and criminal organizations have long valued cryptocurrencies for their perceived anonymity and lack of centralized control, the actions by Iran to enable the official use of cryptocurrencies for the expressed purpose of evading international sanctions is a major escalation. It is unlikely that Iran will remain the only heavily-sanctioned country to explore its use as a sanctions-busting tool. US Treasury officials have already warned that Russia may explore using cryptocurrencies as a way to avoid sanctions levied on the country following their invasion of Ukraine.
Economic sanctions have also increasingly been utilized by Western policymakers – particularly the US – in recent years. This face, coupled with the threat of increased aggression from nations like China, means that more entities and nation-states are likely to fall under Western sanctions and look to adopt their own sanctions-busting crypto payment system.
The top priority for companies in the crypto sphere should be to ensure that they are not doing business with individuals, entities, or nation-states that have been placed under sanctions. This requires comprehensive due diligence to ensure that your company is not at risk of facing significant fines, like Bittrex.
In addition, while most cyber security challenges for cryptocurrency exchanges are preventing the theft of customer funds, these companies should also look to safeguard proprietary algorithms and code that enable their operations. Countries setting up crypto-based, sanctions-busting may look to steal that technology, as they have no legal way of obtaining new knowledge and vendors to improve their own exchanges.
Finally, companies and organizations that are not in the cryptocurrency sector, but are partnering with crypto firms on projects, should also take steps to ensure that the exchange or organization they are partnering with does not have ties to any sanctioned individual, entity, or nation-state.
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