Using Crypto Tech to Promote Sanctions Compliance | by Coinbase | Mar, 2022

Using Crypto Tech to Promote Sanctions Compliance

By Paul Grewal, Chief Legal Officer

Coinbase is committed to building a safe and responsible financial system that promotes economic freedom around the world. We strive to be the most trusted platform for buying, selling, and exchanging digital assets, helping everyday people to participate in the crypto economy. We earn that trust by working hard to ensure the integrity of all transactions supported by our platform, and a critical part of that goal is our compliance with economic sanctions.

Coinbase is committed to complying with sanctions

In the past few weeks, governments around the world have imposed a range of sanctions on individuals and territories in response to Russia’s invasion of Ukraine. Sanctions play a vital role in promoting national security and deterring unlawful aggression, and Coinbase fully supports these efforts by government authorities. Sanctions are serious interventions, and governments are best placed to decide when, where, and how to apply them.

No compliance program is perfect, including ours. But to play our part in these critical economic sanctions, Coinbase implements a multi-layered, global sanctions program. We take steps to:

• Block access to sanctioned actors. During onboarding, Coinbase checks account applications against lists of sanctioned individuals or entities, including those maintained by the United States, United Kingdom, European Union, United Nations, Singapore, Canada, and Japan. To open a Coinbase account, individuals and entities must provide identifying information, including their name and country of residence. We screen this information via an independent vendor before permitting an individual to transact. If a customer lives in a sanctioned country or region, or if they are identified as a sanctioned individual or entity, they cannot open an account on our platform. Similarly, we use geofencing controls to prevent access to the Coinbase website, as well as our products and services, by anyone using an IP address in a sanctioned geography (e.g., Crimea, North Korea, Syria, and Iran). We routinely subject our sanctions compliance program to internal testing and independent audits by third-parties.
• Detect attempts at evasion. Coinbase regularly updates the global sanctions lists that we use for screening. If someone has opened a Coinbase account and is later sanctioned, we use this ongoing screening process to identify that account and terminate it. Because sanctions evaders often try to mask their identities, Coinbase also proactively works to map transactions beyond the entities and individuals specifically flagged by governments. This allows us to identify potentially related parties and block accounts associated with prohibited actors.
• Anticipate threats. Coinbase maintains a sophisticated blockchain analytics program to identify high-risk behavior, study emerging threats, and develop new mitigations. For example, we have methods for identifying accounts held by sanctioned individuals outside of Coinbase, even if we don’t have direct access to their personal information. For example, when the United States sanctioned a Russian national in 2020, it specifically listed three associated blockchain addresses. Through advanced blockchain analysis, we proactively identified over 1,200 additional addresses potentially associated with the sanctioned individual, which we added to our internal blocklist. This is just one example. Today, Coinbase blocks over 25,000 addresses related to Russian individuals or entities we believe to be engaging in illicit activity, many of which we have identified through our own proactive investigations (Note: this figure isn’t specific to the time period since the invasion of Ukraine, most of these addresses we identified prior to the invasion, and we have not seen a surge in sanctions evasion activity in the post-invasion context). Once we identified these addresses, we shared them with the government to further support sanctions enforcement.

Crypto technology enhances sanctions compliance efforts

The benefits of digital assets for sanctions enforcement extend beyond these initiatives. Digital assets have properties that naturally deter common approaches to sanctions evasion.

Ordinary fiat currency laundered through traditional financial institutions remains one of the most common mechanisms for sanctions evasion and money laundering. As the United States Treasury noted of sanctions against Iran, the “Iranian regime has long used front and shell companies to exploit financial systems around the world” to evade sanctions.

An entire money laundering industry has emerged to hide assets in ordinary fiat currency using these techniques. By transacting through shell companies, incorporating in known tax havens, and leveraging opaque ownership structures, bad actors continue to use fiat currency to obscure the movement of funds. In this way, they leave complex financial trails that are difficult to trace, requiring investigators to separately request information from many different financial institutions, and follow a trail across multiple countries (some of which refuse to cooperate or take years to produce records).

By contrast, digital asset transactions are traceable, permanent, and public. As a result, digital assets can actually enhance our ability to detect and deter evasion compared to the traditional financial system.

• Public. Public blockchains offer unprecedented visibility into the details of transactions, including information about the date and time of each transaction, the type of virtual asset transacted, the amount, the wallet addresses involved, and the unique transaction identifier. Suspicious transaction activity can be traced without needing to gather information from multiple financial institutions. These advantages for investigation and enforcement simply do not exist with cash transactions or transactions across multiple countries.
• Traceable. When applied to public blockchain data, analytics tools offer law enforcement additional capabilities. In many cases, law enforcement can trace the transaction history of a wallet from the very first transaction, follow transactions in real time, and group transactions according to risk level based on interactions with other wallets. Other techniques can help authorities to follow transactions between chains or through intermediaries. For example, Coinbase’s proactive on-chain analysis identified more than 16,000 addresses possibly associated with Iranian exchanges, many of which had not yet been identified by others. We used this analysis to strengthen our compliance systems and inform law enforcement in order to enhance industry-wide awareness.
• Permanent. Once recorded on the blockchain, transactions remain immutable. No one (not crypto companies, not governments, not even bad actors) can destroy, alter, or withhold information to evade detection.

In addition to these technical advantages, adoption of digital assets is still nascent, making their use for widespread sanctions evasion — the kind that robs sanctions of their impact — unlikely, a fact recently noted by a national security expert.

For example, the Russian government and other sanctioned actors would need virtually unobtainable amounts of digital assets to meaningfully counteract current sanctions. The Russian central bank alone holds over $630 billion in largely immobilized reserve assets. That’s larger than the total market capitalization of all but one digital asset, and 5–10x the total daily traded volume of all digital assets. As a result, trying to obscure large transactions using open and transparent crypto technology would be far more difficult than other established methods (e.g., using fiat, art, gold, or other assets). This doesn’t mean that bad actors can’t try, but circumventing restrictions on this scale would require massive purchases that would be prohibitively expensive and detectable, as this buying activity would likely lead to price spikes.

We are always working to build trust in the crypto industry

These are just some of the ways that industry best practices and crypto technology help to support sanctions compliance. Of course, no traditional or crypto business can guarantee that its sanctions controls are completely airtight. Malicious individuals may find ways around even the strongest barriers.

The transparency of the blockchain is a formidable tool for law enforcement, and platforms like Coinbase work very hard to partner with law enforcement to root out bad actors. There is also a legitimate interest in protecting the privacy of individuals — a public policy principle long recognized in the traditional financial system. We believe we can balance these interests by continuing to support law enforcement efforts while promoting policy frameworks that respect individual privacy.

Coinbase helps everyday people to protect, build, and share their wealth through crypto technology. At the same time, we vigorously work to promote security, safety, and transparency on our platform, including through our commitment to sanctions compliance. We welcome public scrutiny of the crypto industry, and will continue working to enhance our overall compliance program and industry compliance standards. This is an integral part of our ongoing commitment to remaining the trusted platform that we, our customers, and the public expect.