Key Takeaways

• A judge has issued an opinion in a first-of-its-kind criminal sanctions case involving the use of virtual currency to evade U.S. economic sanctions.

• The opinion reinforces the Treasury Department’s position that (1) virtual currency is traceable and (2) U.S. economic sanctions laws apply to virtual currencies.

In a pithy May 13, 2022, unsealed memorandum opinion (“Opinion”), U.S. Magistrate Judge Zia M. Faruqui, citing multiple Saturday Night Live YouTube clips, concluded:

• Issue One: virtual currency is untraceable? WRONG …
• Issue Two: sanctions do not apply to virtual currency? WRONG.

The case before the U.S. District Court for the District of Columbia, In re: Criminal Complaint, No. 22-mj-067-ZMF, involves an underlying case that is sealed and a defendant (the “Defendant”) whose name was redacted in the Opinion. The Opinion describes a U.S. citizen who allegedly conspired to set up and operate an online payments platform (the “Payments Platform”) based in a country subject to comprehensive U.S. sanctions. (Countries subject to comprehensive U.S. sanctions include Cuba, Iran, North Korea, and Syria.) According to affidavits from U.S. law enforcement cited in the ruling, the Defendant sent more than $10 million worth of bitcoin via a virtual currency exchange to the sanctioned country.

Facts cited to in the Opinion provide that the Payments Platform specifically advertised that its services were designed to “circumvent” U.S. sanctions, “including via purportedly untraceable virtual currency.” As the court filings demonstrate, however, enforcement authorities were able to use blockchain analysis tools to trace the Defendant’s actions notwithstanding the virtual currency’s anonymizing features. The Opinion states, “[l]aw enforcement synthesized subpoena returns from virtual currency exchanges, email search warrant returns, banking information, and shell company registration information to reliably dox Defendant.”

Beyond being traceable, transactions involving virtual currency also are subject to U.S. economic sanctions laws when there is a U.S. nexus. Judge Faruqui’s opinion quotes the Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) October 2021 guidance, “Sanctions Compliance Guidance for the Virtual Currency Industry” (see our OnPoint), which describes how sanctions compliance obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies.

The opinion acknowledges that courts are widely deferential to executive agencies addressing U.S. national security matters, including with respect to OFAC’s interpretation of the International Emergency Economic Powers Act (“IEEPA”). IEEPA provides the statutory basis for many U.S. economic sanctions regimes.

Judge Faruqui’s opinion is reportedly the first – but will likely not be the last – judicial opinion upholding OFAC’s position that U.S. economic sanctions laws apply to virtual currencies. Service providers involved in virtual currency transactions should be mindful of implementing and maintaining robust U.S. economic sanctions compliance programs.