Targeted Sanctions May Be Best Tool To Combat Rogue Cryptocurrency Exchanges

Not all cryptocurrency transactions need to be viewed as suspect. In fact, a 2019 evaluation by Chainanalysis indicates a significantly lower percentage of economic bitcoin activity was comprised of illicit transactions in 2018 than in 2012. But just because more legitimate economic actors are using cryptocurrency doesn’t mean that bad actors aren’t still exploiting cryptocurrency’s vulnerability. This article will explore one problem that persists: rogue cryptocurrency exchanges.

As this Royal United Services Institute (RUSI) commentary explains, rogue cryptocurrency exchanges remain a serious impediment to the widespread integration of cryptocurrency into the traditional economy. Criminals who acquire cryptocurrency use rogue exchanges, which are frequently located in jurisdictions with inadequate anti-money laundering controls, to exchange their unlawfully acquired cryptocurrency for standard fiat currency. This is a difficult challenge to overcome, but as RUSI explains, the cause it not hopeless.

The Financial Action Task Force (FATF) is already addressing the issue. “In October 2018, [FATF] decided that anti-money laundering and counter-terrorist financing obligations should be extended to ‘virtual asset service providers,’, including both crypto-to-fiat and crypto-to-crypto exchanges.” It should only be a matter of time before more jurisdictions begin crafting regulations to fall-in-line.

But the problem isn’t limited to the fact that many jurisdictions lack the legal framework to control cryptocurrency exchanges. A separate problem is that enforcement actions against cryptocurrency exchanges have been rare. RUSI points to two possible related reasons for the lack of enforcement actions against exchanges. First, some jurisdictions may not require cryptocurrency exchanges to adopt anti-money laundering programs like they would for traditional banks. Second, the “less responsible exchanges can be located in jurisdictions with less than robust supervisory regimes.”

RUSI gives a few suggestions for how to deal with the problem rogue cryptocurrency exchanges present. Individual jurisdictions can utilize existing general criminal laws penalizing money laundering or other criminal activity when regulations applying specifically to cryptocurrency exchanges do not yet exist. But a better solution RUSI proposes is to aim for rogue exchanges through targeted sanctions, “which prohibit individuals and companies within the relevant state’s jurisdiction from transacting with the sanctioned person.”

This may very well prove to be the mechanism of choice by which rogue cryptocurrency exchanges are controlled. The RUSI commentary cites the US Treasury’s 2018 move to freeze the assets of two Iranian citizens who were allegedly acting as cryptocurrency exchangers for cybercriminals. Significantly, the US Treasury listed these individuals’ cryptocurrency addresses when announcing the move.

Though targeted sanctions will not result in the imprisonment of bad actors, RUSI does maintain they can have a “devastating” effect. Targeted rogue exchanges should find it far more difficult to do business and their role in the cryptoeconomy will in all likelihood be reduced.