On October 15, 2021, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) released guidance on sanctions compliance for the digital currency industry, the agency’s most detailed statement to date on its expectations for participants in this rapidly growing industry. This guidance expands on the five pillars of OFAC’s 2019 Framework by specifying best practices for implementing a sanctions compliance program (SCP) program for participants in the digital currency industry. While the guidance provides helpful clarity for the digital currency industry on key sanctions compliance challenges, unaddressed issues nevertheless remain.

In the following update sent today, we briefly summarize OFAC’s guidance, highlighting practical implications for both digital currency companies and customers. Regarding the scope of OFAC’s guidance, it defines the digital currency industry to include not just exchangers and administrators, but also wallet providers and, notably, technology companies and miners.

Agency’s Focus on Cryptocurrency and Blockchain Continues

On September 21, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) released an updated advisory to “highlight the sanctions risks associated with ransomware payments”—almost one year after issuing the first such guidance—and simultaneously imposed sanctions on SUEX, a virtual currency exchange accused of facilitating illegal transactions related to ransomware attacks.  These developments highlight OFAC’s continuing focus on sanctions violations that broadly involve virtual currencies and digital assets.  We briefly describe the agency’s actions below.

Ransomware Advisory

OFAC’s updated ransomware advisory is thematically similar to its initial guidance on the topic from October 2020.  It emphasizes U.S. national security interests in preventing ransomware payments to persons, entities, or jurisdictions subject to trade or economic sanctions programs.  As in the original guidance, it also warns U.S. persons to be vigilant when considering such payments and encourages ransomware victims to consult with law enforcement agencies before taking any action.

The updated advisory goes further, however, explaining that OFAC will consider a company’s actions both before and after a ransomware attack in determining an appropriate response to sanctions violations that may occur.  Specifically, and as part of an effective sanctions compliance program, OFAC emphasizes the importance of:

  • taking proactive steps to “reduce the risk of extortion by a sanctioned actor through adopting or improving cybersecurity practices”; and
  • reporting ransomware attacks to “appropriate U.S. government agencies” and cooperating with them in responding to such attacks.

According to the updated advisory, OFAC will consider these actions as mitigating factors under its Economic Sanctions Enforcement Guidelines, giving “significant” weight to prompt reporting of a ransomware event to authorities as well as “ongoing cooperation” in any investigation or remediation that follows. This guidance highlights the importance of developing and implementing clear escalation procedures to ensure that reports regarding ransomware and other types of extortionate demands that may raise sanctions risks are timely reported internally and externally, as appropriate.

SUEX Designation

For the first time, OFAC designated virtual currency exchange SUEX as a specially designated national (SDN), meaning that U.S. persons and companies are broadly barred from direct or indirect transactions involving the exchange or any entity of which the exchange owns 50 percent or more, directly or indirectly, either alone or in the aggregate with other SDNs (e.g., its subsidiaries).  SUEX was sanctioned under Executive Order 13694, which authorizes sanctions against persons or entities engaged in “malicious cyber-related activities.”

In taking this first-ever action against a virtual currency exchange, OFAC acknowledged that “most virtual currency activity is [legal],” but that cybercrimes often involve use of cryptocurrencies.  To that end, the agency explained that more than 40% of SUEX’s transaction history involved “illicit actors.”  OFAC did not, however, detail the specific activity leading to SUEX’s designation, nor did it identify customers or counterparties of SUEX for sanctions.

Perhaps in a sign of additional scrutiny to come, OFAC made clear that participants in the “virtual currency industry play a critical role in implementing appropriate AML/CFT and sanctions controls” and affirmed its support for multinational efforts to “inhibit cybercriminals’ exploitation of virtual assets.”

Recommendations

With these two significant actions, companies should consider taking the following steps:

  1. Improve Cybersecurity Practices to reduce the risk of a ransomware attack. This also will be considered a significant mitigation factor under OFAC’s Economic Sanctions Enforcement Guidelines.
  2. Revise the Company’s existing Sanction Compliance Program to specifically address the steps that Company personnel should take in the event of a ransomware attack, including a.) implementing escalation procedures in the event of a ransomware demand that may raise sanctions risks; and b.) promptly reporting ransomware attacks to law enforcement and/or OFAC.
  3. Digital currency trading platforms should review their user accounts to determine if SUEX has an account. They also should consider whether they have users who conduct multiple deposits and withdrawals with SUEX.

We will continue monitoring related developments and provide updates as warranted.  Please do not hesitate to contact us with questions.

We are pleased to announce that Valeria Bystrowicz-Liendo, a Business Development Director in the firm’s Blockchain, Digital Assets, & Custody industry group, will serve as a Board Member and as the Los Angeles, San Diego, and Orange County Chapter lead for Crypto Connect.

Crypto Connect, which formally launched today, is led by a board of 26 women leaders in the blockchain and cryptocurrency industry. It is a nonprofit, decentralized organization dedicated to sponsoring educational and networking opportunities for the cryptocurrency industry. The board members work in industry, law, academia, marketing, and the media among other sectors. Today Crypto Connect is launching in twelve major cities across the U.S with plans to expand to other cities worldwide by 2022. To learn more, please visit www.cryptoconnect.org.

Crypto Connect kicks off in twelve major cities across the U.S. —Austin, Chicago, Dallas, DC, Denver, Los Angeles, Miami, Nashville, New York, San Diego, San Francisco and Seattle — with plans to expand to other cities worldwide by 2022.

“I’m thrilled to be a part of Crypto Connect, alongside so many amazing women in crypto!” said Valeria Bystrowicz. “My connection to cryptocurrency technology is visceral. As an Argentinian native I faced a lifetime of financial crisis endured by my entire country and family.” She was introduced to Bitcoin in 2014 and a whole new world opened up for her. “Only when you grew up seeing how hyperinflation eroded your family’s life savings, seeing the whole banking system collapse in front of your eyes, you truly appreciate the revolutionary potential of cryptocurrencies.” Crypto Connect “Is a great resource for the community that will provide education and networking opportunities to the blockchain and cryptocurrency space.”

 

Valeria is a dual licensed attorney (California/Argentina). She joined Perkins Coie in 2015 and practiced at the forefront of the blockchain/distributed ledger technology (DLT) as a Senior Attorney in the Blockchain Technology & Fintech Industry Group. She recently pivoted to a business development director role within the firm, which draws on both her professional skills as well as her deep industry alliances, to facilitate smooth and productive business relationships for her clients.

President and Chapter Leads, who also sit on the Board, include:

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Other U.S. Board Members include:

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Crypto Connect also has International Board Members that will help support global expansion of the organization:

  • Layah Heilpern, Author & Host @ The Layah Heilpern Show
  • Teana Baker-Taylor, Chief Policy Officer @ Chamber of Digital Commerce

Perkins Coie LLP is pleased to bring you this updated Digital Asset SEC Timeline.

The Digital Asset SEC Timeline serves as an interactive compilation of select SEC guidance, enforcement actions, and speeches relating to the application of the federal securities laws to digital assets. Beginning with the release of the DAO Investigative Report in July 2017, the Timeline includes relevant information for analyzing the offering, issuance, and trading of certain digital assets in the context of the federal securities laws.

This Timeline is meant to be a resource for those following SEC actions and guidance related to digital assets and to assist experienced securities counsel in assessing the applicability of the federal securities laws. The Timeline is for informational purposes only and does not constitute legal advice. If you are, or are planning to engage in transactions involving digital assets, you may want to contact experienced securities counsel.

Information in the Timeline is provided “as-is,” and may not reflect the latest guidance from the SEC and/or other federal or state regulatory authorities. The Timeline contains links to third-party websites. Such links are only for the convenience of the reader or user. Use of and access to the Timeline, including the links contained within the Timeline, do not create an attorney-client relationship with Perkins Coie LLP.

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Continue Reading Blockchain Week in Review: Week of August 30, 2021

Weekly Fintech Focus

  • Congress Members Reintroduce Bill to Define Digital Assets
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  • DraftKings Announces Launch NFT Digital Marketplace
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Continue Reading Virtual Currency Legal Report – Week of July 19

Weekly Blockchain Focus

  • European Central Bank announces the investigation phase of a digital Euro project.
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  • Federal court order permanently bans PaxForex and imposes a $300,000 penalty for offering illegal leveraged transactions in Bitcoin, Ether, Litecoin, and precious metals.
  • Shapeshift announces “largest airdrop in history” as it attempts to become a fully decentralized exchange.
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  • Tom Brady and Gisele Bündchen take a stake in cryptocurrency exchange FTX.

Continue Reading Blockchain Week in Review: Week of July 12, 2021

Perkins Coie LLP is pleased to bring you this updated Digital Asset SEC Timeline.

The Digital Asset SEC Timeline serves as an interactive compilation of select SEC guidance, enforcement actions, and speeches relating to the application of the federal securities laws to digital assets. Beginning with the release of the DAO Investigative Report in July 2017, the Timeline includes relevant information for analyzing the offering, issuance, and trading of certain digital assets in the context of the federal securities laws.

This Timeline is meant to be a resource for those following SEC actions and guidance related to digital assets and to assist experienced securities counsel in assessing the applicability of the federal securities laws. The Timeline is for informational purposes only and does not constitute legal advice. If you are, or are planning to engage in transactions involving digital assets, you may want to contact experienced securities counsel.

Information in the Timeline is provided “as-is,” and may not reflect the latest guidance from the SEC and/or other federal or state regulatory authorities. The Timeline contains links to third-party websites. Such links are only for the convenience of the reader or user. Use of and access to the Timeline, including the links contained within the Timeline, do not create an attorney-client relationship with Perkins Coie LLP.

Perkins Coie LLP is pleased to bring you this updated Digital Asset SEC Timeline.

The Digital Asset SEC Timeline serves as an interactive compilation of select SEC guidance, enforcement actions, and speeches relating to the application of the federal securities laws to digital assets. Beginning with the release of the DAO Investigative Report in July 2017, the Timeline includes relevant information for analyzing the offering, issuance, and trading of certain digital assets in the context of the federal securities laws.

This Timeline is meant to be a resource for those following SEC actions and guidance related to digital assets and to assist experienced securities counsel in assessing the applicability of the federal securities laws. The Timeline is for informational purposes only and does not constitute legal advice. If you are, or are planning to engage in transactions involving digital assets, you may want to contact experienced securities counsel.

Information in the Timeline is provided “as-is,” and may not reflect the latest guidance from the SEC and/or other federal or state regulatory authorities. The Timeline contains links to third-party websites. Such links are only for the convenience of the reader or user. Use of and access to the Timeline, including the links contained within the Timeline, do not create an attorney-client relationship with Perkins Coie LLP.

Weekly Blockchain Focus

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  • FBI Bolstering Tactics Against Illicit Cryptocurrency Transactions and Cybercrimes
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  • Proposed Regulatory Framework – Cryptoassets in South Africa

Continue Reading Blockchain Week in Review: Week of July 2, 2021