In response to events surrounding the war in Ukraine, blockchain-data analytics firm Chainalysis has announced it’s launching two sanctions-screening tools.
These applications have reportedly been developed to help provide a greater level of regulatory oversight to crypto exchanges and DeFi projects.
According to a report put together by Chainalysis on Thursday, the screening tools – an on-chain oracle and an APIs – make use of tracking software that will assist exchanges in screening digital wallets and transactions for activities that appear to be evading financial sanctions.
We’re excited to announce the launch of two sanctions screening tools – an API and an on-chain oracle available free of charge!
— Chainalysis (@chainalysis) March 10, 2022
The Chainalysis oracle is available for use now and is described by the firm as “a smart contract that can be called from other smart contracts to validate a wallet before allowing an interaction with the second contract”.
The API, scheduled for release next month, is designed for use on a broader variety of applications including centralized crypto exchanges and mobile user interfaces.
One of the key purposes of both tools is to make it very simple and quick to check whether crypto addresses are on economic/trade embargo lists, such as those of the US, EU, or UN, and determine whether they’re prohibited from dealing in certain jurisdictions.
“Now is the time for the industry to demonstrate that blockchains’ inherent transparency make cryptocurrency a powerful deterrent to sanctions evasion,” said Michael Gronager, co-founder and CEO of Chainalysis.
“In anticipation of ongoing sanctions, we’ve prioritized the development of these tools so that all cryptocurrency market participants have what they need to harness this transparency and conduct basic sanctions screening at no cost to them,” Gronager added.
Can crypto be used to evade penalties?
The short answer to that is, yes it’s possible but not at any significant scale, according to industry experts such as Jake Chervinsky – a lawyer and head of policy at the Blockchain Association in the Washington, DC.
For context: current sanctions are targeted at specific bad actors, like Putin, his oligarchs, the gov’t, etc.
Penalties are *not* comprehensive. US firms don’t have to block ordinary Russian citizens.
It’s ludicrous to attack crypto firms for doing exactly what they’re told.
—Jake Chervinsky (@jchervinsky) March 10, 2022
Chainlaysis, which incidentally has an office in Canberra and has partnered with the Commonwealth Bank, is implementing these new tools on the back of current world events. Large sections of the international community, led by the US, the European Union and the UK, continue to impose crippling sanctions on elements of Russia’s economic and trading activities in protest to the Putin-imposed invasion of Ukraine.
As the crypto-analysis firm points out, given the transparency of blockchains, it would be difficult for the Russian government or financial elite to systematically evade sanctions at scale through cryptocurrency without detection.
However, it’s suspected, particularly vocally by the likes of US Senator Elizabeth Warrenthat some sanctioned Russians might still be attempting to use crypto as a means to evade the financial blocks.
Users of DeFi platforms, for instance, can operate with a bit more immediate anonymity than they can on centralized exchanges, which generally apply strict identity verification protocols including KYC (Know Your Customer).
The US-based cryptocurrency platform Coinbase, however, recently emphasized the idea that the transparency and public nature of cryptocurrencies can actually help governments in their enforcement of sanctions.
https://t.co/h08YXYgAoM Sanctions play a vital role in promoting national security and deterring unlawful aggression, and @coinbase fully supports these efforts by government authorities. They are best placed to decide when, where, and how to apply them.
— Paul Grewal (@iampaulgrewal) March 7, 2022
In a blog post published earlier in the week, Coinbase chief legal officer wrote:
“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.”
The blog argued that crypto assets are fundamentally public and traceable, which helps authorities “detect and deter evasion”.