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OFAC Bitcoin Blacklist Threat to Combat Illegal Use of Digital Currencies

The US Treasury’s Office of Foreign Assets Control (OFAC) is currently discussing new measures to identify the criminal use of digital currencies. The agency suggested that it is considering introducing tough new measures in order to combat virtual currency misuse and may add digital currency addresses to its list of specially designated nationals and blocked persons list (SDNs) if this decision becomes law.

SDNs are described by the US Treasury as those associated with sanctioned governments, terrorism and illegal weapons and drug-trafficking. Under these new laws, financial institutions would need to introduce far more pro-active and rigid screening measures, identifying clients that are on the SDN list. This includes blocking and reporting users and denying financial services.

These proposed changes to existing US Treasury law have raised questions. If this is legalized then the OFAC will not only require updates to currently SDN listings but will be encouraging others to associate addresses with those listed, although there will be an appeal process available for those who feel an address has been wrongly associated with the blacklist.

Guilty by association?

There is clearly a risk under this proposed law that financial institutions and individuals innocently receiving ‘dirty’ coins could be negatively affected purely by association with this regulatory process. Such institutions or individuals may even be added to the SDN listings, in which case appealing may be the appropriate action to take for those feeling they have been incorrectly identified.

OFAC may wish to add new addresses that have interacted with listed addresses, which may affect innocent users, however, this would require enormous resources from the US Treasury to update a rapidly expanding list as tainted coins flood the blockchain.

Although it is unclear under this proposed system if coins would be permanently tainted should they be transacted to or from a blacklisted address, it does raise concerns about fungibility as freshly minted coins cleanly mined could become more highly valued than their ‘dirty’ counterparts.

Privately enabled coins such as Zcash or Monero may see an upsurge in their usage as result of the proposed OFAC measures and it’s likely there will be tools developed in order to distinguish tainted cryptocurrencies from those that have a legitimate history.

 

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