On November 5, the American White House fully restored the sanctions that were applied to Iran earlier, but had been canceled by the previous U.S. President, Barack Obama, because of the “nuclear deal.” Back then, it seemed to Washington that Tehran was ready to abandon the development of nuclear weapons, but Trump does not see it that way right now. Meanwhile, in the United States, the authoritative American journal Foreign Policy stated on the eve of the introduction of new restrictions that the sanctions would not have any significant impact on the political elite of Iran.
So why does the U.S. impose sanctions? It is noteworthy that many Iranian banks came under the threat of American restrictions, as they were disconnected from the SWIFT interbank communications system. Despite that SWIFT continues to declare that it is “neutral” in relation to various countries, virtually, the whole Iranian banking sector is de facto disconnected from this system since credit institutions are interconnected by correspondent relationships.
This development raises the question of whether Iran has an alternative to SWIFT. In Russia, where similar sanctions are expected due to the Skripal case, the Mir system is already in operation as the Russian equivalent of SWIFT developed by the Central Bank of the Russian Federation. Several banks are already connected to it, but if the entire Russian banking sector is disconnected from SWIFT, it will switch over to domestic developments. Iran does not yet have such a system, although there are indirect signs that Tehran has invested $9 billion in creating its own crypto coin, which, so far, has not appeared.
Europe Is Thinking of Using Cryptocurrencies As a Means of Settlements with Iran
Iran has no replacement for SWIFT yet, and neither does the European Union, whose leadership is concerned that turning off SWIFT means paralyzing a significant amount of trade with this country. In particular, it is not clear how Tehran will pay $20 billion for the purchase of 120 aircraft from the European Union, which was previously agreed upon. U.S. dollar payments for Tehran are also prohibited, as well as for Caracas.
The European Union sees an opportunity to get out of the current situation even by using cryptocurrency solutions. It is a rare case, but the German media holding Deutsche Welle mentioned one the Ripple Foundation’s solutions among the possible alternatives. This, of course, relates to the three platforms from Ripple, focused on carrying out blockchain-based interbank transactions. xRapid uses XRP tokens for this, and the xCurrent and xVia platforms can hypothetically run on other tokens. The fact that this is a serious alternative has been demonstrated by the XRP price response. The cryptocurrency market, which responds modestly to positive news, showed that something significant had happened. On November 6, XRP instantly became the second-largest cryptocurrency by capitalization, displacing Ether. In one day, the altcoin added 18%. This did not last long, and soon ETH returned its position. It showed, however, that XRP has potential.
The OFAC Keeps Cryptocurrency Sanctions in Focus
Brian Hook, a U.S. Department of State representative, said in mid-summer that the point of the sanctions against Iran was to bring oil exports from Iran to zero. But is this the task of restrictive measures? Washington lawyer Jake Chervinsky does not believe so. He draws attention to the fact that the use of cryptocurrencies is in the focus of the imposed sanctions, although for obvious reasons, the mainstream media bypasses this instance. Chervinsky emphasizes that the U.S. government uses sanctions to tell other countries “play by our rules or we will deny access to our economy.”
The Office of Foreign Assets Control (OFAC) of the U.S. Treasury is the main authority that monitors compliance with sanctions by individuals and companies. The CIA, the FBI, the Bureau of Industry and Security of the Department of Commerce, and other U.S. authorities have similar tasks. In particular, any American crypto exchange, such as Coinbase, will be punished if it makes any deal with cryptocurrencies with residents of North Korea. Moreover, it is impossible to refer to the “anonymous” nature of some transactions with crypto coins, as American persons will, in any case, be accused of violating the sanctions regime.
But this is not enough, either. The OFAC considers a violator to be any person in the world or a company from any country, even if this person does not directly enter into business relations with those who are included in the sanctions list; however, their transactions with other people or companies can contribute to the business of such persons. Such an extraterritorial understanding of sanctions has the direst of consequences.
The FATF and OFAC: The Same
A few days before the introduction of sanctions against Iran, Russian media reported that the Financial Action Task Force (FATF) stated the need for “urgent” adoption of regulatory rules on cryptocurrencies to effectively combat money laundering. This was directly said concerning Russia, which is part of the FATF, along with China and a number of other countries.
A point that passed almost unnoticed was that the head of the FATF, Marshall Billingslea, is at the same time an employee of the U.S. Treasury, the very agency within which the OFAC operates. Moreover, Billingslea bluntly stated that it is possible to act “simply” by prohibiting cryptocurrency activities, such as the operations of casinos that are prohibited in countries where gambling is outlawed. The U.S. Treasury official once again reminded that “time is running out,” and if any state does not comply with the FATF requirements, it will also fall under the U.S. financial sanctions, that is, the restrictions are akin to the ones imposed on Iran.
The FinCEN Sets an Ultimatum to the Cryptocurrency World
In addition to Billingslea’s words, the reports of the FinCEN, another American structure within the U.S. Treasury, which should be involved in the identification of criminal ties in the financial world, point to the true nature of the U.S. sanctions. In March, the FinCEN stated that all financial restrictions imposed on countries, in particular, Venezuela, imply entirely the same restrictions on any cryptocurrency, just as fiat. In October, the FinCEN published an explanation regarding the sanctions already outlined against Iran. It clearly states that “cryptocurrencies are a new payment system that can potentially create opportunities for individuals and legal entities for avoiding sanctions.” As the lawyer Chervinsky emphasizes, such an approach contains a higher risk for the existence of cryptocurrencies than the impact of U.S. securities laws or different approaches to ICO regulation in different countries.
Thus, it is evident that a mighty blow by the current U.S. authorities on the possibilities of carrying out transactions with cryptocurrency is hiding under the guise of sanctions imposed under the same pre-texts that have received a completely different rationale. The most extensive financial constraints of the OFAC and the “connection” to their execution of the FATF as well as the American special services mean that an ultimatum has essentially been set before cryptocurrencies. Will Ripple comply with the sanctions? Rather yes than no, although discussions are continuing on this. Meanwhile, according to Sepehr Mohammadi, the head of the Iran Blockchain Community, the Binance and Bittrex crypto exchanges have already begun to restrict work with this country due to sanctions.
What Does Washington Want to Do with Cryptocurrencies?
At the same time, it is possible that it is not a matter of completely “turning off” cryptocurrencies, but, most likely, of “taming” them, driving them into a clearly defined framework. A boom of patents in blockchain and cryptocurrency can lead to this, as evidenced by the fact that the second-largest U.S. credit institution, Bank of America, registered the exclusive right to own a “secure cryptocurrency storage system” on October 30. The organization received more than 50 rights for the exclusive use of certain aspects of the functioning of the cryptocurrency world, while it most likely does not plan to use them to develop cryptocurrencies and blockchain.
Russia Is Not Being Allowed to the Forum in Davos and Is Demanded to Adopt the “Chinese” Version of the Law on Cryptocurrencies
For Russia, the situation with sanctions raises the question of what to do. Obviously, there will be no miracle in relations between the U.S. and Russia, which means that Russia’s disconnection from SWIFT and other restrictions, even stricter than those with respect to Iran and North Korea, are only a matter of time. It is curious that for the first time, the upcoming prestigious World Economic Forum in Davos (January 22 to 25, 2019) will focus on how financial innovations are affecting the global economy, and the organizers decided not to invite to this important international event some of the largest entrepreneurs from Russia, including Oleg Deripaska, Viktor Vekselberg, and the head of VTB Andrei Kostin. The WEF does not hide the fact that they listen to recommendations on restrictive measures from Washington, although the organization itself does not hesitate to publish messages on the official website that strongly criticize the position of President Donald Trump on sanctions.
At the same time, the OFAC, through the FATF, requires Russia to urgently adopt “proper” cryptocurrency legislation, most likely following the example of a FATF member, China, which banned transactions with cryptocurrency in September last year and has called them “financial bubbles” in the latest report of the People’s Bank of China.
Russia Is Thinking: What to Do?
Obviously, Moscow is under intense pressure from international partners. As a result, we see that the terms defining cryptocurrencies themselves, as well as Bitcoin and mining, have disappeared from the text of the cryptocurrency bill prepared by the State Duma Financial Market Committee. At the same time, despite certain critical remarks regarding ICOs and risks associated with cryptocurrencies, the head of the Central Bank of the Russian Federation, Elvira Nabiullina, and the head of Sberbank, German Gref, have not spoken in favor of the idea of banning cryptocurrency. Anatoly Aksakov, a member of the Russian State Duma, admitted, however, that the lower house of the Russian parliament was considering such an approach.
Meanwhile, any restrictions against cryptocurrencies will be akin to Russia’s restricting of the development of the Internet back in the 1990’s. The effectiveness of such a ban would be precisely the same as the efficiency of today’s restriction of cryptocurrencies in China. As a result, the court in Shenzhen was still forced to recognize cryptocurrencies as a property. Russia can go the Chinese way and lose the time it takes the country to launch new financial technologies. The most severe sanctions are restrictions on access to modern technologies, which operated, for example, in the USSR in the form of the Jackson-Vanik amendment. In a similar situation, for the country’s interests, it would be wrong for the state to self-restraint in using blockchain and cryptocurrencies for the needs of the domestic economy and society. Russia should have every chance of becoming a leader in introducing new financial technologies.