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  • Writer's pictureVeronica Irwin

The feds finally caught someone trying to use crypto to escape sanctions

Legislators have been outspoken about how crypto could be used to evade sanctions for months. But is crypto really as hard to trace as it seems?


5/16/2022

In a strongly worded ruling that suggested more than a passing familiarity with the caps-lock key, U.S. Magistrate Judge Zia Faruqui approved the first Justice Department criminal complaint against a U.S. citizen accused of using crypto in violation of sanctions Friday. The defendant, who remains unnamed, is accused of transferring $10 million in bitcoin to either Cuba, Iran, North Korea, Syria or Russia.

“Issue One: virtual currency is untraceable? WRONG … Issue Two: sanctions do not apply to virtual currency? WRONG,” the judge wrote in a nine-page opinion.


Legislators have been outspoken since Russia invaded Ukraine about how cryptocurrencies could be used to help people evade sanctions. Sen. Elizabeth Warren introduced a bill in March to block crypto companies from trading with sanctioned entities, though many in the industry were concerned the bill was too broad and unfairly targeted many people working in crypto as “facilitators” of the illicit transactions. Members of Congress from California and Texas proposed a companion bill in the House.


The opinion, however, relies on existing law. Faruqui has written similarly snarky opinions about crypto in the past, and clearly has an acute interest in the space. In a February opinion, he quoted "The Big Lebowski" to praise cryptocurrency analytics tools, for example. In January, he dismissed law enforcement concerns over unhosted wallets as based on “fiction.”


Faruqui, a former prosecutor who pursued crypto and darknet cases, has opinions that map closely to the views of Web3 participants, reflecting a sophistication about decentralized technologies that's still rare in legal and government circles. His opinion could bring further awareness to the issue, along with testimony from FinCEN and other crypto-savvy law enforcement agencies.


“It’s super easy to trace and block a wallet, for any of these governments — just nobody in the bitcoin space talks about that,” said Wolf, co-founder of the decentralized censorship circumvention tool Lantern. (Both Lantern founders use pseudonyms for their own safety operating within hostile countries.) The company has done extensive research into how governments can track and censor their citizens' web activity, including their own cryptocurrency, and is quick to point out that most cryptocurrencies are very well-traceable via their immutable public ledgers.


“Even if you they aren’t using an exchange, like Coinbase, that can block it, because all this web traffic is in plain text, they can still block a specific wallet," said Lantern co-founder Lucas.


The FBI, too, is well aware of crypto’s traceability, as exemplified by its recovery of bitcoin collected during the Colonial Pipeline ransomware attack last June.

The question now is whether there will be more cases of crypto sanctions enforcement for Faruqui to opine about — or if sanctioned individuals will wise up and try other means of evasion that aren't as easy to trace.


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