- OFAC is the US Treasury Department office responsible for enforcing economic sanctions.
- Crypto exchanges must comply with OFAC rules or face legal consequences.
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To get across its foreign policy objectives, the US restricts American companies from doing business with certain countries and their citizens. If you're an enterprising Iranian crypto trader, then, forget logging onto Coinbase.
Decentralized exchanges and platforms, which operate within murkier territory, may provide softer landings for people in countries subject to US sanctions. But perhaps not for much longer.
Blockchain tracking firm CipherTrace today released a tool, DeFi Compli, for DeFi protocols and decentralized exchanges to make sure they’re not taking money from countries or individuals on OFAC’s naughty list.
OFAC, short for the Office of Foreign Assets Control, is the part of the US Treasury Department responsible for enforcing sanctions against other countries and individuals, often for drug smuggling, terrorism, or nuclear weapon proliferation.
CipherTrace’s compliance tool is made possible via decentralized oracle network Chainlink; by running a node on that network, CipherTrace can use data it already collects to communicate with other DeFi protocols.
"Despite the significant growth DeFi has witnessed in the past year, many DeFi protocols are currently limited in their ability to leverage compliance tools," said Daniel Kochis, Chainlink Head of Partnerships, in a press release. "By launching their own Chainlink node, CipherTrace brings a compliance oracle solution to DeFi, making integrating compliance data as simple as possible for DEX and other protocols."
CipherTrace says there’s demand for such a tool, despite DeFi’s general DIY ethos. In the world of decentralized finance—which seeks to use tech to do away with financial intermediaries such as banks and brokerage firms to enable peer-to-peer trading and lending—compliance with government rules and regulations can often be a source of friction.
“If you’re [a decentralized] exchange, you’re just like a traditional exchange,” CipherTrace CMO and Chief Financial Analyst John Jefferies told Decrypt via Zoom. “If you fail to comply, that’s an existential risk to your business. And as we saw in the case of BitMEX, there’s some real personal risks at stake for those who choose not to do so.”
BitMEX, of course, is the centralized crypto derivatives exchange whose founders have been charged with violating the Bank Secrecy Act and failing to ensure compliance with anti-money laundering (AML) laws.
DeFi Compli won’t help DEXs with AML yet. According to Jefferies, the firm will release such tools down the line. But it will help exchanges prevent “the most egregious sort of things,” which is an OFAC focus. It recently took crypto wallet company BitGo to task for 183 “apparent violations” from 2015 to 2019, settling for just under $100,000.
And while some might argue that distributing a network’s infrastructure across tens of thousands of users limits developers’ legal responsibility, Jefferies doesn’t think that’s the way regulators will see it. He pointed toward the European Commission’s proposed MiCA (Markets in Crypto-Assets) regulations to protect investors.
“Essentially, they’re trying to crush DeFi like a bug,” he said. “This would be a way to save it. If we bring it under a compliance regime, the regulators will permit it to thrive instead of bring out a big heavy hammer and crush it.”