Since Russia invaded Ukraine, people from all over the world have donated tens of millions of dollars worth of cryptocurrency directly to the Ukrainian government, which is already using the funds to purchase military gear. It’s a demonstration of how crypto enables people to easily transact across borders at the speed of the internet and a powerful example of what this relatively new financial infrastructure can do. It’s difficult to overstate the possibilities for financial inclusion as crypto and web3 technology mature.
Of course, these innovations are available to both good and bad actors. While the industry celebrates the Ukrainian government’s successful fundraise, we’ve also heard concerns about the potential for cryptocurrency to be used by sanctioned entities and individuals in Russia for sanctions evasion. That’s why today we’re announcing the launch of sanctions screening tools for the cryptocurrency industry free of charge. These solutions will enable the builders of decentralized web3 protocols like DEXs, DeFi platforms, DAOs and DApps, as well as practically anyone interacting with cryptocurrency, to easily validate that they aren’t interacting with cryptocurrency addresses associated with sanctioned entities.
We’re making two new tools available for sanctions data: an API expected to launch next month, and an on-chain oracle available now. Below we’ll explain the background for building these tools, why they’re critical now, and how they will work.
Who needs Sanctions Screening solutions?
As countries around the world continue to leverage economic sanctions in response to Russia’s invasion of Ukraine, it’s more important than ever for anyone facilitating economic activity to be able to screen for sanctioned entities.
Sanctioned entities refer to entities listed on economic/trade embargo lists, such as by the US, EU, or UN, with which anyone subject to those jurisdictions is prohibited from dealing. Currently this includes the Specially Designated Nationals (SDN) list of the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). The prohibition on dealing includes any instrumentalities of the sanctioned entities, including operating companies, bank accounts, and cryptocurrency addresses.
Traditional financial institutions and Virtual Asset Service Providers (VASPs) like centralized exchanges have transaction monitoring solutions in place to comply with sanctions and other regulations. These tools also help protect their users and their organization from interacting with illicit actors. However, many decentralized web3 protocols like DEXs, DeFi platforms, DAOs and DApps do not have the lightweight solutions they need to comply with sanctions policies.
New Free Chainalysis Sanctions Screening Tools
The inherent transparency of the blockchain can make cryptocurrency a powerful deterrent to sanctions evasion. As we’ve seen with sanctions impositions in the past, cryptocurrency compliance professionals with the right data and technology are effective at identifying transactions by sanctioned entities and taking action.
Cryptocurrency transactions are real-time and irreversible, and with the rise of smart contracts, programmatic. We are building tools that make it easier for any organization to integrate sanctions screening for cryptocurrencies into their existing operation, including:
- An API designed for web/mobile UIs and web servers: Users will receive an API key through which they can check if an address of interest is on the sanctions list or not. While we anticipate the API will become available in April, this is still to be determined. To express interest in the API, click here.
- An on-chain oracle designed for smart contacts: Users can call the Chainalysis oracle from another smart contract to check if an address is on a sanctions list. The Chainalysis oracle is deployed on most EVM chains like Ethereum, Avalanche, BSC, Polygon, Optimism, Arbitrum, Celo. Click here to learn more.
An address is considered to be on the sanctions list if it is included within OFAC’s Specially Designated Nationals (SDN) list. If any new cryptocurrency addresses are on an EVM chain and included within economic/trade embargo lists, they will be added to these solutions.
Beyond Sanctions Screening
The solutions described here will provide any cryptocurrency business, protocol, or organization a simple way to quickly check if an address is on a sanctions list before allowing it to connect with their service. However, as these organizations are involved in more financial activity, there may be an increasing need to look more holistically at the risk profile of entities they interact with in order to protect their users and counterparties. Chainalysis provides a range of solutions to help mitigate exposure to risky activity like terror financing, ransomware and more.
If you’d like to learn more about how Chainalysis can help you play a role in deterring sanctions evasion, please contact us.
This material is for informational purposes only, and is not intended to provide legal, tax, financial, or investment advice. Recipients should consult their own advisors before making these types of decisions. Chainalysis has no responsibility or liability for any decision made or any other acts or omissions in connection with Recipient’s use of this material.