On March 19, 2018, President Trump issued an Executive Order prohibiting all U.S. persons and residents from transacting in digital currencies issued by the Government of Venezuela, including the country’s recently launched oil-backed cryptocurrency the “Petro” (PTR) or petromoneda. The sanctions are in response to an emerging trend of sanctioned or rogue regimes experimenting with digital assets.
1. The Sanctions – Key Takeaways
The new sanctions prohibit all dealings within U.S. jurisdiction relating to any digital currency issued by the Government of Venezuela (or its controlled entities, including the Central Bank of Venezuela and Petroleos de Venezuela, S.A. (PdVSA)) on or after January 9, 2018. Effectively, users of Venezuelan cryptocurrencies may not interact with the United States economy or financial system (or with U.S. persons) in connection with such transactions.
2. Background on the Petro
Venezuelan President Nicolás Maduro launched a purportedly oil-backed cryptocurrency, the Petro, in February 2018 as a way for the Government of Venezuela to raise money, counter sanctions imposed by the U.S. and E.U., and help boost Venezuela’s struggling economy. Data released by Carlos Vargas, the Government of Venezuela’s Superintendent of Cryptocurrency and Related Activities, shows that in the pre-sale of the Petro—which took place from February 20, 2018 to March 19, 2018—more than 82 million Petros were purchased, generating sales of over $5 billion. The initial coin offering (ICO) of the Petro commenced on March 21, 2018, after President Trump issued this Executive Order. Separately, on February 21, 2018, President Maduro announced that Venezuela would launch a second digital currency called the Petro Gold or Petro Oro, which will allegedly be backed by precious metals, including gold.
3. Broader Trends Among Sanctioned and Rogue Regimes
Venezuela’s shift toward cryptocurrencies—explicitly to help circumvent international sanctions—is part of a broader interest in cryptocurrencies by sanctioned countries and rogue states. Iran is reportedly creating its own cryptocurrency. In February 2018, the Ministry of Information and Communications Technology tweeted that Iran’s state-run Post Bank was developing its own digital currency based on the blockchain. North Korea has also allegedly been mining cryptocurrencies and attempting to hack cryptocurrency exchanges in South Korea. Additionally, Russia has started experimenting with blockchain technology. In July 2017, Russian President Vladimir Putin met with Vitalik Buterin, the founder of Ethereum, a platform which generates the popular cryptocurrency Ether. To many, the Putin-Buterin meeting signaled a shift in the Russian Government’s position on cryptocurrency. Subsequently, a consortium of Russian banks, including Russian state-owned Sberbank PJSC, developed a distributed ledger called Masterchain, which uses a virtual currency called “gas.” The Russian consortium is hoping that by adopting blockchain technology, Russia will be on the forefront of a trend that is disrupting the financial industry. Then in October 2017, a Russian government official was quoted as saying that President Putin had ordered the swift launch of a “crypto-ruble.”
4. U.S. Government Warnings
The U.S. government has long been concerned about the use of cryptocurrencies by criminals, terrorists, and other bad actors. This is in large part due to cryptocurrencies’ pseudo-anonymity— the blockchain for a particular cryptocurrency does not identify real names or addresses, but if the owner of a particular digital wallet is revealed, their transactions can be traced back to them because the blockchain is itself public. Bitcoin was also the primary medium of exchange on the notorious online drug market Silk Road, which was shut down by the U.S. government in 2013. Now that sanctioned and rogue regimes have publicly started experimenting with cryptocurrencies, government officials have recently issued warnings. On February 13, 2018, U.S. Department of the Treasury Undersecretary for Terrorism and Financial Intelligence (TFI) Sigal Mandelker delivered a speech that mentioned cryptocurrencies to the Securities Industry and Financial Markets Association Anti-Money Laundering & Financial Crimes Conference in New York City. Undersecretary Mandelker explained that terrorist groups, criminal organizations, and regimes like Venezuela have been experimenting with the use of digital and virtual currencies to “exploit the financial system,” “hide their ill-gotten gains,” and “finance their illicit activities.” She specifically noted that Venezuela had recently announced its plans for the Petro “to try and sidestep our powerful sanctions,” and identified North Korea, Hezbollah, and Iran as other illicit actors who might attempt to use these new technologies. Undersecretary Mandelker urged the U.S.’s international partners to strengthen their virtual currency frameworks and noted that the U.S. is one of the only major countries in the world that regulates these activities for AML/CFT purposes.
In sum, sanctioned and rogue regimes appear to primarily view cryptocurrencies as a method for quickly raising capital and a medium of exchange that evades U.S. sanctions and other regulations of the global financial system. The Trump Administration will likely continue to focus policy and enforcement efforts on the use of cryptocurrencies by criminal elements and regimes targeted by U.S. sanctions. Other governments have also begun to restrict the use of cryptocurrencies, including South Korea, which recently banned cryptocurrency trading by anonymous bank accounts and banned foreigners from trading on its domestic exchanges. China has altogether banned ICOs and cryptocurrency trading through domestic and foreign exchanges.
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