Crypto Isn’t Immune to Sanctions

For years, cryptocurrency was seen as a loophole in the global sanctions system — decentralized, anonymous, and outside traditional banking. But that era is over. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has made it clear: crypto transactions are subject to the same sanctions laws as fiat money.

Whether you’re a crypto investor, exchange operator, wallet provider, or startup in DeFi or Web3, violating sanctions regulations with crypto can result in blocked funds, legal penalties, or even criminal prosecution.

 

When Does Crypto Trigger OFAC Sanctions?

OFAC sanctions apply to U.S. persons and institutions, which include:

• U.S. citizens and residents
• Companies incorporated in the U.S.
• Foreign businesses that do business with the U.S. or use U.S.-based tools (including cloud, code, and exchanges)
• Any transaction involving U.S. dollars or technology touching U.S. soil

OFAC treats crypto just like cash. If you:

• Send Bitcoin to a wallet belonging to an SDN
• Facilitate trades for someone on the SDN List
• Operate a crypto platform that doesn’t block access to sanctioned countries
• Use a mixing service to obscure sanctions-violating payments
• Interact with a smart contract owned by a designated individual or entity

…you’re violating sanctions, and OFAC can act against you.

 

The Tornado Cash Case: A Landmark Warning

One of the most significant crypto sanctions cases happened in 2022, when OFAC sanctioned Tornado Cash, an open-source privacy mixer protocol built on Ethereum. OFAC alleged that:

• North Korean hacking group Lazarus used Tornado Cash to launder over $450 million in stolen crypto
• The protocol helped obscure the origin of funds from ransomware and hacking campaigns
• The developers did not take sufficient steps to prevent sanctioned parties from using the platform

OFAC’s action included:

• Adding Tornado Cash’s smart contract addresses to the SDN List
• Blocking access to its frontend website
• Freezing associated assets on compliant exchanges
• Chilling effect across DeFi and open-source development communities

The designation marked a new era of enforcement — one where even autonomous code could be sanctioned.

Other Notable Cases

• Suex and Chatex (2021): Two crypto exchanges were designated for facilitating ransomware payments. Their U.S. assets were blocked, and users lost access to their wallets overnight.
• Garantex (2022): A Russia-based exchange was sanctioned for laundering funds from criminal groups. Despite being based outside the U.S., the exchange lost access to global liquidity and infrastructure.
• Lazarus Group Wallets: Dozens of wallet addresses linked to the North Korean state-backed hackers have been sanctioned. Anyone transacting with them, knowingly or unknowingly, is in violation.

What Happens If You Violate Sanctions in Crypto?

OFAC can enforce sanctions violations in crypto with the same force as in traditional finance:

• Freezing assets: If a wallet or exchange touches a U.S.-based node, server, or custodian, it can be blocked
• Investigations: If your address or exchange is linked to a flagged transaction, OFAC can issue subpoenas
• Civil fines: Penalties can reach $300,000 per transaction or twice the value of the transaction, whichever is greater
• Criminal charges: If the violation is deemed willful, charges can include up to 20 years in prison

OFAC has already penalized U.S. companies for failing to screen wallet addresses or continuing to serve Iranian and North Korean users.

 

How Can You Stay Compliant?

1. Screen Wallet Addresses

Use compliance tools like:

• Chainalysis KYT
• Elliptic Navigator
• TRM Labs
• Coinfirm

These platforms flag wallet addresses known to be linked with SDNs, darknet markets, or criminal actors. If you’re an exchange, custodial wallet provider, or broker, this step is non-negotiable.

2. Implement Geofencing

If your platform or dApp is accessible globally, use IP geolocation to block users from:

• Iran
• North Korea
• Cuba
• Syria
• Crimea, Donetsk, and Luhansk regions of Ukraine
• Any additional OFAC-sanctioned jurisdictions

Some platforms use geofencing to block U.S. users, but U.S. regulators may still pursue enforcement if U.S. tech or finance systems are used.

3. Maintain KYC and AML Protocols

Even decentralized platforms should build compliance optionality:

• Partner with third-party KYC providers
• Collect at least minimal user data for regulatory inquiries
• Log all wallet activity and token flows
• Flag repeat offenders and irregular behavior

The DeFi ethos of anonymity may clash with this, but failing to prepare invites sanctions exposure, which can sink a project entirely.

4. Monitor Smart Contracts and DAO Activity

If your protocol’s treasury interacts with an SDN address — even accidentally — the entire DAO could be at risk.

• Screen all treasury addresses
• Monitor DAO proposals for compliance violations
• Assign responsibility to a legal and compliance multisig role

This is particularly important in multi-sig DAOs or protocols managing millions in TVL (Total Value Locked).

5. Apply for OFAC Licenses (If Necessary)

In rare cases, you may need to interact with a sanctioned party or address for:

• Legal reasons (e.g., lawsuits, arbitration)
• Liquidating assets
• Recovering hacked funds or submitting evidence

OFAC allows for specific licenses to carry out such transactions, but you must apply and wait for approval.

As crypto-related sanctions enforcement intensifies, legal clarity is essential. Lionel Iruk, Esq., General Counsel at Empire Global Partners, has represented individuals and companies facing asset freezes tied to blockchain transactions, guiding them through wallet forensics, OFAC licensing, and crypto-specific compliance reform. His approach helps clients legally transact while mitigating sanctions exposure.

 

Can You Be Sanctioned Just for Building Open-Source Code?

This is the burning question after the Tornado Cash case. The short answer: it’s complicated.

OFAC’s action blurred the line between:

• Sanctioning a person or entity
• Sanctioning the code itself

The developers of Tornado Cash argued that their code was autonomous, open-source, and not under their control. But OFAC pushed forward, focusing on the effect and intent, not just control.

This has prompted a wave of legal challenges, civil liberties concerns, and debates around the First Amendment and software freedom.

Bottom line: if you’re developing privacy tools, mixers, or programmable DeFi infrastructure, speak with legal counsel.

If You’re Already Flagged — What to Do

If your wallet, platform, or project has been linked to a sanctioned transaction:

• Do not attempt to hide or re-route the funds
• Notify your legal team immediately
• Engage a sanctions attorney — this is a specialized field
• Submit a voluntary disclosure to OFAC — in some cases, this reduces penalties

Deliberate evasion is far more dangerous than open engagement. OFAC takes cooperation into account when assessing penalties or settlement terms.

Final Thoughts

Crypto is no longer outside the system. OFAC and other regulators are watching closely — and taking action.

Whether you’re a builder, investor, or casual trader, it’s no longer enough to stay in your lane. You must stay informed, proactive, and ready to act. The price of ignoring sanctions laws in crypto isn’t just financial — it could shut down your business, freeze your assets, or worse.

Don’t wait to be on a list. Protect your project before regulators do it for you.