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A deep dive into sanctions compliance

Tl;dr: Coinbase is committed to compliance with relevant laws and regulations in the places we operate so customers can feel safe using our platform. Our proprietary software specifically helps with sanctions compliance by allowing us to interdict (freeze) assets to and from crypto addresses subject to sanctions laws.

By Coinbase

Company

, April 14, 2023

, 3min read time

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At Coinbase, we’re working hard to help update the financial system by building trusted products that expand the utility and adoption of crypto, because we believe crypto and blockchain technology have the ability to increase economic freedom and opportunity around the world. Coinbase chose to become a public company in the US because we believe the US would best be served by embracing this fundamental innovation, but we’re also focused on international markets, many of which are moving forward with strategies to become “crypto hubs.” A key part of fulfilling this commitment is ensuring that we comply with the relevant laws and regulations in the places we operate, so customers can feel safe using our platform. 

Protecting your assets from sanctioned parties

Our Financial Crimes Compliance program incorporates all of the components and controls customers expect from a traditional financial institution while taking into consideration the unique characteristics of crypto. To do this, we’ve built proprietary tools and technology that take advantage of the blockchain to add layers of protection that set us apart. One of those tools is the Interdiction Solution, which specifically helps combat sanctions violations and ensures the recovery of funds where applicable, through a process called interdiction.

In the context of sanctions compliance, “interdiction” means intercepting and freezing assets intended for or sent from individuals and entities subject to certain types of sanctions. Interdiction allows us to screen crypto transactions and, if a customer is the intended recipient of crypto assets from a sanctioned address, we can seamlessly interdict and transfer those assets to an internal holding account where they are held securely, thereby preventing a sanctions violation from ever occurring. 

Why interdiction is important in crypto

The Office of Foreign Assets Control (“OFAC”) generally requires that when the property of a designated or other blocked person is in the possession or control of a U.S. person, such as Coinbase, that U.S. person must block (freeze) and report that property to OFAC. Because of the push-based nature of crypto, it is difficult to prevent an on chain transaction from occurring. As an example, if a malicious actor dusts someone (that is, sends a small amount of unsolicited crypto to a person’s known address), that transaction can’t be prevented because it has been broadcast to the entire network. With Coinbase’s screening tool, interdiction occurs before the sanctioned assets ever hit the user account. 

Other exchanges use blockchain analytics vendors to monitor for activity involving sanctioned addresses, but they are left taking reactive steps once they are alerted to the transaction that has already occurred, rather than preventing the crypto assets from ever hitting the user account. Those reactive steps involve reviewing the alert to determine if a sanctioned address was involved and transferring the sanctioned assets out of the account into an account maintained by the exchange where they are now frozen and reported to OFAC. Because this is a manual and lengthy process, the assets may be gone before the exchange can block them. That’s why Coinbase’s interdiction solution is unique – all transactions are screened in real time, and if deemed to involve a sanctioned address, subsequently blocked automatically. 

Continued commitment to trust and transparency

When OFAC includes a crypto address on its list of sanctioned persons (the SDN List), we tag these addresses as “sanctioned” in our proprietary tools. As mentioned in a blog post last year, we then expand this data out by clustering related addresses with these sanctioned addresses. We also engage in proactive work to identify sanctioned persons, for example, crypto exchanges operating in sanctioned jurisdictions like Iran. All of this means that we have one of the most comprehensive lists of sanctioned crypto addresses against which to screen our transactions – bolstering our ability to interdict transactions and create first-in-class crypto compliance.

In committing to our promise of transparency and trust, when a transaction is interdicted we promptly communicate to our customers and provide information on how they can apply for a license authorizing Coinbase to return their assets. Although many of OFAC’s regulations were written years before Satoshi mined the first bitcoin, OFAC sanctions compliance obligations still apply to crypto transactions. Our interdiction program is another way Coinbase is driving product innovation to create the most secure and compliant platform for our customers.

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