Overview
On March 19, 2018, US President Donald Trump issued Executive Order 13827 (the EO), which for the first time targets US economic sanctions against a virtual currency – namely, a digital currency colloquially known as the "petro" that has been issued by the Government of Venezuela (GOV). Specifically, the EO prohibits “all transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the [GOV] on or after January 9, 2018.”
As justification for these sanctions, the EO cited recent actions undertaken by the Maduro regime to circumvent US sanctions by issuing a digital currency, which Venezuela’s National Assembly had “denounced as unlawful.” Treasury Secretary Mnuchin also issued a statement about the US policy rationale for promulgating sanctions against GOV-issued digital currency, coins, or tokens (collectively referred to as “Digital Currency”), as well as the blocking of four individual GOV officials. The EO follows statements, as reported earlier this year, by the US Department of the Treasury warning US persons that dealing in Venezuela’s so-called “petrocurrency” could violate US sanctions.
Key Aspects of the New GOV Digital Currency Sanctions
Section 1 of the EO prohibits any US Person from engaging in any transfers or other transactions related to Digital Currency issued 1) on or after January 9, 2018 and 2) by the GOV, unless authorized by Treasury’s Office of Foreign Assets Control (OFAC).
- “US Person” means any: 1) US citizen, 2) US permanent resident alien, 3) Entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches of such entities), or 4) any Person (i.e., individual or Entity) within the United States. An “Entity” means a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.
- The GOV includes any political subdivision, agency, or instrumentality (e.g., state-owned or controlled enterprise) of the government, including the Central Bank of Venezuela and Petroleos de Venezuela, S.A. (PdVSA), and any Person owned or controlled by, or acting for or on behalf of, the foregoing. Note that this prohibition would extend to any Entity that is simply controlled under the EO and thus is broader than the so-called “50 percent ownership” rule typically enforced by OFAC for blocked property.
Section 2 of the EO prohibits any transaction that evades or avoids, causes a violation of, or attempts or involves a conspiracy to violate the sanctions in effect against covered Digital Currency. These prohibitions could penalize foreign, non-US Persons who are engaged in transactions with a nexus to the United States (e.g., US dollar clearing or settling transactions).
The EO does not authorize the designation and blocking of any Person (i.e., a foreign Person) for any transactions or other business dealings related to Digital Currency. Therefore, this EO does not include authorities to subject a foreign Person to so-called US secondary sanctions restrictions. However, as noted above, foreign Persons potentially could be subject to penalties for “causing” or “conspiring” to violate restrictions related to Digital Currency in the EO. In addition, other EOs include secondary sanctions restrictions (for example, for providing material support to designated Venezuelan government officials) that potentially could be relevant to Digital Currency-related transactions.
Implications of the New GOV Digital Currency Sanctions
OFAC has not issued any general licenses authorizing activity under the new EO. Before issuance of the EO, as previously advised, OFAC issued a number of General Licenses under the Venezuela sanctions program related to US Person restrictions on issuing “new debt” to the GOV (of more than 30 days) or to PdVSA (of more than 90 days) and on dealings in certain GOV-issued bonds. For example, General License 2, authorizing transactions with CITGO Holding Inc., General License 3, permitting transactions in certain GOV international bonds, and General License 4, allowing export of agricultural commodities and medical commodities to Venezuela, authorize transactions by US Persons that would otherwise be restricted. None of these General Licenses have been amended to authorize transactions involving Digital Currency that would be prohibited under the new EO, nor has OFAC issued guidance indicating that it intends for these General Licenses to authorize activities under the new EO. In the absence of General Licenses applying to such activities, any transaction, financing, or dealing in applicable GOV-issued Digital Currency after the effective date by a US Person would require case-by-case authorization through a specific license from OFAC.
On the same day as the EO, OFAC issued Guidance in new Frequently Asked Questions 559-563 indicating that “digital currency” includes “sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency.” The Guidance also publishes separate definitions for terms such as “virtual currency,” which means “a digital representation of value that functions as (i) a medium of exchange; (ii) a unit of account; and/or (iii) a store of value; is neither issued nor guaranteed by any jurisdiction; and does not have legal tender status in any jurisdiction,” as well as “digital currency wallet” and “digital currency address.” The Guidance does not differentiate between the meaning of a virtual currency as opposed to a digital coin or digital token referred to in the EO.
Based on these terms, the Guidance recommends that Persons, including (i) technology companies; (ii) administrators, exchangers, and users of digital currencies; and (iii) other payment processors develop a tailored, risk-based compliance program, including screening and other appropriate measures, to mitigate potential liabilities, but recognizes that no single type of program or solution will be suitable for every circumstance or business involved. Finally, the Guidance establishes that digital currency addresses and different digital currency types can be added to fields of the OFAC Specially Designated Nationals and Blocked Persons List, in which case such property or interests in property, if held by US Persons or otherwise in the United States, would need to be blocked (i.e., frozen), cannot be dealt in, and must be reported to OFAC.
OFAC’s guidance also defines “virtual currency” in a manner that appears to be consistent with guidance issued by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which promulgates Anti-Money Laundering (AML) regulations applicable to US financial institutions. Notably, OFAC’s definition of “virtual currency” tracks administrative rulings issued by FinCEN by indicating that “virtual currency” is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. (This aspect differentiates virtual currency from FinCEN’s definition of “currency,” which means “the coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted.”)
FinCEN’s regulations, as interpreted by certain administrative rulings, require any Person who is doing business, wholly or in substantial part in the United States, as an “exchanger” and “administrator” of virtual currency to register as a money transmitter, a type of money services business (MSB) for whom AML compliance program obligations apply, unless specifically exempt. Specifically, FinCEN guidance does not require registration for “users” of virtual currency as an MSB or other persons who qualify under certain exemptions of the AML money transmitter regulations, including payment processors and activities that are integral to the provision of goods or services other than money transmission. However, note that US Persons are prohibited under the EO and by OFAC from engaging in transactions, financings, or other dealings, even if they are “users” of, or otherwise exempt under FinCEN’s MSB regulations, related to covered GOV-issued Digital Currency.
In addition to FinCEN, other US government agencies have announced enhancing scrutiny over matters involving virtual currency. For example, where subject to US jurisdiction, the US Securities and Exchange Commission has asserted that certain digital coins and tokens are “securities” requiring registration (unless exempt), and the US Commodity Futures Trading Commission also has asserted that virtual currency is a “commodity.” Furthermore, the Internal Revenue Service has issued guidance that general tax principles that apply to property transactions under the Internal Revenue Code apply to transactions using virtual currency.
The Venezuela action under the EO may be followed by developments in other US economic sanctions programs that apply to Digital Currency. In particular, various media sources have reported that Russia and Iran are contemplating the issuance of government-backed digital currency. To the extent that these governments or other US sanctioned actors release virtual currency in a manner viewed as evading US sanctions, threatening US national security, or undermining other important US foreign policy objectives, it is probable that other types of digital currency may be targeted by US sanctions in the future.
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