Assessing the Impact of Sanctions in the Crypto Ecosystem: Effective Measures or Ineffective Deterrents?

TL;DR

This study evaluates how effective financial sanctions are in deterring criminal entities from using cryptocurrencies, especially Bitcoin, revealing mixed results and adaptive behaviors in evasion strategies.

Contribution

It provides an empirical analysis of sanctioned entities' crypto activities, highlighting their continued use of digital assets and preferred methods to evade sanctions.

Findings

Sanctions deter about half of the examined entities.

Punished entities often use rapid exchange services for conversions.

Some entities continue to move funds despite sanctions.

Abstract

Regulatory authorities aim to tackle illegal activities by targeting the economic incentives that drive such behaviour. This is typically achieved through the implementation of financial sanctions against the entities involved in the crimes. However, the rise of cryptocurrencies has presented new challenges, allowing entities to evade these sanctions and continue criminal operations. Consequently, enforcement measures have been expanded to include crypto assets information of sanctioned entities. Yet, due to the nature of the crypto ecosystem, blocking or freezing these digital assets is harder and, in some cases, such as with Bitcoin, unfeasible. Therefore, sanctions serve merely as deterrents. For this reason, in this study, we aim to assess the impact of these sanctions on entities' crypto activities, particularly those related to the Bitcoin ecosystem. Our objective is to shed light on the validity and effectiveness (or lack thereof) of such countermeasures. Specifically, we analyse the transactions and the amount of USD moved by punished entities that possess crypto addresses after being sanctioned by the authority agency. Results indicate that while sanctions have been effective for half of the examined entities, the others continue to move funds through sanctioned addresses. Furthermore, punished entities demonstrate a preference for utilising rapid exchange services to convert their funds, rather than employing dedicated money laundering services. To the best of our knowledge, this study offers valuable insights into how entities use crypto assets to circumvent sanctions.