Navigating the Challenges of Cryptocurrency Regulation: Official Report on Potential Risks and Threats by OFSI for the Year 2025
UK Cryptoasset Sector Faces Growing Sanctions Risks, According to OFSI Report
The UK Office of Financial Sanctions Implementation (OFSI) has published a Cryptoassets Threat Assessment report, highlighting key findings and recommendations for the UK cryptoasset sector to enhance its compliance with financial sanctions.
Key Findings
The report reveals significant under-reporting of suspected sanctions breaches by UK cryptoasset firms, with many breaches linked primarily to Russian (90%) and Iranian (10%) entities. Inadvertent non-compliance is common, often caused by direct or indirect exposure to designated persons (DPs) and sanctioned jurisdictions. Delayed identification of breaches occurs frequently due to retrospective use of blockchain analytics.
Challenges and Risks
Cryptoasset firms face unique challenges in freezing and preventing illicit transactions, as they cannot reject incoming payments, increasing vulnerability to sanctions evasion. There is risk exposure through intermediaries such as sanctioned exchanges and indirect relationships, compounding compliance difficulties. Many sanctions breaches involve lack of robust due diligence and inadequate sanctions risk assessment frameworks.
Recommendations
OFSI recommends that cryptoasset firms enhance their due diligence processes, use sophisticated blockchain analytics tools for both retrospective and real-time detection of exposure to sanctioned entities, timely report suspected sanctions breaches to OFSI, and incorporate cryptoasset-related sanctions risks into their overall sanctions risk assessments and compliance frameworks.
Increased risk-based sanctions compliance programs are crucial, including updating internal sanctions controls to reflect the evolving nature of cryptoasset services and threats. OFSI expects firms to treat sanctions compliance seriously, and warns that enforcement and regulatory scrutiny will increase.
Implications
The report signals a government focus on tightening sanctions compliance in the UK crypto sector, highlighting both evolving threats and the need for proactive, technology-enabled compliance measures. Since January 2020, cryptoasset firms must register with the Financial Conduct Authority (FCA) for AML supervision. The report serves as a critical resource for UK cryptoasset firms and stakeholders aiming to strengthen compliance and mitigate exposure to illicit activity.
The FCA has introduced various regulations for the cryptoasset sector, including the Travel Rule, the cryptoasset financial promotions regime, and discussions on stablecoins, market abuse, and admissions and disclosures. The UK Government has also published draft legislation aimed at bringing the operation of a cryptoasset trading platform, intermediation, cryptoasset lending and borrowing, staking, and decentralised finance (DeFi) within the FCA's remit.
The report covers the evolving risks and vulnerabilities in the crypto sector related to financial sanctions, including the use of anonymous private wallets, VPNs, decentralised exchanges, peer-to-peer trading, nested exchanges, instant exchanges services, and layering cryptoassets by moving them between different blockchain networks.
The report serves as a wake-up call for firms to be proactive in updating systems, training, and policies to account for the emerging threats, be vigilant in screening for transaction and counterparty risks, and be cooperative with their regulators and with OFSI in reporting suspected sanctions breaches.
The UK cryptoasset sector, as outlined in the OFSI report, must integrate advanced technology into their compliance programs to better detect and prevent breaches involving financial sanctions, particularly with the rising number of suspected breaches linked to Russian and Iranian entities. Cryptoasset firms should prioritize robust due diligence and the implementation of sophisticated blockchain analytics tools for enhanced real-time detection of exposure to sanctioned entities.
With increased regulatory scrutiny and government focus on tightening sanctions compliance in the UK crypto sector, it is essential for firms to taken a proactive approach in updating their systems, training, and policies to account for evolving threats, and to cooperate with their regulators in reporting suspected sanctions breaches. This includes adapting to the use of emerging technologies in the crypto sector, such as decentralized exchanges and peer-to-peer trading.
