‘Borderless’ crypto networks wrestle with state sanction compliance

The United States’ financial sanctions against countries like Iran create a messy regulatory environment where cryptocurrency startups have to pick their battles carefully. So far, the battles these companies aren’t picking are having real effects on users and can sometimes directly contradict the company’s alleged decentralization philosophy.

“Something will come down on someone. We just don’t know where or when these regulations will be tested,” said Larry Florio, general counsel at Syndicate, a company focused on enabling “decentralized autonomous organizations” (DAOs) for tech-savvy collectives.

For a previous example, the crypto custody startup BitGo was penalized in 2020 by the Office of Foreign Assets Control (OFAC) for failing “to implement controls designed to prevent” interacting with users from sanctioned jurisdictions. Basically, BitGo is almost like a crypto bank; it helps store clients’ assets in secure vaults. And the legal penalty came when some of those clients may have received cryptocurrency from individuals in sanctioned jurisdictions. OFAC showed this is not allowed under U.S. sanctions. Along those same lines, the crypto exchange Binance has been known to routinely deactivate accounts owned by Iranians and Cubans.

That’s supposedly why the ConsenSys Academy, one of the industry’s leading Ethereum-centric educational organizations, banned roughly 50 Iranian students from its online platform in November 2021, claiming a “recent review of our records shows that you indicated that you are located in a country that we are prohibited from providing goods or services to under U.S. law.”

This compliance review raises questions since the program was free, with no transactions involved, and Coogan Brennan, head of developer relations at ConsenSys Academy, gave an interview to CoinDesk in February 2021 about these Iranian students and the challenges they faced. Former program participant Salman Sadeghi told ProWellTech that “Iranians are treated like second-class citizens in web3.”

“They knew that we were from Iran from the very beginning,” Sadeghi said. “I think sanctions harm innocent people as you see, not the government. It’s not fair…Ethereum mining is still popular in Iran. But it’s the government, mostly, that mines cryptocurrency.”

Yet another thwarted student, who goes by @Alireza__28, said that he had already quit his job in Tehran to study at the academy and that getting kicked out of the program without a completion certificate, after months of participation, ruined his career plans.

“It was really humiliating,” he said. “There are many remote blockchain job opportunities that pay with crypto. It doesn’t matter where you are living. Another hope that I had was getting a job offer with a visa sponsorship [to leave Iran]. And the other big hope I had was to make a decentralized app from here, myself.”

It’s also unclear if the sanctions actually apply to this educational program at all. The educational platform Coursera does allow Iranian students with direct permission from the U.S. government. According to Michael Mosier, the former acting director of the Financial Crimes Enforcement Network (FinCEN), the Biden administration is trying to thaw relations with Iran. As such, OFAC might have granted ConsenSys permission to serve this population. For an example from a different sanctioned country, last year OFAC approved a humanitarian stablecoin distribution campaign in Venezuela.

“The big takeaway from the ConsenSys stuff is that it’s worth talking to experienced lawyers in the OFAC space,” Mosier said. “I find it hard to believe that ConsenSys can’t do this. There’s a lot of times when people self-select out of something rather than deal with the risk.”

On the other hand, Florio countered that it is hard to fault companies taking a conservative approach to such sanctions.

“Sometimes even just trying to seek a waiver could raise your profile and attract more regulatory scrutiny,” Florio said. “A lot of the way that the industry works these days is don’t ask, don’t tell.”

There may still be hope for Iranian Ethereum fans. ConsenSys global PR lead Elo Gimenez told ProWellTech his company is “fully dedicated to our mission of building the digital economy of tomorrow, which includes exploring ways that we can lawfully share and educate around the world, including in jurisdictions where international engagement can be challenging.”

In the meantime, it’s still commonplace for Iranians to use centralized NFT platforms and tools provided by Ethereum co-founder Joe Lubin’s portfolio companies like Gitcoin or MetaMask, usually in combination with a VPN service to mask their location. The crowdfunding platform Gitcoin, for example, is a crowdfunding platform that hosted a campaign for Persian-speaking students that was active from March until December 2021.

Gitcoin COO Kyle Weiss told ProWellTech that, as of December 8, 2021, his fundraising platform is now “marking this grant as inactive out of an abundance of caution to ensure compliance with U.S. law.”

However, Mary Beth Buchanan, the former general counsel for the cryptocurrency exchange Kraken who previously worked for the Department of Justice, where she contributed to the Sentencing Guidelines for Business Organizations, told ProWellTech she doesn’t agree that companies like Gitcoin and ConsenSys Academy need to automatically ban users from sanctioned countries.

“It’s quite possible the activity they wanted to engage in might even be exempt from sanctions. It may be that the company didn’t ask the right questions,” Buchanan said. “Lots of activities are completely exempt from the sanctions regime and others can be granted a general license. You can also apply to OFAC on a case-by-case basis to ask if what you’re doing is okay.… there are phone numbers so that even average people can call OFAC and talk through whether an activity is exempt from sanctions.”

In short, crypto companies may be choosing to avoid marginalized communities rather than devising strategic ways to include them. Buchanan said, especially in cases that involve art or education, it’s far less expensive to be compliant than most business owners might expect. In the meantime, some people from Iran, Cuba and other sanctioned countries feel the crypto industry operates with a de facto caste system. Needing to hide one’s identity in order to participate in online communities is not the same thing as the community being borderless or inclusive.

“Yes, we can develop our own user interfaces and web3 websites,” said Aysha Amin, one of the women involved with the shuttered Gitcoin campaign, describing the esoteric concept that people refer to as web3 or “the metaverse” when describing Ethereum projects and altcoin competitors like Solana. “This kind of isolation does not seem good.”

Beyond Gitcoin, Amin said she’s currently participating in an Ethereum Foundation-supported educational program, called Secureum, while also working for a Tehran-based tech company. Like many Iranians cited in this piece, she is a MetaMask user who intends to continue working in the space despite discriminatory bans on any specific platform.

“We started this [Farsi-language group for blockchain enthusiasts] group after finishing [another] ConsenSys blockchain developer bootcamp,” Amin said. “As long as I have my own private key, I’m not worried. MetaMask saves my info locally.”

For a little background, the Iranian group she’s a part of includes members that met in Japan at the DevCon Ethereum conference in 2019. Amin joined this subgroup of five Iranian women in 2021. Their U.S.-based partner in the Gitcoin campaign, Thessy Mehrain, described the Gitcoin campaign:

I have worked with Consensys Academy on diversity initiatives. As part of that, I was offered scholarships for minority communities, which I in turn extended to CoinIran, an Amsterdam-based organization that has the goal to educate about web3. I met them [CoinIran bloggers] at the Ethereum conference in Osaka. In 2020, a group of female developers took part in the Solidity bootcamp… a Women in Blockchain chapter was formed in Tehran, the same as we have globally in NYC, Boston, Brisbane, Lagos and elsewhere… They are run locally, entirely independently to educate about the tech and its opportunities.

All things considered, it appears these initiatives are more focused on education than strictly on financial transactions.

“Education helps an individual make informed decisions for themselves and also contribute to the progress of the society and nation,” Mehrain said. “These women are members of the global society and should be empowered by education to meaningfully contribute.”

And it also appears that the recent Gitcoin ban is an outlier among the global initiatives funded by Ethereum co-founders like Vitalik Buterin, founder of the Ethereum Foundation, and Lubin, the leading investor behind ConsenSys. This is partially because, as Florio pointed out, it’s impossible to discriminate across the entire metaverse.

“I don’t see sovereign nations giving up their foreign policy arsenal… yet it’s unenforceable to say that Iranians can’t participate in anything without applying some type of firewall to the entire country of Iran. I don’t even think the technology exists to do something like that type of internet blockade,” Florio said. “Imposing sanction laws is going to be difficult and require creative interpretations…I don’t know how the enforcement will come there or if they’ll take into account there are no known methods of fully complying in this context.”

For now, some crypto companies prefer to ban Iranians and other people from sanctioned jurisdictions, rather than seek a compliant legal strategy for including them.

“We don’t have full access all the time. It’s easy to exclude or ban us in web3,” Amin said. “Here in Iran, people who work with blockchain technology, miners, traders, developers, always worry about their access to web3. And we definitely feel this ‘second class citizens’ treatment.”