Error message

  • Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Notice: Trying to access array offset on value of type int in element_children() (line 6600 of /var/www/drupal-7.x/includes/
  • Deprecated function: implode(): Passing glue string after array is deprecated. Swap the parameters in drupal_get_feeds() (line 394 of /var/www/drupal-7.x/includes/

‘Israeli soldier’ from notorious unit confesses to US citizen’s killing

Published by Anonymous (not verified) on Wed, 22/05/2024 - 6:33am in

In recordings obtained by The Grayzone, a self-proclaimed soldier from Israel’s infamous Netzah Yehuda battalion detailed his unit’s killing of a 78-year-old Palestinian-American, and flaunted his genocidal views. After announcing plans to sanction the battalion, the Biden administration has inexplicably pulled back. The Biden administration has balked after announcing plans to sanction five units of the Israeli military accused of wanton human rights abuses in the occupied West Bank. “Four of these units have effectively remediated these violations, which is […]

The post ‘Israeli soldier’ from notorious unit confesses to US citizen’s killing first appeared on The Grayzone.

The post ‘Israeli soldier’ from notorious unit confesses to US citizen’s killing appeared first on The Grayzone.

Huge victory for Goldsmiths students for Gaza as uni accepts divestment demand and more

Published by Anonymous (not verified) on Sat, 04/05/2024 - 5:34am in

Six months of demos and five weeks of sit-ins see university climb down in face of students’ determination

Students at London’s Goldsmiths university have won a huge victory after months of solidarity with Palestinians, forcing their university to accept their demand to divest from involvement with the Israeli occupation and to set up scholarships for Palestinian students.

Organiser Fatima Zaid explained in a Twitter/X thread what the students have achieved, including the end of an investment contract with a firm closely connected to Israeli PM Benjamin Netanyahu – and a review of the university’s use of the unfit (and non-definitional) so-called ‘IHRA definition’ of antisemitism, that has been widely used to suppress criticism of Israel:

The news will strengthen even further the determination of students at a string of other UK universities who have set up encampments – and is already encouraging students in the US facing brutal state repression and foul smears.

Congratulations and solidarity with the people of Palestine and all those who are fighting for an end to genocide, occupation, apartheid and repression.

If you wish to republish this post for non-commercial use, you are welcome to do so – see here for more.

Video: Miriam Margolyes’s powerful statement on ‘vicious, genocidal’ Israel

Published by Anonymous (not verified) on Sun, 07/04/2024 - 9:06pm in

Jewish actress posts no-holds-barred video supporting Jewish Council of Australia, attacked by Zionists for ceasefire call

Jewish actress and national treasure Miriam Margolyes, a joint UK and Australian citizen, has posted a video supporting the Jewish Council of Australia (JCA) call for an immediate and permanent halt to Israel’s genocidal assault on Gaza – along with the imposition of sanctions and an immediate end to Australia’s military ties with Israel.

The JCA has been heavily attacked by pro-Israel groups for the call, with the attacks following similar lines to the dismissal in the UK of left-wing Jewish groups by right-wing nationalist organisations and politicians.

In her video, Margolyes says she has never been more ashamed of Israel – which she described as a ‘vicious, genocidal, nationalist nation’:

Despite the antisemitic representation by western governments and media as if all Jews support Israel, very many do not – and even many who have supported it are disgusted by Israel’s mass murder of, so far, more than forty thousand Palestinian civilians, overwhelmingly women and children, and the blockade and assaults it is using to starve two million more. The UK and Australian establishments continue their complicity in Israel’s war crimes.

If you wish to republish this post for non-commercial use, you are welcome to do so – see here for more.

The effects of Russian sanctions as portrayed in YouTube videos

Published by Anonymous (not verified) on Sat, 30/03/2024 - 12:44pm in



Last month American provocateur Tucker Carlson visited a Russian grocery store. Because it was filled to the brim with food, Carlson claims that western sanctions placed on Russia aren't having an effect. "We've been told sanctions on Russia have had a devastating effect on its
economy," writes Carlson. "We visited a grocery store in Moscow and found a very
different situation."

Carlson's video is just one of many in a strange genre of "sanctions aren't working" videos produced by Westerners visiting or living in Russia. (Here is a good rebuttal to Carlson's video by Russian YouTuber NFKRZ.) In another video, Dutch-Canadian farmer Arend Feenstra, who has recently moved to Russia with his wife and nine children, walks through a hardware store full of tools. "Sanctions???" he quips.

Don't let the videos fool you. Sanctions have had a big effect on Russia. And by sanctions I'm referring not only to the official sanctions levied by coalition governments, but also self-sanctions imposed by Western companies. Self-sanctioning occurs when companies like Lego, Coke, or McDonald's choose to leave Russia, not because their government says they must, but because their customers and employees have pressured them to leave, or out of a general sense of solidarity with Ukraine. (Here is a list of companies that have left.)

While Carlson and Feenstra's videos of store shelves suggest prosperity, what they don't show is how many resources Russian businesses have been forced to sacrifice in order to re-order their affairs so as to provide Russians with full shelves. These businesses have had to go out and build new relationships with manufacturers in places like China or Turkey. The alternative products that have been introduced often aren't as good, or as familiar, or as useful to customers. 

Many of the "sanctions don't work" videos spotlight the contraband Western goods that are often found on Russian store shelves. This video, for instance, shows Coke being sold at Spar, a grocery store. Coke is banned in Russia, so the message here is presumably that the sanctions are a waste of time. But what they don't show is that the prices for these contraband goods will be higher than before. The Coke products in the video are no longer made in Russia but must be
smuggled in via third-parties such as Poland, Afghanistan, and
Kazakhstan, the extra shipping and handling costs being incorporated into their final price. Think of this as a sanctions-induced smuggling tax.

Put differently, coping with sanctions and self-sanctions is costly for Russia; in Carlson's videos we only see the final product, full shelves, but not all the hassle and resources that have gone into producing that state of affairs. Nor is the set of full shelves on display in his video necessarily as desirable as the set of full shelves that existed prior to sanctions.

A much more realistic illustration of the effect of sanction is provided in a recent video by Arend Feenstra, the Dutch-Canadian farmer, of a visit he makes to a Russian tractor dealership.

I watched it so you don't have to. What follows is a quick summary of the relevant bits. It starts out with an excited Feenstra driving out to is what he believes to be a Case/New Holland dealership. Since the Case and New Holland tractor brands are popular in Canada, Feenstra's previous home, he will get to see some brands that he is familiar with. Ah, nostalgia.

(A side note: As a Dutch-Canadian myself, I find it jarring that someone of my ilk has decided to emigrate to Vladimir Putin's Russia. But digging deeper, we learn that Feenstra is a bigot: he doesn't like the LGTBQ community. Given that Russia's regime considers the "international LGBT movement" to be a terrorist organization, I suppose there's a natural fit for folks like him in Russia.)

Unfortunately for Feenstra, when he arrives at the dealership he discovers that it no longer sells Case or New Holland tractors. Both brands of farm equipment are built by CNH, a UK-headquartered equipment manufacturer, and along with most other Western farm companies CNH pulled out of Russia in 2022, effectively ending all its Russian dealership relationships. 

The only new tractors that the dealership has available are Chinese-built YTOs, which the dealership was forced to turn to in 2022 to fill the sudden gap in its show room.We learn in the video that YTOs are a regression in terms of technology. Feenstra points out throughout that the Chinese tractors have less electronics than their western equivalents and more mechanical parts. Instead of electronic shifting, for instance, the YTOs use mechanical shifting. The fuel pumps are mechanical too. It's like stepping back in time.

A regression to mechanical components is a nuissance, but it's not awful. However, things get worse. Enter the triple mower problem.

A tractor with a triple mower

Prior to the sanctions, we learn that the dealership's most popular tractors were larger horsepower products like the New Holland 210. These larger tractors are particularly desired by farmers in the region for their ability to accept an attachment known as a triple mower, says the employee. A triple mower is designed to cut a wider swath of grass or crops compared to a single mower. This allows farmers to cover more ground in less time, improving overall efficiency during harvesting or haymaking operations.

Alas, the Chinese-made YTOs can't use a triple mower, the employee tells us. The dealer is in talks with the manufacturer to make changes to the frame to accommodate them, but there's no indication when this will occur. Feenstra is not impressed by any of this.

Feenstra checking out a YTO tractor

In the meantime, the dealer tells Feenstra that if he needs a new tractor with triple mower compatibility, he will have to import a Western one via the parallel market. This will involve buying a tractor in Europe and sending it through a third-party transit country, like Turkey, then moving it to Russia. But the whole process will be expensive, warns the employee, including paying VAT three times.

Russian farmers who bought New Holland or Case tractors prior to the sanctions are no better off, we learn, because they now face hurdles getting spare parts for their tractors. Prior to the self-sanctions they could rely on the Case/New Holland dealership for a steady supply of Case and New Holland parts, but with the dealer having lost its relationship with CNH, the only way to get parts is by smuggling them in. Alas, smuggling adds uncertainty and a higher price tag.

Another conversation between Feenstra and the employee centres around a piece of machinery known as a baler, which can be attached to the back of a tractor in order to convert a row of hay into a convenient bale. According to the employee there are a number of Russian companies that make balers, but they are "not very good". The video reveals that one Western-made baler brand is available for purchase, a German-made Kuhn. (Is Kuhn one of those rare European farm companies that has chosen not to self sanction?) But the Kuhn baler it is quite expensive, more than the cost of an entire tractor.

Stepping back, Feenstra's video is great illustration of the costs imposed on Russia by sanctions and self-sanctions. The dealership is struggling to fill the void left by departing Western brands. Its customers, Russian farmers, are stuck with the option of an inferior replacement for Western-made tractors, like the YTO, or a more expensive smuggled products. The dealership and its customers seem to be getting by, but they are clearly worse off than before.

Feenstra isn't the only western farmer in Russia to be producing "sanctions don't work" videos. An Australian family that has moved to Russia in order to start a farm also makes YouTube videos on the topic. "So, the sanctions really haven't been bad for Russia," says the family patriarch, John, standing in a Russian mall. "If they have done anything, they have been great for Russia."

But another video (see below) suggests the opposite. In it the Australians are paying a visit to a nearby John Deere tractor dealership. We learn from an employee that this particular dealership is part of a Russian dealership network that, prior to the sanctions, was the largest John Deere distributor in all of Europe. John Deere is a U.S. equipment manufacturer.

Near the start, John optimistically films a large sign boasting the dealership's many relationships with western manufacturers, including JCB, Pottinger, Väderstad and Haybuster. But as he learns later on, the sign is no longer meaningful. Along with most other farm product companies, John Deere and JCB exited Russia in 2022. The dealership has lost its dealer status and can no longer sell either John Deere or JCB products, nor most of the other brands that are advertised on its sign.

To fill the void, the dealership now offers Turkish-made Basak tractors and Chinese-made Noma tractors. An employee who shows the family around the dealership grouses to John about the quality of the Chinese tractors that he stocks, saying: "I don't know what we will do with it, because if I sit inside of the cabin and look down I can see the ground because there in a gap in the floor." The tractor is the technological equivalent of a first generation John Deere, he complains.

Interestingly, the owner of this particular network of Russian dealers, known as EkoNiva-Technika, is based in Germany and produces public financial statements. I dug through the numbers to get a better feel for how the dealership is doing. 

In 2021, prior to self-sanctions, the EkoNiva-Technika dealership network sold 403 tractors. Then Russia invaded Ukraine, and the dealership's sales fell to 263 tractors in 2022. In 2023 it sold just 131 tractors. That's a big fall.

The German parent blames the decline in tractor sales on a "significant drop in demand" for new agricultural machinery by Russian farmers, as well as the loss of its main suppliers, which were replaced by alternatives from China and Turkey whose "products fell far short of the previous sales figures." Meanwhile, the dealer's spare parts business saw a big jump in revenue thanks to an intensification in demand for Western parts and higher parts prices, no doubt due to having to resort to costly transshipment routes. Spare parts have gone from 24% of the dealership network's revenues prior to sanctions to 49% of revenues in 2023.

Back to John, the Australian farmer. When he does eventually buy a tractor, we find out that it's a used Japanese-made Yanmar tractor. All the controls are written in Japanese and he can't read the manual. Compounding matters, Yanmar has officially left Russia, so John will likely find that getting parts is a pain. Again, that's the nuissance of sanctions. Rather than getting the first-best, the only option is often second- or third-best.

John and his new Japanese tractor

Given all the anecdotes I've assembled, what is the bigger picture?

Prior to being sanctioned, Russia's farming sector had evolved towards a particular pattern of specialization and trade comprised of middlemen dealerships, their relationships with Western manufacturers, and the farmers they served. The sanctions (and self-sanctions) immediately upended that pattern, forcing dealers and farmers to undergo a massive and costly recalculation event.

The new pattern of specialization and trade that the Russian farm sector has arrived at doesn't appear to be as good as the initial pattern. 

To begin with, the alternative brands that have filled the void seem to be a downgrade. The Chinese YTOs that the first dealer is selling won't accept a triple mower while the tractors the second dealer stocks have holes in the floors. Spare parts that were once widely available thanks to dealerships' stable relationships with their western suppliers are harder to come by. Dealership resources are now being diverted to smuggling in contraband parts, which means higher prices for farmers. Finally, as suggested by the dealership's financials, farmers are refurbishing old tractors rather than investing in new tractors. This slowdown in capital investment will presumably hurt crop yields in the long term.

In sum, contrary to Tucker's video and many other "sanctions aren't working" videos on YouTube, the videos made by expatriate Canadian and Australian farmers suggest that the opposite: sanction are having an effect. And it isn't a good one.

Inside the anti-Syria lobby’s Capitol Hill push for more starvation sanctions

Published by Anonymous (not verified) on Thu, 21/03/2024 - 9:41am in

A week from the 13th anniversary of the US-backed Syrian dirty war, the American Coalition for Syria held its annual day of advocacy in Washington DC. I went undercover into meetings with Senate policy advisors and witnessed the lobby’s cynical campaign to starve Syria into submission. On the morning of March 7, as the US Capitol teemed with lobbyists securing earmarks ahead of appropriations week and activists decrying the Gaza genocide, one special interest group on the Hill stood out. […]

The post Inside the anti-Syria lobby’s Capitol Hill push for more starvation sanctions first appeared on The Grayzone.

The post Inside the anti-Syria lobby’s Capitol Hill push for more starvation sanctions appeared first on The Grayzone.

How PayPal can use stablecoins to avoid AML requirements and make big profits

Published by Anonymous (not verified) on Tue, 19/03/2024 - 8:09am in

There's a new financial loophole in town: stablecoins. Stablecoins are dollar, yen, or pound-based payments platforms that are built using crypto database technology.

Financial institutions are always looking for loopholes to game the system. Typically this has meant avoiding capital requirements or liquidity ratios in one jurisdiction in favor of a looser standards elsewhere. The new stablecoin loophole allows for a different set of financial standards to be avoided, society's anti-money laundering regulations.

I'll explain this new loophole using PayPal as my example.

PayPal now offers its customers two sorts of regulated platforms for making U.S. dollar payments. The first type will be familiar to most of us. It is a traditional PayPal account with a U.S. dollar balance, and includes PayPal's flagship platform as well as PayPal-owned platforms Xoom and Venmo. These all have strict anti-money laundering controls.

The second type is PayPal's newer stablecoin platform, PayPal USD, which has loose anti-money laundering controls. PayPal USD is built on one of the world's most popular crypto databases, Ethereum. Dollars held on crypto databases are typically known as stablecoins, the most well-known of which are Tether and USDC.

What do I mean by fewer anti-money laundering controls?

If I want to transfer you $5,000 on PayPal's traditional platform, PayPal will first have to grant both of us permission to do so. It does so by obliging us go through an account-opening process. PayPal will carry out due diligence on both of us by collecting our IDs and verifying them, then running our information against various regulatory blacklists, like sanctions lists. Only after we have passed a gamut of checks will PayPal allow us to use its platform to make our $5,000 transfer.

Contrast this to how a payment is made via PayPal's new stablecoin platform.

First, we both have to set up an Ethereum wallet. No ID check is required for this. That now allows us to access PayPal's stablecoin platform. Next, I have to fund my wallet with $5,000. I can get these these funds from a third-party who already holds money on PayPal's stablecoin platform, say from a friend, or from someone who buys goods from me, or from a decentralized exchange. Again, no ID is required for this transaction to occur. Once I have the funds, PayPal will process my $5,000 transfer to you.

Can you spot the difference? In the transaction made via PayPal's legacy platform, PayPal has diligently got to know everyone involved. In the second transaction, PayPal makes no effort to gather information on us. And lacking our names, physical addresses, email addresses, or phone numbers, it can't do a full cross-check against various regulatory black lists.  

More concretely, PayPal's legacy platform does its best to stop someone like Vladimir Putin, who is sanctioned, from ever being able to sign up and make payments. But if Putin wanted to use PayPal's new stablecoin platform, PayPal makes almost no effort to stop him from jumping on.

One of the biggest expenses of running a legacy financial platform is anti-money laundering compliance. Programmers must be deployed to set up onboarding and screening processes. Compliance officers must be hired. If a transaction is suspicious, that may trigger a halt, and the transaction will have to be painstakingly investigated by one of these officers. The platform is hurt by lost customer goodwill – no one likes a delay.

That's where the stablecoin loophole begins.

PayPal can reduce its costs of getting to know its customer by nudging customers off its traditional platform and onto its PayPal USD stablecoin platform. Now it can onboard them without asking for ID. Since it no longer collects personal information about its user base, fewer transactions trigger flags for being suspicious, and only rarely do they register hits on sanctions blacklists. That means fewer halts, delays, and costly investigations. PayPal can now fire a large chunk of its compliance staff. The reduction in costs leads to a big rise in earnings. Its share price goes to the moon.

For now, PayPal's stablecoin platform remains quite small. Only $150 million worth of value is held on the platform, as the chart at the top of this post shows. The company's legacy platforms are much larger, with around $40 billion worth of balances held. Given the compliance cost difference, though, I suspect PayPal would love it if its stablecoin platform were to grow at the expense of its legacy platform.

I've used PayPal as my example, but the same calculus works for the financial industry in general. If every single bank in the financial system were to convert over to a stablecoin platform for the delivery of financial services, and no longer use their legacy platforms, the industry's total anti-money laundering compliance costs would plummet.

So far I've just explained this all from the perspective of financial institutions, but what about from the viewpoint of the rest of us? Society has set itself the noble goal of preventing bad actors from using the financial system. A large part of this effort is delegated to financial institutions by requiring them to incur the expense of performing due diligence on their platform users. This requires a big outlay of resources. Many of these costs are ultimately passed on to us, the users.

If institutions like PayPal switch onto infrastructure that doesn't vet users, then resources are no longer being deployed for the purposes we have intended, and the broader goals we have set out are being subverted. Is that what we want? I'd suggest not.

Some followup thoughts:

1. PayPal's stablecoin platform employs fewer anti-money laundering controls than its regular platform. On the other hand, its stablecoin platform has stricter standards in other areas, including the safety of its customer funds. I wrote about this here: "It's the PayPal dollars hosted on crypto databases that are the safer of
the two, if not along every dimension, at least in terms of the degree
to which customers are protected by: 1) the quality of underlying
assets; 2) their seniority (or ranking relative to other creditors); and
3) transparency."

2. The pseudonymity of stablecoins is something I've been writing about for a while. In a 2019 post, I worried that at some point this loophole would lead to "hyper-stablecoinization," a process by which every bank account gets converted into a stablecoin. I'm surprised that almost five years later, this loophole still hasn't been closed.

3. The typical riposte to this post will be: "But JP, stablecoins are implemented on blockchains, and blockchains are transparent. This prevents bad actors from using them, and so stablecoins should be exempt from standard anti-money laundering rules." I don't buy this. Bad actors are using stablecoin platforms, despite their pseudo-traceability. "Its convenient, it's quick," say a pair of sanctions breakers about payments made via Tether, the largest stablecoin platform. Society has deputized financial institutions to perform the crucial task of vetting all their users. By not doing so, stablecoin platforms are shirkers. Trying to outsource the policing task to the public or to the government by using a semi-transparent database technology doesn't cut it.

Have the sanctions on Russia failed?

Published by Anonymous (not verified) on Thu, 14/03/2024 - 12:34pm in



I very much enjoy economist Robin Brooks's tweets, especially his charts showing how sanctions imposed on Russia have affected regional trade patterns. While direct trade between Europe and Russia has collapsed thanks to Russia's invasion of Ukraine and subsequent sanctions, the chart below shows a suspicious-looking countervailing boom in European trade with Kyrgyzstan.

A big chunk of these European goods are presumably being on-shipped from Kyrgyzstan to Russia.

Now, you can look at this chart and arrive at two contradictory conclusions. The first is that the EU's sanctions are not working because they are being avoided via third-party nations like Kyrgyzstan. (This is Steve Hanke's take on Robin's charts.) Or you can see the charts as evidence that the sanctions are working, for the following reasons.

Sure, prohibited goods are filtering through to Russia – that was always going to be the case. But consider all the extra nuisances and frictions that now exist thanks to sanctions. For instance, instead of JCB tractors being shipped directly from factories in Europe to Russia, they have to be transferred to a third-party country, like Armenia, then perhaps re-routed to yet another country for the sake of obfuscation, say UAE, prior to those tractors finally entering Russia. (One of Robin's charts illustrates the rise of the EU-Armenia-UAE-Russia nexus).

These new roundabout trade routes introduce all sorts of additional costs including taxes, customs fees, shipping, insurance, and warehousing, not to mention extra palms to grease. There is also the extra risk of getting caught somewhere along this chain. A dealer involved in moving tractors to Russia via a third-party country, for instance, might be blacklisted by JCB (which has voluntarily chosen to exit Russia), losing their dealer status.

These combined costs get built into the final sticker price that Russian must pay for contraband American and European imports. Think of this extra wedge as a "sanctions tax." This sanctions tax leaves Russians with less in their pocket. And that means fewer resources for Putin to wage war than if the sanctions had never been levied.  

So when I see Robin's charts of various transshipment routes, they suggest to me that sanctions are effective courtesy of the sand-in-the-gears effect I just explained.

Now, this doesn't mean that I think the coalition's existing sanctions program is sufficient. We are in a sanctions war with Putin, and that necessitates constantly opening up new economic fronts in order to throw Putin off guard and make it harder for him fund his war. The transshipment points illustrated in Robin's charts are a sign to me that existing sanctions are working, but they also seem like a great target for future sanctions.

And in fact, the coalition has already taking two steps to pressure transshipment to Russia.

The U.S. Treasury recently imposed secondary sanctions on any foreign financial institution that facilitates transactions involving Russia's military/industrial complex. (I wrote about this here). What this means, for example, is that banks in transshipment points like Kyrgyzstan will have to be more careful when they deal with Russian entities. Any trade involving the military-industrial sector that passes through Kyrgyzstan will likely grind to a halt. Other non-military trade transiting through Kyrgyzstan, say JCB tractors, will probably continue to make it through, but thanks to heightened sanctions risk, banks will pass on this risk to Russians in the form of a higher sanctions tax.

The second step is the EU's new and very provocative "no-Russia clause." It requires EU exporters to contractually prohibit their trading partners from re-exporting certain restricted goods to Russia. If caught, fines must be paid or the contract voided. That adds more sand in the gears.

One hopes that the coalition of nations arrayed against Russia continues to increase its pressure on transshipment points. For instance, the EU could widen the range of goods subject to the no-Russia clause, the current list being somewhat limited. For now, though, my guess is that Robin's charts will show that the coalition's sanctions program is doing a better job in 2024 than it did in 2023, with the EU's no-Russia clause and the U.S.'s secondary sanctions being the proximate cause of that improvement.

The first round of U.S. secondary sanctions on Russia is working

Published by Anonymous (not verified) on Fri, 23/02/2024 - 9:59am in


gold, sanctions

Turkish banks halted transactions with Russian banks last month and are only slowly reintroducing payments for a narrow range of products that are on a so-called "green list," reports Ragip Soylu. This broad debanking of Russia by Turkey is part of the fallout from President Biden's first round of secondary sanctions, announced on December 22. 

Ukraine/sanctions watchers around the world are breathing a sigh of relief. At last the cavalry has arrived! While the Russian sanctions program has often been described by the press as the "world's strictest", in actuality it has been (till now) alarmingly light-touched due to its lack of the toughest tool of financial warfare: secondary sanctions.

Primary sanctions vs secondary sanctions

Secondary sanctions, especially when applied to foreign banks, are far more damaging than primary sanctions, which to date have been the dominant type of sanction levied against Russia. 

With primary sanctions, it is the "primary" layer – U.S. citizens and companies – that are cut off from dealing with the designated Russian target(s). However, primary sanction don't prevent non-U.S. individuals or non-U.S. companies, say a Turkish bank, from filling the void left by departing American counterparts, often acting as a re-router of the very U.S. goods that can no longer be moved directly to Russia by U.S. firms. So rather than reducing the amount of Russian trade, primary sanction often lead to little more than a displacement of trade from one route to another. That's a nuissance for the targeted country, but hardly a game changer.

Secondary sanctions are an effort to combat this displacement effect. They do so by extending the trade prohibitions placed on the primary layer, U.S. actors, to the second layer, that is, to non-U.S. actors. In the case of Biden's December order, foreign banks can no longer facilitate certain Russian transactions that have already been off bounds to Americans for several years.

So far, Biden's secondary sanctions appear to be working. In addition to halting all transactions with Russia for a month, Turkish banks have completely stopped opening accounts for Russian customers. According to Reuters, Turkish exports to Russia fell 39% year-on-year in January. In China, reports say that banks have "heightened scrutiny" of Russian transactions, in some cases going so far as to cut off Russian banks. UAE banks have also begun to restrict linkages to Russia.

Why comply with the U.S.?

Why do non-U.S. actors bother complying with U.S. secondary sanctions? After all, if you're a Turkish banker in Istanbul, Biden has no jurisdiction over you. America can't put you in jail, or fine you.

The way that the U.S. is able to sink a hook into non-U.S. actors is by threatening to take away access to the U.S. economy. Foreign banks, for instance, are told they will be exiled from the all-important U.S. banking system if they don't severe or constrict their Russian relationships. Since access to the Ne York correspondent banking system is so important relative to the small amounts of sanctioned Russian business they must give up, foreign banks are quick to fall into line.

Biden's secondary sanctions on foreign banks only apply to a narrow range of transaction types, specifically those that support Russia's military-industrial base. In short, any foreign bank that is found to be conducting transactions involving military goods destined for Russia can be penalized. Those foreign banks that deal in, say, Russian food imports needn't worry.

In addition to obviously prohibited military items, like missiles and fighter jets, the U.S. Treasury has provided a list of not-so obvious items, such as oscilloscopes and silicons wafers, that it deems fall under the category of military-industrial goods. I've appended this list below. The Treasury suggests that these additional items might be used for, among other things, the production of advanced precision-guided weapons.

Source: OFAC

That's quite an extensive list.

Turkish banks appear to have overcomplied by dropping any transaction that even has a whiff of Russia. This de-risking effect is a common by-product of various banking controls, both sanctions and anti-money laundering, whereby banks cease dealing not only with prohibited customers but certain legitimate customers that are superficially similar to prohibited customers that they are deemed too risky and expensive to touch.

According to reports, Turkish banks have reintroduced transactions for green-listed products such as agricultural products, which aren't actually targeted by the U.S. secondary sanctions.

Turkish financial institutions may be particularly sensitive to U.S. sanctions given the fact that an executive of Halkbank, a Turkish government-owned bank, was sentenced to 32-months in U.S. jail in 2018 for helping Iran evade U.S. sanctions and money laundering. One of his evasion routes was the notorious gold-for-gas trade, which I wrote about here. Halkbank itself was indicted in 2019 for sanctions evasion; the case against it is ongoing.

An unforgiving legal standard

An important element of any alleged crime is the mental state of the alleged criminal, or their "intent." This gets us to another reason for the rapidity and breadth of the debanking of Russian trade. Biden's secondary sanctions have a novel legal feature. The legal standard on which they rely, strict liability, does not require that the prosecution prove intent.

Up till now, U.S. secondary sanctions have not deployed this sort of a strict liability standard. To demonstrate that a foreign bank has engaged in evading secondary sanctions on Iran, for instance, U.S. prosecutors have been required to show that the foreign bank did so knowingly. If the banker conducted prohibited Iranian transactions unknowingly (i.e. inadvertently or unintentionally), then they couldn't be found guilty of sanctions evasion.

Under the strict liability standard set out in Biden's December 22 order, there is no onus on U.S. sanctions authority to show that a foreign bank has knowingly conducted transactions linked to Russia's military-industrial complex. Even an unintentional transaction can be punished. Because this strict liability standard makes it so much more likely that foreign banks run afoul of sanctions and get cut off from the U.S. banking system, bankers are rushing to comply.

What's next?

When the U.S government asked domestic entities to stop dealing with Russia a few years ago, many of these transactions were quickly displaced to third-parties like Turkey. By deputizing foreign banks to be equally vigilant, secondary sanctions will likely crimp the original displacement effect, resulting in a big and permanent decline in Russian trade.

To get an idea for what might happen to Russia's military-industrial goods trade, take a look at how Iran's oil exports were halved after Obama imposed secondary sanctions on Iran in 2012, leapt when they were lifted in 2016, and crumbled again when Trump reimposed them in 2018.

The lesson is that secondary sanctions on foreign financial institutions can be very effective.

Evasion efforts will begin very quickly. When secondary sanctions were first placed on Iran in 2012, Turkish bank Halkbank introduced a forged document scheme in an effort to disguise trade in sanctioned crude oil shipments as legitimate food transactions. The U.S. will have to step up its enforcement efforts to plug these holes. Without proper enforcement, the effect of the secondary sanctions will remain muted.

Using the secondary sanctions on Russia's military-industrial complex as a model, there are many more sectors of the Russian economy on which secondary sanctions might be placed. The next round could extend to Russian automobile imports, its central bank, or the diamond industry.

Secondary sanctions to strengthen the oil price cap 

Even more useful would be to use secondary sanctions to strengthen the most important piece of financial artillery heretofore deployed against Russia: the $60 oil price cap. 

The price cap endeavors to force Russia to accept a below-market price for the oil that it ships, thus hurting its ability to finance its invasion of Ukraine. The cap is currently underpinned at the primary level by threatening banks, insurers, shippers and other businesses located in the EU, U.S., and other G7 countries ("the Coalition") with penalties if they trade in Russian oil above $60. Because Russia has historically been dependent on Coalition service provides for shipping oil, it has been getting less revenue for its oil then it would otherwise receive. 

However, over time a growing chunk of Russia's oil exports has been diverted away from Coalition service providers to third-parties in jurisdictions like Turkey and UAE that are not subject to the cap. This has allowed Russia to sell at prices in excess of $60 and thus recover much of its forgone revenues. If the cap were to be applied not only at the primary Coalition layer, but also at the secondary layer by requiring foreign financial institutions to join in via the threat of secondary sanctions, then much more Russia oil would brought back under the $60 ceiling, and Russia's ability to finance its war against Ukraine would be significantly crimped.

It's time to impose Iran-calibre sanctions on Russia

Published by Anonymous (not verified) on Tue, 09/01/2024 - 4:41am in



Russia is sometimes described as the world's most sanctioned nation. And while that's true, the long list of sanctions that the G7 coalition has placed on Russia in response to its attack on Ukraine are surprisingly light compared to the fewer but far more-draconian sanctions placed on Iran over the last decade or so.

This ordering of sanctions precedence is a mistake. With its all-out invasion of Ukraine, Russia has moved past Iran into top slot at world's most dangerous nation. Vladimir Putin merits a sanctions program that is at least as onerous as Iran, if not more so, yet for some reason he is getting off lightly. It's time to apply Iran-calibre sanctions to Russia.

What makes a draconian sanctions program draconian?

What makes the Iranian sanctions program so draconian is that many of the sanctions are so-called secondary sanctions, a feature that has been mostly absent in the Russian sanctions program.

When the U.S. or EU levy primary sanctions on an entity, they are saying that American individuals, banks, and businesses (and European ones, too) can't continue to interact with the designated party. This hurts the target, but it leaves foreign individuals, banks, and businesses with free reign to fill the void left by departing American and European actors, thus undoing part of the damage.

Secondary sanctions prevent this vacuum from being occupied. The U.S. government tells individuals or businesses in other nations that they, too, cannot deal with a sanctioned entity, on pain of losing access to U.S. economy. It's either us, or them.

When applied to foreign financial institutions (i.e. banks) secondary sanctions are particularly potent. The U.S. tells foreign banks that if they continue to provide banking services to sanctioned Iranians, the banks' access to the all-important U.S. financial system will end. Since the U.S. financial system is so crucial, foreign banks quickly offboard all sanctioned Iranian individuals and businesses. The sanctioned Iranian entity finds that it has now been completely removed them from the global financial system. This financial shunning effect is much more powerful than the effects created by primary sanctions or secondary sanctions on non-banks.

Notice that I've limited my commentary on secondary sanctions to the U.S. Since it first began to use secondary sanctions in 1996, the U.S. Treasury has become a master of the art, whereas as far as I know they are a tool the EU has long resisted adopting.

The bank-focused secondary sanction placed on Iran over the last decade-and-a-half have been particularly devastating because they target a broad sector of Iranian society, most crucially the Iranian oil sector, the life blood of Iran's economy. Secondary sanctions prevent foreign banks from processing Iranian oil trades on pain of losing access to the U.S., and so most foreign banks have chosen to cease interacting with the Iranian oil companies.

The chart below illustrates the effectiveness of this approach. When President Obama placed the first round of bank-focused secondary sanctions on Iran's oil industry in 2012, the nation's oil exports immediately cratered from around 2 million barrels per day to 1 million barrels. When he removed them in 2016, they quickly rose back up. And when Trump reapplied the same secondary sanctions in 2018, they collapsed once again, almost to zero.

Source: CRS [pdf]

In short, U.S. secondary sanctions imposed huge body blows on the Iranian oil industry. These same forces have not been brought to bear on Russia's oil industry.

A dovish Russian sanctions program

While the Russian sanctions program is often portrayed as being strict, it is far lighter than other sanctions programs, including the one placed on Iran, because it is comprised almost entirely of primary sanctions. (For a good take on this, see Esfandyar Batmanghelidj here). While a small list of secondary sanctions have been placed on Russia, for the most part they have not been of the banking type.*

The second reason why the Russian sanctions program is dovish is that the oil component of the EU and U.S. sanctions campaign has been particularly lenient. Take a look at the above chart of Iran oil exports and you can see very real evidence of damage from sanctions. Scan the chart of Russian oil exports below, however, and it suggests business as usual.

Source: CREA

Sure, the EU and other coalition partners have cut Russian oil imports to almost nil, and that's great. But overall, this effort hasn't done much harm to Putin, since over time the coalition's respective share of Iranian oil exports has simply been taken up by nations like India and China. Both before and after the 2022 invasion of Ukraine, Russia reliably shipped around 1,000 kt/day of crude oil and crude oil products.

Underlying this leniency, G7 businesses are still allowed to engage in the Russian oil trade, as long as this doesn't involve bringing the stuff back to the EU. For instance, foreign buyers of Russian oil (say like Indian refiners) are allowed to hire European insurers and shipping companies to import Russian oil.

There is a limitation on this. European insurers and shippers can only be used by an Indian refiner, or some other foreign buyer, if the purchase price of Russian oil is set at $60 or below. This is what is known as the G7 oil price cap.

Because the insurance and shipping industries of the UK, EU, and U.S. have a large share of the market, Russia has had little choice but to rely on coalition intermediaries for selling at least some of its oil at $60. This has come at a cost to Russia; it must sell at below-market prices. And that certainly makes Russia worse off than a world in which there was no oil price cap.

But the very fact that these purchases are occurring at all, compared to a world in which Iran-calibre sanctions would prevent them from ever taking place, illustrates how weak the oil price cap is. 

Russia's oil export income is the life-blood of Putin's war economy. These funds gets funneled directly to the front-line in the form of weapons and supplies. It's time to get serious about Russian sanctions, remove the dovish oil price cap, and apply to Russia the same calibre of secondary sanctions that so effectively crimped Iranian oil exports.

We may have to deescalate sanctions on Iran in order to escalate them on Russia

What has prevented the U.S. and its allies from applying draconian Iran-style sanctions to Russia? One of their main worries is that taking a major oil exporter out of the market will have major macroeconomic impact. 

Russia currently exports around 4 million barrels of crude oil per day, as well as a large amount of refined products such as gasoline. Assuming that half of this were to be removed by secondary sanctions, world oil prices would probably rise. Voters in the EU and US would get angry. Neutral countries dependent on oil imports – China, India, Brazil – would push back against the colation, because they'd have to scramble to replace a major supplier. Secondary sanctions aren't just a nuisance for these neutral parties. Due to their extraterritorial  nature, secondary sanctions impinge on the sovereignty of neutral nations. This creates hostility, understandably so, the negative blowback eventually flowing back to the U.S.

So if the EU, U.S. and the rest of the coalition are going to get serious about sanctioning the Russia's oil industry, and thus removing a few million barrels of oil per day from the world market, they may need to counterbalance that in order to soften the blow. One way to do so would be to free up more Iranian oil exports, which means softening the sanctions on Iran.

That doesn't mean not applying sanctions to Iran. A version of the $60 price cap on Iranian oil probably makes a lot of sense. However, a fully armed financial battleship – i.e. bank-focused secondary sanctions directed at a major crude oil exporter's oil industry – may be something that has to be reserved for one country only: Russia.

Now, I could be wrong about the world being unable to bear draconian sanctions on two major oil exporters. Maybe I'm creating a false dichotomy, and in actuality the choice is less stark and the coalition can actually apply draconian oil sanctions on both Iran and Russia. If so, I stand corrected.

Either way, Russia's oil industry has skated through the invasion and resulting sanctions remarkably unscathed, as the Iranian counterexample illustrates. It's time to cut off Russia's main source of revenues by putting the same set of secondary sanctions that Iran has faced on Russia's oil patch. 

* There are a few bank-focused secondary sanctions placed on Russia. Notably, Section 226 of CAATSA (2017) requires foreign financial institutions, or FFIs, to avoid certain sanctioned Russians or sectors on pain of losing access to the U.S. banking system. (See here, for example.) However, the U.S. must not be enforcing Section 226 very tightly because I haven't found a single case of a bank being punished under 226.

This December, another round of secondary sanctions was imposed on FFIs. Any foreign bank that facilitates transactions involving Russia’s military-industrial base may be cut off from the U.S. financial system. Additionally, any bank that conducts transactions for specially designated nationals who operate in Russia's technology, defense and related materiel, construction, aerospace or manufacturing sectors may face punishment. Note that both rounds of secondary sanctions leave the Russian oil industry untouched.

The long arm of OFAC and its reach into the Ethereum network

Published by Anonymous (not verified) on Sun, 17/12/2023 - 12:51am in

Coinbase, the U.S.'s largest crypto exchange, is openly processing Ethereum transactions involving Tornado Cash, a piece of blockchain infrastructure that was sanctioned by the U.S. government last year for providing mixing services to North Korea. 

Over the last two weeks Coinbase has validated 686 Tornado-linked transactions, according to Tornado Warnings. I've screenshotted the table below:

This table shows how many blocks each validator has proposed that includes a transaction that has interacted (either depositing or withdrawing)
with Tornado Cash contracts in
all denominations, or with TORN tokens. Source: Tornado Warnings by Toni Wahrstätter

This is awkward for everyone involved.

First, it's embarrassing for the agency that administers U.S. sanctions, the U.S. Treasury's Office of Foreign Assets Control, or OFAC. OFAC clearly states that U.S. based persons are not to transact with sanctioned entities unless they have a license. Yet here is America's largest crypto exchange interacting with a sanctioned entity, Tornado Cash, without a license.

OFAC can look away and pretend that nothing unusual is happening, which is pretty much what it has done so far. But since these financial interactions are clearly displayed on the blockchain, everyone can see the infraction occurring. Eventually, OFAC will have to confront the problem and make some tough decisions, a few of which may end up damaging companies like Coinbase and the Ethereum network.

The whole affair is also awkward for the crypto industry. After a 2022 in which much of the ecosystem went bankrupt or succumbed to fraud, crypto currently finds itself in the damaging crosshairs of the culture war and the pervasive threat of being banned. It is desperate for social license, yet here is crypto's leading company choosing to operate in contravention of one of the key pillars of U.S. national defence.

Meanwhile, Coinbase's main U.S. competitor, Kraken, has taken a very different approach to dealing with Tornado Cash. As the table above shows, Kraken has processed zero Tornado Cash transactions over the last two weeks compared to Coinbase's 686. These diverging approaches to handling sanctioned transactions only highlight the awkward nature of crypto's "compliance" with sanctions law.

Before I dive deeper, we need to fill in the basics. For folks who are confused about crypto, what follows is a quick explanation why Coinbase is interacting with Tornado Cash, whereas Kraken isn't.

What is validation?

To begin with, Coinbase and Kraken operate in many different businesses. Their most well known business line is to provide a trading venue where people can deposit funds in order to buy and sell crypto tokens.

I suspect that both companies are being very careful to ensure that their trading venues avoid any dealings with Tornado Cash. If someone were to try to deposit Tornado-linked funds to Coinbase's exchange, for instance, I'm sure Coinbase would quickly freeze those transactions, which is precisely what OFAC obliges it to do. Crypto trading venues have gotten in trouble before for dealing with sanctioned entities: last year Kraken was fined by OFAC for processing 826 transactions on behalf of Iranian individuals.

But the issue here isn't these companies' trading platforms. Coinbase's interactions with Tornado Cash are occurring in an adjacent line of business. Let's take a look at how Coinbase and Kraken's validation services business operate.

Say that Sunil lives in India and wants to make a transaction on the Ethereum network, perhaps a deposit of some ether to Tornado Cash. He begins by inputting the instructions into his Metamask wallet. This order gets broadcast to the Ethereum network for validation, along with a small fee, or tip. A validator is responsible for taking big batches of uncompleted transactions, one of which is Sunil's Tornado Cash deposit , and proposing them in the form of "blocks" to the Ethereum network for confirmation. As a reward, the validator collect the tips left by transactors.

The biggest validators are the ones that own large amounts of ether, the Ethereum network's native token. Since Kraken and Coinbase have millions of customers who hold ether on their platforms, they have become two of the most important providers of Ethereum validation services. Coinbase accounts for 14% of global validation while Kraken stands at 3%, according to the Ethereum Staking dashboard. So even though Sunil is not actually depositing any crypto to Coinbase's trading venue, he may end up interfacing with Coinbase via its block proposal and validation business.  

Validators can choose what transactions to include in their blocks. This explains the difference between the two exchanges. Whereas Kraken chooses to exclude transactions like Sunil's Tornado Cash deposit, Coinbase includes all transactions linked to Tornado Cash in the blocks that it proposes, in the process earning transaction fees linked to Tornado Cash.

To sum up, Coinbase operates its trading venue in a way that complies with OFAC regulations, but it doesn't run its validation service in the same manner, whereas Kraken does. Next, we need to fill in another important part of the story. What does OFAC do?

OFAC around and find out

For folks who don't know how U.S. sanctions work, a big part of OFAC's job is to blacklist foreign individuals and organizations who are deemed to undermine U.S. national security or foreign policy objectives. These blacklisted entities are known as SDNs, or specially designated nationals. U.S. citizens and companies cannot deal with SDNs without getting a license.

OFAC also administers comprehensive sanctions. These prevent U.S. individuals or businesses from interacting with entire nations, like Iran.

With each of the individuals or entities that it designates, OFAC discloses an array of useful information including the SDN's name, their aliases, address, nationality, passport, tax ID, place of birth, and/or date of birth. U.S. individuals and firms are supposed to take a risk-based approach to cross-checking this information against each of the counterparties they transact with so as to ensure that they aren't dealing with an SDN. They must also be aware of U.S. comprehensive sanctions so they don't accidentally interact with an entire class of sanctioned individuals, say all Iranians. Failure to comply can result in a monetary penalty or jail time.

Whereas Coinbase appears to have chosen to ignore OFAC's requirements when it comes to validation, Kraken hasn't, and has incorporated the SDN list into the internal logic of the validation services that it provides. But Kraken has only done so in a limited way, as I'll show below.

Five years ago OFAC began to include an SDN's known cryptocurrency addresses in its array of SDN data. To date, OFAC has published around 600 crypto addresses, including around 150 Ethereum addresses, of which a large chunk are related to Tornado Cash. Kraken is using this list of 150 addresses as the basis for excluding certain transaction from the blocks that it is proposing to the Ethereum network.

Data source: OFAC and Github

Among members of the crypto community, this sort of editing out of OFAC-listed addresses is sometimes described as creating "OFAC-compliant blocks." Hard core crypto ideologues believe that it compromises Ethereum's core values of openness and resistance to censorship.

While Kraken's approach may appear to be the compliant approach to proposing blocks, it's not. It's half-compliance, or compliance theatre. 

OFAC-compliant blocks as compliance theatre 

Right now, Kraken's block validation process merely weeds out transactions involving the 150 or so Ethereum wallets that OFAC has explicitly mentioned, which includes Tornado Cash addresses. But many of the SDNs linked to these 150 wallets have probably long since adapted by getting new wallets. Kraken isn't taking any steps to determine what these new wallets are, and is therefore almost certainly processing these SDN's transactions in its blocks. This would put it in violation of OFAC policy.

Of the 12,000 or so SDNs on OFAC's SDN list, most are not explicitly linked by OFAC to a specific Ethereum wallet. But that doesn't mean that these entities don't have such wallets. To be compliant, Kraken needs to scan the entire list of 12,000 SDNs and verify that none of them are being included in Kraken blocks. Again, it doesn't appear to be doing that.

Complying with OFAC isn't just about crosschecking the SDN list. Remember, OFAC has also levied comprehensive sanctions on nations such as Iran, which prohibit any U.S. entity from dealing with Iranians-in-general. Because Kraken limits its block editing to the 150 or so Ethereum addresses mentioned by OFAC, it is almost certainly letting Iranian transactions into the blocks that it is proposing. Which is ironic, since the very infraction that Kraken was punished for last year was allowing Iranians to use its trading platform. Apparently Kraken has one Iran policy for its trading venue, and another policy for its block proposal service.

Coinbase's decision to ignore OFAC altogether now makes more sense. Perhaps it's better to not comply at all and thereby retain the ability to claim the non-applicability of sanctions law to validation, than to comply insufficiently but in the process tacitly admit that OFAC has jurisdiction over validation. As part of this strategy, Coinbase may try to fall back on arguments that validation isn't a financial service, but qualifies as the "transmission of informational materials," which is exempt from sanctions law.

Having started down the path to compliance, the only way for Kraken's validation business to be even close to fully compliant with sanctions law is to adopt the very same exhaustive process that its own crypto trading venue abides by. That means painstakingly collecting and verifying the IDs of all potential transactors, cross-checking them against OFAC's requirements, and henceforth only proposing blocks that are made up of transactions sourced from its internal list of approved addresses.  

By adopting this complete approach to verifying transactions, Kraken would now be closer to compliance. As for OFAC, it would be relieved of its awkward situation.

There is no easy policy decision for OFAC

However, this approach has its drawbacks. A requirement that IDs be verified for the purposes of block inclusion would be expensive for Kraken to implement. I suspect that the company would react by ceasing to offer validation services. Even if Kraken and Coinbase were to roll out an OFAC-compliant know-your-customer (KYC) process for assembling blocks, most Ethereum transactions would probably flow to no-hassle offshore validators, which don't check ID because they are under no obligation to comply with OFAC.

So in the end, the very transactions that OFAC wants to discourage would end up happening anyway.

Compounding matters, by pushing validation away from U.S. soil, the U.S. national security apparatus would have destroyed a nascent "U.S. Ethereum nexus," one they might have otherwise levered as a tool for projecting U.S. power extraterritorially. If you're curious what this entails, consider how the New York correspondent banking nexus is currently harnessed by the state to exert U.S. policy overseas. A San Francisco-based Ethereum nexus would be the crypto-version of that. But not if it gets chased away.

To prevent validation from being performed everywhere but the U.S., the government could twin a requirement that domestic block validators implement KYC with a second requirement that all U.S. individuals and companies submit all Ethereum transactions to sanctions-compliant validators. This would pull U.S. Ethereum transactions back onto U.S. soil and into the laps of Coinbase and Kraken.

But this is a complicated chess game to play, and you can see why OFAC has been hesitating.  

On the other hand, OFAC can't prevaricate forever. Sure, crypto is still small. But OFAC is an agency with a democratic mandate to administer law, and law is clearly being broken. It cannot "not govern." To boot, sanctions are a matter of national security, which adds to the urgency of the issue.

One option would be for OFAC to offer an explicit sanctions law exception to U.S. blockchain validators in the form of a special license. But that invokes questions of technological neutrality and equal treatment before the law. Why should Coinbase and Kraken be allowed to maintain financial networks that admit sanctioned actors whereas other network operators, like Visa or American Express, do not enjoy this same exemption?

This isn't just about fairness. By providing a blockchain carve-out, OFAC may unintentionally spur the financial industry to switch over to blockchain-based validation, because that has become the least-regulated and therefore cheapest technological solution for deploying various financial services. At that point, OFAC will find itself with far less to govern, because a big chunk of finance now lies in the zone that OFAC has carved-out.

I don't envy the mandarins at OFAC. They've got a tough decision to make. In the meantime, Coinbase continues to process Tornado Cash transactions every hour.