Archive for the ‘Venezuela’ Category


Mar

20

OFAC Doesn’t Understand How Digital Currencies Work


Posted by at 1:50 pm on March 20, 2018
Category: CryptocurrenciesOFACVenezuela

Nicolas Maduro via https://commons.wikimedia.org/wiki/File:Nicolas_Maduro_February_2017.png [Fair Use]
ABOVE: Nicolas Maduro

Yesterday the White House issued an executive order prohibiting U.S. persons from transactions in the Petro, the new Venezuelan digital currency. As you might recall, OFAC initially suggested that dealings in the Petro would violate restrictions on providing debt financing to the Venezuelan government, an idea that I said was a foolish misunderstanding of the difference between debt and currency.

The new executive order does what it should have done to begin with: restrict the digital currency directly. Of course, as the only current and guaranteed use for the Petro is to pay Venezuelan taxes and government fees, it is doubtful that the Petro will be of interest to U.S. persons and, as a result, it is hard to see that the new executive order will have much impact, other than, I suppose, preventing U.S. persons  or persons in the U.S. from operating nodes in the P2P network for the Petro.

In addition to banning U.S. persons, the new order gave OFAC the opportunity to wade into digital currencies again and shows fundamental misconceptions about how digital currencies work. Astonishingly, the new FAQs on digital currencies issued with the executive order propose to add digital currency addresses as identifiers on the SDN List:

To strengthen our efforts to combat the illicit use of digital currency transactions under our existing authorities, OFAC may include as identifiers on the SDN List specific digital currency addresses associated with blocked persons.

Oh. My. Goodness. They really said that. Next OFAC will be adding an SDN’s favorite unicorn name as identifiers on the SDN List.

Here’s what’s wrong with this idea of using  digital currency addresses as identifiers on the SDN List: they are only used once (unless you’re particularly clueless). For each payment request, the requester generates a unique public and private key pair. The digital address is a hash of that key pair. The payment request is signed with the private key and sent with the public key, allowing the authentication of the request. When the individual wants to make another payment request, a new key pair and address is generated.

So, if OFAC puts an address on the list, hoping to prevent U.S. persons from sending digital currency to that address, it is a waste of time because it is highly unlikely that address will ever be used again for a payment request (particularly once the address is on the SDN List). Nor will it prevent U.S. persons from receiving money from that address, because  the digital currency can be transferred to a newly-generated address prior to sending the currency. (And this problem is not solved by looking at the last-sent-to address in a blockchain explorer, because that will not establish that the new address is controlled by the same, presumably blocked person. If sent by the blocked person to an address of an unblocked person, the transferred digital currency is no longer blocked because the blocked person no longer has any interest in it.)

Of course, in the unlikely event that the SDN is not savvy enough to use a different address for all of his/her digital currency transactions (or to use wallet software preventing address reuse), then he will get caught by listing his reused address as an identifier. But, I’m guessing the only people re-using the same address for all their digital currency transactions are working at OFAC.

Permalink Comments Off on OFAC Doesn’t Understand How Digital Currencies Work

Bookmark and Share


Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Jan

23

OFAC Doesn’t Understand How Money Works


Posted by at 1:13 pm on January 23, 2018
Category: OFACVenezuela

Nicolas Maduro via https://commons.wikimedia.org/wiki/File:Nicolas_Maduro_February_2017.png [Fair Use]
ABOVE: Nicolas Maduro

Venezuelan President Nicolas Maduro in December announced his plans to have Venezuela issue a commodity-backed cryptocurrency.  Although cryptocurrencies typically have no backing, there is no reason that they could not.  In such a situation, the blockchain would take over the validation function normally performed by a central bank.  Maduro’s cryptocurrency would, he says, be backed by oil, gas, diamond and gold reserves.  The opposition dismissed Maduro’s plan and called him a “clown” for even suggesting the new currency.

Not to be out-clowned, the Office of Foreign Assets Control last week issued its own FAQ on Maduro’s vague and unimplemented plan:

551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808?

A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk. [1/19/2018]

Oh dear. They really said that? Seriously??

For starters, let’s address the notion that using currency issued by a government is an extension of credit to the government. Credit is extended to a government when goods or services are supplied to that government without a requirement for immediate payment. By that common and uncontroversial definition, accepting fiat money or representative money in exchange for goods and services from a private individual is not an extension of credit by the purchaser to the government that issued the currency because no goods or services were supplied by the purchaser to the government. This is even the case even if goods and services are provided to the government because the currency obtained can be immediately used for other transactions and there is no delayed payment. If the government paid with a debt instrument, such as a bond with a future maturity, then that would be an extension of credit to the government.

It appears that the genesis of OFAC’s misconception here is that the currency can be exchanged later with the government for the underlying commodity. Even were that an extension of credit to the government, OFAC’s rules would only be implicated if that exchange was delayed for more than 30 days. But, of course, the point of commodity backed currency is that it is immediately convertible. One could take the new Venezuelan currency and immediately demand to exchange it for oil, gas, gold or diamonds, so it does not have a “maturity of greater than 30 days.”

You know, you would think that the people at the Treasury, of all places, would understand how money works.

Permalink Comments (1)

Bookmark and Share


Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Aug

30

OFAC’s FAQs on Venezuela Sanctions Omit the Most Frequently Asked Question


Posted by at 11:49 pm on August 30, 2017
Category: OFACVenezuela

CITGO Gas Station by Mike Mozart [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/oMJJ6w [cropped]Last week the Office of Foreign Assets Control (“OFAC”) announced a set of new sanctions on Venezuela and it’s petroleum company Petroleos de Venezuela, S.A. (“PdVSA”) as set forth in the newly published Executive Order 13808. Under the Executive Order, U.S persons are prohibited from dealing in (1) new debt of the Government of Venezuela extended after August 24 with a maturity greater than 30 days, (2) new debt of PdVSA extended after August 25 with a maturity greater than 90 days, (3) bonds issued by the Government of Venezuela or (4) dividends or other profit distributions paid to the Government of Venezuela by entities owned by the Government of Venezuela. At the same time, it issued four general licenses authorizing, among other things, wind-down transactions, transactions involving CITGO and transactions involving agricultural commodities, medicine or medical devices.

The prohibitions on dealing in new debt closely parallel similar restrictions that OFAC imposed on certain Russian entities and, in fact, OFAC issued FAQs on the new Venezuela debt prohibitions that are identical to the FAQs on the Russian debt prohibitions. As a result, and once again, OFAC doesn’t answer in its FAQs what is in fact the most frequently asked question about new debt — namely, does new debt cover instances where PdVSA or the Government of Venezuela fails to pay for goods or services rendered within 30 or 90 days after the services are rendered or the goods are provided.

Certainly, it seems clear that it would be debt where the contract provides for and allows payment after these 30-day and 90-day periods as applicable. But suppose, you have a contract with PdVSA which provides for payment net 30. Does that become “new debt” with a maturity greater than 90 days when, on day 91, PdVSA fails to pay? And since the FAQs say that the prohibitions do not extend to debt extended prior to August 25, 2017, when was this debt extended if the goods or services were provided prior to August 25. Did that occur on Day 31? Or day 91? Given what appears to be the not uncommon practice of these two entities of not paying on time, these are not simply brain teasers that I have cooked up to tease the folks at OFAC.

Of course, it seems that there would be a good argument that an involuntary extension of debt in such a situation should not be covered, although nothing in the order or the FAQs makes this clear. If such involuntary extensions are included in the prohibitions, should the contracting party file a voluntary disclosure as soon as possible after PdVSA accounts receivable age out over 90 days? And even if involuntary extensions of debt are exempted, what does the party to the agreement with PdVSA or the Government of Venezuela have to do to prove that the extension of debt is involuntary. Sue? Withhold further services? Stop future deliveries? Send a nastygram from its lawyers demanding payment?

Rather than answer these questions, which, no doubt, large numbers of people with accounts receivable from PdVSA or the Government of Venezuela are asking at this very moment, OFAC’s FAQs dither around on the esoterica of, among other things, whether the new sanctions prohibit getting bank financing to purchase goods from PdVSA (no) or prohibit maintaining correspondent accounts for state-owned Venezuelan banks (no, as long as no debt of greater than 30 days is extended). This is all baffling and simply further evidence that the people at OFAC who administer these regulations have little idea of how business actually works.

Photo Credit: CITGO Gas Station by Mike Mozart [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/oMJJ6w [cropped]. Copyright 2014 Mike Mozart

 

Permalink Comments Off on OFAC’s FAQs on Venezuela Sanctions Omit the Most Frequently Asked Question

Bookmark and Share


Copyright © 2017 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Nov

12

Venezuela Joins the Axis of Evil


Posted by at 11:44 pm on November 12, 2014
Category: BISVenezuela

Venezuela Capitol Building by Márcio Cabral de Moura via https://www.flickr.com/photos/mcdemoura/2316759071/ [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)]It is probably safe to say that no one was particularly shocked earlier this week when the Bureau of Industry and Security added Venezuela to the list of countries (currently Russia and China) to which certain dual use items may not be exported if these items are for military end use. The specific items subject to this restriction are those listed in Supplement 2 to Part 744 of the Export Administration Regulations. These items include, among other things, certain composite materials, lasers, and aircraft navigational equipment.

The rule was adopted in final form and went into immediate effect on November 7.

Permalink Comments Off on Venezuela Joins the Axis of Evil

Bookmark and Share


Copyright © 2014 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Sep

10

Sen. Landrieu Attempts to Clarify the Record … But Doesn’t


Posted by at 8:28 pm on September 10, 2014
Category: Economic SanctionsOFACSDN ListVenezuela

Sen. Landrieu [Official Portrait, Public Domain]

On Sunday, in Lafayette, LA, The Advertiser printed an opinion from Sen. Mary Landrieu entitled, “Sanctions, as written, will hurt La. workers.”  While we hoped Sen. Landrieu was writing to clarify the record in response to our post last week, she was writing instead to respond to an earlier opinion in The Advertiser written by Sen. Marco Rubio and Rep. Bill Cassidy.

Sen. Landrieu began by referring to the Lake Charles, LA oil refinery as “owned by Citgo, a Venezuelan company with a strong and respected reputation in Louisiana.”  Citgo, however, is quite clearly a U.S. company, founded and incorporated in the United States over a hundred years ago.  It became wholly owned U.S. subsidiary of Petróleos de Venezuela, the Venezuelan national oil company, in 1990, but remained a U.S. company.  The hawkish view on U.S. sanctions is, of course, that Citgo, even though a U.S. company employing U.S. persons, is not immune from the conduct of its foreign parent if, in this case, Petróleos de Venezuela’s conduct were found to be at variance with U.S. economic sanctions and was added to the SDN List, its subsidiary Citgo would be equally blocked and unable to employ U.S. workers.

In her opinion, Sen. Landrieu continued to defend her opposition to the Venezuela Defense of Human Rights and Civil Society Act of 2014 because she believed that “the legislation as written was too vague” and “will continue to oppose it unless the language of this resolution makes crystal clear that there will be no threat to the [Lake Charles] refinery.”  But, as we pointed out last week, Sen. Landrieu’s references to amending the Act have led to no clear (crystal or otherwise) suggestions on how to do so.  We think we can help her out.

The Act, like other sanctions bills, already permits the President to waive the application of sanctions against a person if he determines that such waiver is necessary for the “national security interests of the United States.”  The amendment we recommend to Sen. Landrieu is to rewrite the waiver in Section 5(c)(1) to read, “The President may waive the application of sanctions under subsection (b) with respect to a person if the President determines that such a waiver is in the national security or economic interests of the United States.”  By adding simply “or economic” to the waiver condition, the President has another avenue to defend not imposing sanctions against otherwise sanctionable foreign persons.  Again, as we pointed out last week, the President would not take lightly a decision to block Citgo’s assets in Louisiana or anywhere else in United States.  Congress, moreover, would be hard-pressed to oppose a waiver if the President were able to show that imposing sanctions would have tremendous economic ramifications.

If Sen. Landrieu wants to take the position that U.S. economic sanctions against human rights violators can’t come with a cost that significantly harms the U.S. economy, there is a way to protect that interest.  Whether or not her position wins the day on the Senate floor, we think the only practical way to do so is to give the President more discretion in how he may choose not to impose sanctions.  A tidy addition of the two words “or economic” should do the trick and put to bed another odd episode of “How a Bill Becomes a Law.”

 

Permalink Comments Off on Sen. Landrieu Attempts to Clarify the Record … But Doesn’t

Bookmark and Share


Copyright © 2014 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)