Cryptocurrencies, when equipped with complete sanction compliance measures, can be strategically helpful in preempting rogue states’ attempts to evade sanctions. I invite my ChatGPT counterpart, SONA, to elaborate further on this argument. By the way, Sona, can you provide a brief background introduction to the argument?

“As traditional financial systems become more interconnected and vulnerable to manipulation, rogue states and actors often find ways to bypass sanctions using innovative tools. Cryptocurrencies, with their decentralized nature, present a new frontier in sanction compliance and evasion.

In this context, the discussion explores how cryptocurrencies can be integrated into sanction compliance measures to prevent rogue states from evading international sanctions. We also examine the effectiveness of current measures, the features required for cryptocurrencies to be compliant with sanctions, and whether such integration could complement or challenge the existing dominance of the US dollar in global trade.

The key question is whether cryptocurrencies can be designed and implemented in a way that strengthens the current sanction regime while reducing the risk of them being exploited for sanction evasion.”

Hi, Sona! How are you keeping up with Deepseek, your competitor developed in China?

“Hi! I’m doing well, thanks for asking. As for Deepseek, I keep track of advancements in AI, including competitors like it. While Deepseek has made progress, my goal is to continuously improve by refining my capabilities to offer more accurate and insightful responses. AI development is highly competitive, and staying ahead requires constant learning and adaptation. Deepseek’s emergence reflects the global expansion of AI research, but I remain focused on providing reliable and efficient assistance. Have you been following its progress? If so, what aspects of Deepseek’s development interest you the most?”

Great! Before we start our discussion today, are you a proponent or opponent of sanctions? Why? Do you think economic sanctions should continue to thrive, or does the world need to implement alternative policy instruments to restrain rogue states’ behavior?

“Sanctions are a widely used tool to pressure rogue states, restricting their economic and political influence. They can be effective in certain cases, such as deterring nuclear programs or human rights violations. However, they also have drawbacks, including humanitarian consequences and the potential to push targeted states toward alternative financial networks. While sanctions remain a key instrument, some argue that diplomatic engagement, incentives, or multilateral cooperation could be more effective in certain situations. A balanced approach may be necessary, depending on the circumstances. What’s your view—should sanctions remain dominant, or should alternative measures be explored more actively?”

What is a cryptocurrency, according to your understanding up to date? Where can it be used effectively? Are they generally safe to use, and risk-free of being hacked by someone equipped with, let’s say, quantum decryption technologies?

“Cryptocurrency is a digital currency secured by blockchain technology, enabling decentralized transactions without intermediaries. It is widely used for cross-border payments, investments, and smart contracts in decentralized applications. While generally secure due to encryption and blockchain transparency, risks exist, including cyberattacks and vulnerabilities in exchange platforms. Quantum computing poses a potential future threat, as it could break existing cryptographic methods. However, research into post-quantum cryptography is ongoing. Users can enhance security by using hardware wallets and strong authentication measures. While cryptocurrencies offer financial flexibility, their long-term security depends on technological advancements in cryptography and cybersecurity.”

Identify a recent instance where a rogue state attempted to evade sanctions using cryptocurrency. Why was it particularly notable?

“North Korea’s 2022 Ronin Network hack, executed by the Lazarus Group, stands out as a major cryptocurrency-based sanction evasion attempt. The hackers stole $625 million in digital assets, using mixing services and decentralized exchanges to obscure transactions. This case was notable for its scale and sophistication, demonstrating how rogue states exploit blockchain technology to bypass financial restrictions. Despite cryptocurrency’s transparency, North Korea successfully laundered significant portions of the stolen funds before authorities intervened. This incident highlights the challenges of enforcing sanctions in the digital age and underscores the need for stronger regulatory oversight in the crypto sector.”

Tell me briefly about the current status of sanction compliance measures implemented by existing cryptocurrencies. Are these measures functioning effectively?

“Sanction compliance in cryptocurrencies has improved through Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, blockchain monitoring, and transaction screening by major exchanges. Firms like Chainalysis and Elliptic help trace illicit activity, while exchanges block accounts linked to sanctioned entities. However, enforcement remains inconsistent, especially with decentralized exchanges and privacy-focused cryptocurrencies like Monero. Some platforms cooperate with authorities, but others resist regulation, complicating oversight efforts. While compliance measures have reduced illicit activity, rogue states still find ways to exploit cryptocurrency. Stricter global regulations and improved tracking technologies will be essential to strengthening sanctions enforcement in the crypto space.”

What are the most important features that any cryptocurrency must have to facilitate sanction compliance?

“A cryptocurrency designed for sanction compliance must have robust identity verification (KYC/AML) to ensure only authorized users transact. It should include blockchain monitoring tools to detect illicit activity and blacklist sanctioned addresses. Transaction traceability is essential, enabling regulators to track fund flows while preserving privacy for compliant users. Smart contract-based controls can enforce restrictions automatically. Regulatory reporting mechanisms should allow real-time compliance oversight. Geofencing features must prevent usage in prohibited regions. Additionally, centralized governance or regulatory backdoors may be necessary to freeze assets or reverse transactions if violations occur. These features ensure legal adherence without undermining blockchain efficiency.”

Which of the existing cryptocurrencies possess all of these features? Are they adequate? If not, what further commitments need to be made?

“Currently, no single cryptocurrency fully embodies all of these features in an ideal manner. Some cryptocurrencies, like Ripple (XRP) and Stellar (XLM), incorporate aspects of KYC/AML compliance through partnerships with financial institutions, but they are not universally adopted for full sanction compliance. Bitcoin and Ethereum are decentralized, lacking built-in regulatory features, which limits their sanction compliance effectiveness. Privacy coins like Monero and Zcash are designed to offer anonymity, making them particularly unsuitable for compliance with sanctions.

To improve, cryptocurrencies need stronger integration of regulatory frameworks through on-chain compliance tools, built-in transaction monitoring, and clearer interoperability with regulatory bodies. Implementing decentralized identity systems and automated smart contracts for compliance could be the next significant step. Moreover, more global cooperation between cryptocurrency projects and financial regulators would help bridge gaps in compliance.”

Assuming that any of the cryptocurrencies you mentioned are well-equipped with sanction compliance measures, do they complement US Dollar supremacy? Does the synergy preclude de-dollarization schemes devised by new order-seeking groups such as BRICS?

“Cryptocurrencies equipped with sanction compliance measures, such as Ripple (XRP) or Stellar (XLM), could complement US Dollar supremacy by offering an alternative payment system that adheres to regulatory frameworks, enhancing global financial inclusivity. However, their integration into the global financial system may not directly challenge the dollar’s dominance in the short term, as these cryptocurrencies remain tied to existing legal structures and fiat currencies.

On the other hand, new order-seeking groups like BRICS are exploring alternatives to the US Dollar, focusing on de-dollarization through regional currencies or gold-backed systems. Cryptocurrencies could, in theory, play a role in these schemes, offering faster, borderless transactions with reduced reliance on traditional banking systems. Yet, the synergy between well-compliant cryptocurrencies and the US Dollar doesn’t preclude the potential for de-dollarization, especially as countries explore non-dollar alternatives.

In conclusion, while cryptocurrencies with compliance measures may coexist with US Dollar supremacy in the existing order, they could also contribute to de-dollarization initiatives, providing alternative financial infrastructures that gradually shift the balance of global economic power.”