Blacklisting Crypto (and More)

Abstract

The U.S. Treasury’s blacklisting of Tornado Cash – a crypto mixing service – that potentially exposed trolled celebrities such as Jimmy Fallon and Logan Paul to criminal liability, continues a recent years’ reliance of policy-makers on blacklisting as a significant tool in their arsenal. Yet, the concept of blacklisting is not new. Historically, being a blacklisted entity meant having a negative reputation of an entity that cannot be trusted or has done something wrong. Regulatory blacklisting, based on a similar notion, enables lawmakers and public officials to enforce regulatory standards on businesses, individuals, organizations and even jurisdictions by using signaling economy and sanctions. However, as we have seen in recent months, with the blacklisting of Russian corporations by the Biden Administration in an attempt to stop Russian aggression against Ukraine, this regulatory tool is not always effective in reaching the goals it is meant to achieve.

This Article explores using blacklisting as a regulatory tool. Doing so, this Article examines the impact of any related explicit and implicit sanctions, especially as such sanctions include reputational damage, increased hardship in getting credit, and the potential costs of “doing business.” Additionally, the Article makes the important distinction between being blacklisted for participating in or advancing an illegal activity, or failing to comply with binding legal requirements, and being blacklisted for moral or ethical reasons, as, for example, President Trump’s administration perceived the case with TikTok – the Chinese social platform – should be. It explains why distinguishing between the two matters. It further discusses why sanctions do not always work and derive policy recommendations for regulators in order to increase the effectiveness of blacklisting as a regulatory tool, while still examining the problematic nature of regulation by enforcement.

 

Keywords: Blacklisting, Law and Economics, Sanctions, Cryptocurencies, Regulation by Enforcement

JEL Classification: K00, K22, K42, M00