Senate Inquiry Heightens Sanctions Compliance Burden
Findings by the U.S. Senate Permanent Subcommittee on Investigations (PSI) identifying stablecoins, particularly tether (USDT), as a key liquidity engine for Iran's shadow banking apparatus signal that Western authorities may no longer view reactive compliance as sufficient.
For licensed virtual asset service providers (VASPs) operating across the Gulf Cooperation Council (GCC), the findings could significantly reshape counterparty risk assessments. Given the region's geographic proximity to Iran and its fluid cross-border trade networks, distinguishing legitimate GCC transactions from sanctioned proxy activity requires increasingly precise wallet attribution.
Regional cryptocurrency exchanges and merchants may need to reassess their relationships with liquidity providers, over-the-counter desks, and cross-border payment processors.
Sanctions Liability Across Payment Rails
Many merchants operate under the assumption that receiving local currency in a domestic bank account insulates them from crypto-related sanctions risks. However, legal experts warn that liability does not necessarily begin or end with bank settlement.
According to Soham Jethani, partner at law firm Septten, there is no single universal point in the payment chain at which liability attaches. The relevant prohibition may concern dealing with a designated person, making funds or economic resources available, or handling property in which a designated person has an interest, Jethani stated, noting that such risks can materialize long before final bank settlement.
Receiving fiat currency does not eliminate underlying compliance obligations. Merchants must understand their customers, the structure of their payment arrangements, and the controls deployed by their payment providers. While a wallet risk flag warrants investigation rather than serving as automatic proof of a violation, the operational burden generally falls on licensed VASPs rather than individual merchants.
Title and Contractual Claims in Stablecoin Transactions
Uncertainty remains over whether merchants legally take title to stablecoins or merely hold a contractual claim for fiat against their payment processor. A stablecoin's denomination does not determine legal ownership. Instead, title depends on the underlying contracts and actual payment flows.
A merchant may receive tokens directly, have tokens held on its behalf, or possess only a contractual entitlement to local currency from its provider. This distinction affects custody, insolvency exposure, and which assets or claims the merchant holds, though it does not answer every sanctions question. A prohibited transaction can involve services or making resources available without the merchant owning the tokens.
Secondary Sanctions and Global Stablecoins
Accepting globally traded stablecoins can expose businesses to secondary sanctions risks from foreign regulatory regimes, even when transactions appear purely domestic. Secondary sanctions can allow jurisdictions, most notably the United States, to penalize non-U.S. entities or individuals for certain dealings with sanctioned parties.
Local-currency settlement through a bank does not eliminate underlying legal risks. Instead, it can obscure upstream exposure, where an illicit counterparty or intermediary in the transaction chain could create compliance risks for other participants.
Real-Time Screening and Pre-Screened Ecosystems
In instant retail checkout scenarios, where transaction screening must occur within seconds, traditional blockchain analytics can face limitations. Real-time checks depend heavily on the quality and timeliness of underlying data, which can be affected by attribution delays involving newly created wallets, obfuscation through exchange hot wallets, and complex cross-chain bridges.
However, real-time retail risks in regulated markets such as the UAE are mitigated because transactions are risk-fenced well before customers reach the checkout. Consumers use wallets associated with licensed UAE exchanges, where assets are subject to continuous monitoring and pre-screening. Suspicious funds can be frozen before a point-of-sale transaction is initiated, while recipient merchants undergo prior know-your-customer (KYC) onboarding before they can accept settlements.
Operational Responsibility on Licensed VASPs
Legal liability and operational risk remain concentrated on the licensed VASP processing the transaction. The regulated intermediary facilitating the on-ramp and off-ramp bears responsibility for conducting comprehensive counterparty and sanctions-risk assessments, applying appropriate controls, and authenticating transactions.
Across GCC jurisdictions with established cryptocurrency regulatory frameworks, this can include compliance with applicable Travel Rule requirements and comprehensive counterparty screening. The duty falls on the regulated player between the transaction to take responsibility for the counterparties. If compliance fails, they will be held in violation and subject to fines and penalties.
This regulatory oversight has helped strengthen the UAE's position as a hub for digital asset firms, with rigorous testing and compliance requirements during the licensing process supporting the country's standing with the Financial Action Task Force (FATF) as its digital asset sector expands.
