Sanctioned Addresses and Accidental Exposure

Exchanges screen incoming deposits against databases of addresses associated with sanctions, theft and illicit activity. A deposit that fails screening can be frozen, and the process for resolving it is slow.

How screening works

Analysis firms maintain databases mapping addresses to categories: sanctioned entities, known theft proceeds, darknet markets, mixing services.

When you deposit, the venue traces the funds backward some number of hops and checks whether they touched anything flagged.

How many hops, and what proportion of exposure triggers action, varies by venue and is generally not published.

How ordinary users get caught

Receiving from someone else. A payment from a counterparty whose own funds have problematic history.

Using a mixing service. Some are sanctioned outright. Funds that passed through one are frequently flagged regardless of why.

Buying from a peer-to-peer counterparty who is laundering proceeds. The buyer receives the coins and the history.

Receiving an unsolicited deposit. Small amounts sent to random addresses from flagged sources. This is sometimes deliberate, to contaminate addresses.

Trading on a venue later associated with illicit activity.

What happens

The deposit is held. The venue requests source-of-funds documentation: where the funds came from, from whom, and evidence.

Resolution can take weeks. In some cases funds are returned to the sending address; in others they are held pending an investigation.

This is not a penalty, and it is an obligation the venue has under its licence, which is why regulated venues screen more aggressively than unregulated ones.

Reducing the risk

Know your counterparties. Peer-to-peer trades with strangers are the highest-risk category.

Keep records. Where funds came from, when, and why. Source-of-funds requests are answerable if you have records and difficult if you do not.

Avoid mixing services unless you understand the legal position in your jurisdiction, which for most people means avoiding them.

Use a fresh address for anything unusual, so that contamination does not reach your main holdings.

Do not withdraw unsolicited deposits into your main wallet. Leave them.

If it happens

Respond promptly and completely to the source-of-funds request. Provide documentation rather than explanation.

Do not attempt to move the funds elsewhere during an investigation, which looks exactly like what a guilty party would do.

Venues with a real compliance function have a documented process and a stated timeline. Platforms publishing that process, such as platforms with a real complaints process, are considerably easier to deal with than those that simply freeze an account and stop responding.

The general point

Screening exists because venues are legally required to prevent laundering. It catches innocent people because the chain does not distinguish between knowing and unknowing receipt.

Records are the entire defence. Anyone who can document where their funds came from resolves these situations. Anyone who cannot is arguing from assertion.