OFAC screening for DeFi lending protocols

DeFi lending protocols that distribute interest to lenders must screen lender wallet addresses against the SDN List.

TL;DR

TL;DR: A lending protocol that pays interest to lender wallets must check those wallets against the SDN List before distributing yield, and block flagged addresses.

Why lending is in scope

Interest payments are value transfers. A protocol that sends yield to a designated wallet has facilitated a prohibited transaction. Strict liability applies, so the operator does not need intent. The moment the protocol pays out to a sanctioned lender, the exposure exists.

Where to screen

• Lender wallets: before each interest distribution.
• Borrower wallets: before opening a position.
• Collateral: apply the 50 Percent Rule to majority owned entities.

Practical controls

Run a screening call under 100 ms inside the claim and distribution flow. Log every screen, and block flagged wallets from receiving yield. Since DeFi often automates payouts through smart contracts, the check should be called programmatically before the contract executes, so a flagged lender is stopped at the gate rather than paid and clawed back later.

Automation is the point of failure

DeFi payouts are usually triggered by smart contracts, which will happily pay a designated wallet unless the screen is in the path. The check has to run inside the contract's logic, before the transfer executes. If the screen lives off chain where the contract cannot see it, a flagged lender will still be paid. Wire the check into the execution path itself. A single distribution to a sanctioned lender is enough to create exposure, so the screen must run every time, not just at position opening.