When Russia started the war against Ukraine 3 months ago, the economic situation worldwide also came to a head. There were shortages of resources, supply chains were disrupted and developments even had a regulatory impact on the crypto space.
Following the military invasion of Ukraine by Russia on 24 February 2022, the international community decided to economically sanction Russia, targeting individuals, banks, businesses, monetary exchanges, bank transfers, exports, and imports, excluding major Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunications), and freezing the assets of the Russian Central Bank.
We briefly review the initial concerns among policy makers and financial regulators that crypto assets could be used to evade the sanctions, and examine the actions taken by international bodies and national authorities, as well as by centralised crypto exchanges, to prevent this from happening. Over time, regulators have turned their attention to decentralised finance (DeFi) platforms, the potential use proof-of-work mining to generate revenues and weaken sanctions, and the challenges raised by the increased ‘cryptoization’ of emerging economies.
Early concerns and policy reactions
The European Central Bank (ECB) expressed concerns about the use of crypto assets on the 25. February to evade the freshly imposed international sanctions, and emphasised that compliance with sanctions applied to transactions in cryptoassets and the operations of related service providers. It called for an acceleration of the development and implementation of the crypto-regulatory framework, or Markets in Crypto Assets (MiCA) regulation.
On 1 March, the US government (White House and Treasury) asked US-based businesses and individuals not to support crypto transactions addressed to specific Russian individuals and banks. Following on the 4. March the G7 and the EU announced measures to restrict the use of cryptocurrencies to evade sanctions. On 12 March, the US Treasury made clear that it would take legal action against the use of virtual currencies to circumvent economic sanctions. The first impact of the ongoing war on crypto regulation has, therefore, been a sense of urgency to accelerate the momentum to regulate crypto assets, and a clear call for compliance action.
Countries and Exchanges impose sanctions
Crypto nations including Switzerland and their federal government announced freezing crypto assets owned by Russian citizens and businesses. This measure came on top of the penalties decided at the EU level, which Switzerland adopted. On the same date, Singapore and Japan announced sanctions against the Russian Federation that would include prohibiting digital payment token service providers from supporting transactions aimed at circumventing sanctions. The UK followed suit on 11 March by mandating explicitly crypto firms to comply with the sanctions. A second effect of the ongoing war on crypto regulation has taken the form of a series of measures that the main crypto hubs have adopted against crypto actors, to protect their own status and contribute to the effectiveness of the sanctions.
Also crypto exchanges like Coinbase and Binance responded to the regulatory expectations by clarifying their commitment to complying with the sanctions. They reported they had enhanced monitoring and detection of attempts to evade the sanctions through crypto transactions, eventually preventing such users from using the exchange services. Binance also stopped accepting Mastercard and Visa cards held by Russians as a way to interact with the exchange.
While evidence showed that Russians had been buying more crypto following the sanctions, it is clear that it was more as a response to the desire to fight the depreciation of the ruble rather than to evade sanctions. During the first half of April 2022, the US Securities and Exchange Commission (SEC) pushed for more oversight of centralized crypto exchanges and announced a cooperation with the Commodity Futures Trading Commission (CFTC) in the supervision of such platforms. The SEC confirmed its intention to regulate crypto exchanges, like traditional securities exchanges. A third consequence of the ongoing war on crypto regulation has therefore been a push to centralised crypto exchanges to accelerate know-your-customer (KYC) and anti-money-laundering (AML) compliance, and monitoring of related transactions.
Cryptocurrencies as a tool to evade sanctions?
Analysts doubted if cryptocurrencies could be used effectively to evade sanctions in a material way. They argued that cryptocurrencies are insufficient as an asset class to absorb the sheer damage caused by the sanctions, and that their large-scale use (by states, institutions, and individuals) would exacerbate price volatility. Moreover, individuals using crypto to evade sanctions would have to deal with the traceability of their transactions. It, thus, became clear that the Russian state, institutions and individuals were unlikely to have been using cryptocurrencies to evade international sanctions.
On 21 April, the International Monetary Fund (IMF) concluded that there was no strong evidence on the use of cryptocurrencies by governments, companies, or individuals to massively evade international sanctions. The statement aligned with the US Treasury view that cryptocurrencies cannot be used on a large scale to evade the sanctions. The compliance efforts deployed by the main crypto exchanges are sure to have contributed to this outcome.
Next to fuelling a sense of urgency on the need to regulate crypto assets, leading key crypto nations to implement immediate measures, and triggering major crypto exchanges to step up compliance, the regulatory legacy of the ongoing war extends to the mining of PoW coins (energy intensive) and associated concerns that it may be used by Russia to divert its vast energy resources, generate revenues and evade sanctions. This legacy includes fears that the ongoing war may lead to a more widespread use of crypto assets in emerging markets and through DeFis. These concerns led the International Monetary Fund (IMF), in its annual report, to call for regulatory action in the form of comprehensive global standards for crypto assets, including governance schemes for DeFi platforms, and the use of anonymous cryptocurrencies. On that score, on 31 March, the EU Parliament approved measures to outlaw anonymous crypto transactions.
War highlights the urgency of regulations
The need to ensure the effectiveness of international sanctions against Russia has increased the sense of urgency to regulate the industry, led several crypto-leading countries to take concrete measures to protect their status and contribute to the cause, triggered centralised crypto exchanges to step up KYC /AML compliance and transactions monitoring efforts, and authorities in the US to renew efforts to regulate crypto exchanges similarly to traditional securities exchanges. The war has shown that cryptocurrencies can be a valid tool to facilitate transactions in warzones; by 12 March, donations to Ukraine in cryptocurrencies surpassed USD 100 million, while Ukraine had spent cryptos to meet about 20% of its USD 30 million – worth military equipment expenses.
The regulatory legacy of the ongoing war is taking the form of increased focus on DeFi governance and of an acceleration of the (further) development, and implementation of crypto-regulatory frameworks around the globe, more broadly. We anticipate the net effect of this consequences to be supportive of, rather than undermining, the broad adoption and development of a sustainable crypto space.