US Sanctions On Bitcoin Inevitable or Impossible To Implement (#GotBitcoin)
If there’s one thing the United States has had a history of, it’s imposing sanctions on its enemies. US Sanctions On Bitcoin Inevitable or Impossible To Implement (#GotBitcoin)
Venezuela, Cuba, North Korea, Russia and numerous other nations have been subject to restrictions and penalties over the years, with the U.S. harnessing its economic muscle in order to punish pretty much any country that doesn’t play by the international rulebook. One of the most notable of these countries is Iran — which, since the Iran hostage crisis of 1979, has been on the receiving end of a long series of prohibitions, blocks and sanctions.
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Some of these sanctions were lifted in January 2016, when the then-President Barack Obama, signed an executive order revoking them as part of the previous year’s historic nuclear deal with Iran. However, they were reinstated in November 2018, five months after the current president, Donald Trump, had decided to withdraw the U.S. from the aforementioned deal.
And since then, things have only picked up steam, with the Trump administration announcing new sanctions in June in retaliation for the downing of a U.S. drone and then with American lawmakers introducing a bill in December that would place restrictions on Iran’s ability to operate a digital currency.
Following in the footsteps of Venezuela, the Iranian government is reportedly planning its own central bank digital currency, while a significant number of Iranian citizens have been mining various preexisting cryptocurrencies as part of an effort to mitigate the effects of a hyper-inflating national currency, the rial.
But even if Iran could be distantly admired for demonstrating some degree of ingenuity here, the U.S. is working out how to curtail the Islamic Republic’s ability to profit from cryptocurrency.
Iranian officials complained at the beginning of July that the U.S. Congress is aiming to block Iran’s access to Bitcoin (BTC) mining and other cryptocurrencies more generally, without specifying how exactly it intends to achieve such an aim.
But while there’s little doubt that the U.S. would much prefer Iran to have no access whatsoever to cryptocurrency — as well as no ability to mint its own digital currencies — it doesn’t seem likely that it can do anything to restrict the Middle Eastern country other than introducing sanctions that prohibit American and foreign firms from having crypto-related dealings with the Islamic Republic.
On July 6, local news outlet Al-Fars reported that the Iranian assistant minister of industry, trade and supply, Saeed Zarandi, released a statement concerning cryptocurrency.
In it, Zarandi noted that Bitcoin can be used as a tool to circumvent the American embargo, while he also claimed that the U.S. Congress is trying to prevent the production of Bitcoin in Iran.
How exactly American lawmakers are hoping to do this, he didn’t explain. Nonetheless, he did add that several Iranian ministries are collaborating with the Central Bank of Iran to “resolve the issue of Bitcoin mining,” while more recently, the central bank’s governor announced that the government is planning to legalize mining, which it had previously been cracking down on.
This would imply that the Iranian government is now intent on encouraging the use of cryptocurrencies as a means of resisting American-led pressures while also planning to develop its own central bank digital currency.
Given this possible change of direction, it would be instructive to consider how the U.S. could possibly restrict or prevent cryptocurrency mining and production from taking place in Iran.
Or, to put this question differently, it would be instructive to consider just how much real power the U.S. government could potentially wield over Bitcoin and other cryptocurrencies.
When it comes to technical ways of preventing cryptocurrency mining and use, Bitcoin and blockchain experts argue that this would be very difficult for even the U.S. government to achieve.
As Bitcoin Core developer Jimmy Song explained to Cointelegraph, the success of such an endeavour would be unlikely, as every country in which mining takes place will have to get involved. According to Song:
“A ban would require coordination on a massive scale, with every mining operation being compelled by their respective jurisdictions to not accept blocks that their governments ban.
It’s really difficult to do, as anyone anywhere can mine. They would need at least 51% of the network, though practically speaking, the number would have to be much higher, like 75%, to enforce this ban in a reasonably efficient way.”
As Song concluded, “Too much mining power is outside the U.S. and it’s hard to prevent anything in a decentralized system.” This point is key, since the only realistic scenario in which the U.S. government could block cryptocurrency mining is if the activity took place only in the United States, as explained to Cointelegraph by Spencer Lievens, the CEO of Duality Blockchain Solutions:
“ISP providers can be required to block mining pools or anything related to mining. However, governments will have more luck in preventing mining in the countries they control than in preventing the mining of other, sovereign nations.”
Thus, it’s highly unlikely that America could prevent Bitcoin or cryptocurrency mining directly, as there’s no way it could gain control of Iran’s internet or gather enough hash power to reject blocks originating from Iran.
Similarly, Song also believes it’s highly improbable that it could prevent Iran from developing and producing its own digital currency, largely because the Iranian government or central bank would control this currency’s blockchain. “Iran can produce its own digital currency anytime it wants and no one can stop it,” he said.
Other Bitcoin developers agree with Song’s analysis, with fellow BTC developer Nicolas Dorier telling Cointelegraph in no uncertain terms, “It is not possible to prevent mining.”
However, both Song and Dorier agree that there are indirect ways of restricting cryptocurrency mining in Iran and of frustrating the Islamic Republic’s attempts to profit from its own digital currency.
For one, Dorier agrees that the U.S. could “prevent American miner manufacturers like Bitfury from selling their products to Iran, but there are many other miner manufacturers (e.g. in China).”
In much the same vein, Song adds that, while Iran could certainly produce its own currency without much harassment from the U.S. and its agencies, “getting other people to accept that as a means of payment or getting them to store their wealth in it is another matter altogether.”
In both cases, the issue once again turns to sanctions — something that the U.S. has already deployed in curtailing Venezuela’s ability to make a success of the ill-fated Petro.
The U.S. could certainly pass legislation or an executive order that prohibits American citizens from purchasing any Iranian digital currency, and such legislation could potentially also prohibit any kind of transaction with the Iranian cryptocurrency sector, thereby making it harder for Iranians to access mining equipment, for instance.
In fact, this is indeed what the U.S. is attempting to do, as the “Blocking Iran Illicit Finance Act” — which is currently working its way through Congress — intends to make it very hard for Iranian crypto to exist.
For instance, Section 303 of the act declares, “All transactions related to, provision of financing for, and other dealings in Iranian digital currency by a United States person or within the United States are prohibited.” And the act doesn’t stop with U.S. citizens. Section 304 states:
“The President shall impose 5 or more of the sanctions described in section 6(a) of the Iran Sanctions Act of 1996 with respect to any foreign person that the President determines knowingly engages, on or after the date of the enactment of this Act, in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services, or technological support, used in connection with the development of Iranian digital currency.”
Put simply, the Blocking Iran Illicit Finance Act will prohibit any U.S. citizen or foreign person from buying an Iranian digital currency or helping with the development of this currency.
This doesn’t specifically address Bitcoin mining, but it’s probable that there will be some jurisdictional overlap insofar as equipment sold to Iranians to mine Bitcoin could potentially be construed as being used in connection with the development of an Iranian cryptocurrency.
As such, the act may have an impact on the production (i.e., mining) of Bitcoin in Iran — at least, to the extent that it prevents American mining manufacturers from selling relevant equipment to Iranian organizations.
However, even if the act succeeds in preventing such manufacturers in most countries from selling mining units to Iran, even this might not prevent Bitcoin or cryptocurrency mining from taking place in the Islamic Republic.
As Dorier put it, “Manufacturing miners is a well-understood process, so if there is unmet demand somewhere, I don’t think it would be too hard for a motivated entrepreneur to create or smuggle the supply.” Lievens added to this point:
“There’s always a way around blockages. The US would have to control Iran’s digital infrastructure.
With Iran seeing support from Russia, this is an unlikely scenario.”
Indeed, if Iran is capable of building its own atomic weapons (as is often claimed), then it will certainly be capable of building its own ASIC chips and mining units. Then again, if the Blocking Iran Illicit Finance Act is passed, it will certainly find it much harder to profit from its own digital currency, with or without the ability to mine crypto. Just ask Venezuela.
Iranian Authorities Greenlight Power Plants Mining Bitcoin
According to Iranian authorities, power plants can mine cryptocurrencies like Bitcoin, but will not be able to take advantage of subsidies.
Iran has announced that it will now allow industrial-scale power plants in the country to operate as Bitcoin miners —- provided they don’t use subsidized fuel.
In a statement to the Islamic Republic News Agency (IRNA) on July 27, Mostafa Rajabi Mashhadi, a Deputy Managing Director at Tavanir, Iran’s Power Generation, Transmission and Distribution Management Company, said power plants in the country could operate as Bitcoin mines “if they comply with approved tariffs” and have the necessary licenses.
Mashhadi said that any power plant considering such a venture could not use subsidized fuel for crypto mining.
“Now we’re in a situation where the supply of electricity is of great importance to the public,” the energy spokesman said. “We will not allow anyone to misuse tariffs provided for the agricultural and industrial sectors to produce Bitcoin while it’s worth more than $9,000.”
All About Power
Cointelegraph reported in January that Iran’s Ministry of Industries, Mining and Trade had issued 1,000 licenses for crypto mining since the government authorized it as an approved industrial activity in July 2019.
According to the IRNA, a spokesman for the electricity industry said 14 crypto miners in Iran had requested more than 300 megawatt (MW) of power — equivalent to the usage across three provinces in the country.
The tariff scheme for crypto miners in Iran is dependent on market factors such as fuel prices in the Middle East. Mining requires a lot of power, but the country’s electricity is very cheap compared to the rest of the world. Mashhadi estimated in 2019 that the production of a single Bitcoin would use only about $1,400 in state subsidies.
People who expose illegally operating cryptocurrency mining companies in Iran also receive a bounty of up to 100 million Rials, or $2,375.
Rogue States Dodge Economic Sanctions, But Is Crypto In The Wrong?
DeFi projects are “decentralized, disintermediated and borderless — everything our legal and regulatory frameworks are not.”
When the United States first began going after crypto companies for violating its economic sanctions rules, it didn’t exactly start with a bang.
In December, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced a settlement with crypto wallet provider BitGo after the Palo Alto firm failed to prevent persons apparently located in the Crimea region, Iran, Sudan, Cuba and Syria “from using its non-custodial secure digital wallet management service.” The penalty for the “183 apparent violations” of U.S. sanctions? An underwhelming $98,830.
This was “the first published OFAC enforcement action against a business in the blockchain industry,” according to law firm Steptoe, though six weeks later, the OFAC reached a similar settlement with BitPay, a payment processing firm, for 2,102 “apparent violations of multiple sanctions programs,” in which BitPay reportedly allowed persons in the same countries as in the BitGo case — but with the addition of North Korea — “to transact with merchants in the United States and elsewhere using digital currency on BitPay’s platform even though BitPay had location information, including Internet Protocol addresses and other location data, about those persons prior to effecting the transactions.” BitPay agreed to pay $507,375 to resolve its potential civil liability.
But future violators may not be treated so leniently.
It’s worth mentioning that economic sanctions are typically applied “against countries and groups of individuals, such as terrorists and narcotics traffickers,” according to the United States Treasury, typically “using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.”
More Enforcement Actions Are Coming
“The crypto industry should absolutely expect more enforcement actions from OFAC, and it can expect that there will be much larger penalties as well,” David Carlisle, director of policy and regulatory affairs at Elliptic, tells Magazine. “OFAC’s first two enforcement actions in this space were fairly simple cases, where the underlying violations were not egregious, and the fines were small. But the next cases could be different,” he says, adding:
“There will undoubtedly be other cases out there that involve much more serious and egregious violations — and we can expect that OFAC will issue fines against crypto businesses that are much larger than those we’ve seen thus far.”
Expect more enforcement actions like those targeting BitPay and BitGo, Doug McCalmont, founder of BlocAlt Consulting LLC, tells Magazine, as well as “the expansion of targeted individuals, such as coders linked to the technology.”
Sanctions regimes have been applied extensively in recent years by the United States, as well as the European Union and United Nations, often targeting “rogue” nation-states, such as North Korea and Iran.
One of the best-known early crypto cases involved Virgil Griffith, a former hacker, who was arrested in April 2019 after he spoke at a blockchain and cryptocurrency conference in North Korea, in violation of sanctions against that outcast nation, the U.S. charged.
“Sanctions violations are a real problem,” says David Jevans, CEO of CipherTrace, whose crypto forensics firm recently found that more than 72,000 unique Iranian IP addresses are linked to more than 4.5 million unique Bitcoin addresses, “suggesting that sanction violations are likely rampant and mostly undetected by virtual asset service providers,” he tells Magazine.
It’s not only U.S. authorities who are concerned about “bad actors” using the nascent blockchain technology to dodge economic sanctions. Agata Ferreira, assistant professor at the Warsaw University of Technology, tells Magazine that authorities in Europe “are becoming more active and more focused. The crypto space is under increasing scrutiny, and I do think this trend will remain and accelerate.”
Nor is OFAC’s recent crypto focus surprising, according to Robert A. Schwinger, partner in the commercial litigation group at Norton Rose Fulbright. The United States government has no choice but to rein in this new, cryptocurrency asset class because “not to do so would expose it to the risk that its sanctions regime could be rendered toothless by new financial technology.
Players in the cryptocurrency space who ignore the restrictions imposed by U.S. international sanctions are being put on notice that they do so at their peril,” he wrote on Law.com.
Is DeFi Problematic?
As crypto adoption grows, it seems only inevitable that its decentralized finance (DeFi) networks will push up against more nation-state prerogatives, including economic sanctions. But isn’t there something inherently problematic about cracking down on a decentralized exchange (DEX)? Does the exchange even have a headquarters address? Is anyone even home at home? And should it even answer to someone if it’s truly decentralized?
Enforcing regulations in a decentralized world presents certain challenges, Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University Kennedy School, tells Magazine, but U.S. regulators are “trying to figure it out.”
Might the government eventually put more pressure on developers at DeFi firms, including decentralized exchanges? “Yes, they can build into the code some proper procedures… but it’s a lot easier to go after centralized intermediaries,” says Massad.
“I think we’ll see DeFi developers come under real pressure to ensure their platforms can’t be abused for sanctions evasion — for example, by enforcing address blacklisting,” says Carlisle, adding, “There’s a lot of talk lately about [traditional] financial institutions taking interest in DeFi, but it’s hard to imagine major institutions participating in DeFi unless they’re confident it can be compatible with sanctions requirements.”
DeFi projects are “decentralized, disintermediated and borderless — everything our legal and regulatory frameworks are not,” Ferreira informs Magazine. The latter are built around centralized, intermediated and jurisdiction-based architecture.
“Therefore, this is a challenge and a learning curve for regulators, and not all proposed solutions will be optimal,” Ferreira adds.
The European Union is aware of the DeFi compliance challenge. Its recent Markets in Crypto-Assets (MiCA) regulatory proposal “will force DEXs to have legal entities in order to transact with EU citizens, effectively banning fully decentralized exchanges,” Jevans tells Magazine. He adds, “Many so-called DEXs have very centralized governance, venture capital investors and physical headquarters, causing the FATF to categorize them as VASPs.”
Meeting compliance demands for digital service firms like BitPay and BitGo will require some effort. “Trying to identify where a counterparty is located in a crypto transaction is inherently difficult due to the nature of the technology,” observes Carlisle, but crypto firms need to realize that anytime they undertake a transaction “and don’t make an effort to identify the source or destination of funds, they’re taking on a major risk of sanctions violations.”
Crypto mining, too, carries sanctions-compliance risks. “If you process transactions on behalf of participants in a mining pool that’s connected to a country like Iran, or pay a fee to an Iranian miner,” you could run afoul of OFAC, says Carlisle. There are sanctions risks, too, in handling ransomware payments “because some ransomware campaigns have involved cybercriminals in places like North Korea and Iran.”
Then, too, the growing use of privacy coins, like Monero and Dash, which hide users’ addresses and transaction amounts — unlike Bitcoin — makes the task more difficult, arguably.
Forensic blockchain firms, however, are looking into how to “improve sanctions compliance on the part of virtual asset service providers,” McCalmont comments. CipherTrace, for example, has developed the ability to track the anonymity enhanced currency (AEC) Monero, once thought to be “the gold standard of AECs.” He adds:
“These [forensic] firms will rise to the occasion and roll out capabilities that will ‘circumvent’ any compliance ‘speed bumps’ utilized by decentralized exchanges. It really is somewhat of a regulatory arms race.”
And the stakes appear to be rising.
“There’s overwhelming evidence at this stage that sanctioned countries are using crypto,” says Carlisle, concluding, “North Korea’s crypto-related cybercrime has raised at least hundreds of millions of dollars. Iran and Venezuela have looked to crypto mining as a method for sanctions evasion and to generate revenue.”
To stay ahead in the “regulatory arms race,” some crypto companies are now using tools such as blockchain analytics, recounts Carlisle, to identify whether a crypto wallet belongs to a sanctioned party, but even then, staying compliant can be tricky.
“Not only do you need to screen addresses against the OFAC list, you should have systems that are calibrated to detect more subtle signs of sanctions risk, and your staff must be trained to handle situations that involve possible sanctions issues.”
OFAC, too, is operating on the principle of strict liability. “You can be held to account even if you were acting in good faith” with no wrong-doing intended, adds Carlisle.
“The crypto industry will need to operate to very high standards of sanctions compliance to avoid run-ins with OFAC.”
Part of a larger, global regulatory trend.
Recent sanctions activity is just part of a global crackdown that can be expected in the crypto sector, some say. In May, the U.S. Treasury Department announced stricter new rules for Bitcoin and other cryptocurrencies. Crypto transfers worth $10,000 or more will have to be reported to the Internal Revenue Service.
This Treasury Department action is likely to be “the first major step towards a global regulation” for cryptocurrencies, according to Nigel Green, CEO and founder of deVere Group, in a public statement. “This is inevitable as the market grows and matures.”
Nor should the crypto community fight it — they should embrace it, suggests Green. “Proportionate regulation should be championed,” he says, further explaining:
“It would help protect investors, shore-up the market, fight criminality, and reduce the potential possibility of disrupting global financial stability, not to mention offering a potential long-term economic boost to those countries that introduce it.”
In the absence of new crypto legislation and regulatory guidance, the players themselves — i.e., the crypto and blockchain industry — need to get their house in order, James Cooper, associate dean of experiential learning at California Western School of Law in San Diego, tells Magazine, adding, “We have an obligation to create self regulatory organizations. […] The industry has got to push out all the bad actors.”
If 95% percent of media stories and the public’s conversation about crypto focuses on ransomware or Iranian miners or criminal entities, “then something is wrong,” continues Cooper, because all the good things, like blockchain for food security or blockchain for vaccine tracing, get pushed out.
A Bretton Woods For Crypto?
“We need our Bretton Woods moment,” opines Cooper, referring to the multi-governmental agreement that set the outlines of international finance after World War II. Something similar is needed for the crypto century.
Not all agree. “The Bretton Woods Agreement centralized monetary policy,” says Jevans, and it “is an approach that is unlikely to be accepted in the decentralized blockchain economy since different projects have wildly varying objectives and governance models.”
More promising in his view are the Financial Action Task Force’s recent updated compliance guidelines, which make clear “that decentralized exchanges as well as other DeFi platforms do bear responsibility for ensuring compliance with global sanctions as well as Anti-Money Laundering and Counter-Terrorism Financing laws.
The solution is for these entities, now classified as VASPs by the FATF, to adopt solutions that enable them to achieve compliance without sacrificing decentralization and user privacy.”
Many have called for international collaboration for addressing these new technological developments, like crypto and blockchain, notes Ferreira, but “I am not sure how feasible it is. Authorities sometimes act when there is a trigger.
Libra was such a trigger — and a wake up call — for authorities.” She adds, “Maybe we will see other events in the future that could mobilize authorities to more internationally coordinated action.”
Decentralization At Odds With The Law?
But isn’t there an inherent conflict, though, between economic sanctions — imposed by sovereign nations, or quasi governments like the U.N. — and decentralized finance?
One of the strengths of decentralized finance, according to proponents, after all, is that it’s a hedge against centralized government corruption, including authoritarianism. Might a blanket ban on Iranian users, for example, also shut out Iranian dissidents looking to transfer money outside the reach of the government? “Absolutely,” answers McCalmont:
“I, a ‘regular Joe guy,’ can create an account on a decentralized exchange within minutes and immediately transfer funds to North Korea, Syria, Iran — completely under the radar and with little effort — speaks volumes. If those dissidents have a will, there is without a doubt a way.”
All in all, what may be required here is a mean between two undesirable outcomes. A young, evolving sector like the crypto and blockchain industry will inevitably have “vacuums” that nefarious, non-state actors will seek to exploit “until the state comes in and kicks them out,” Cooper tells Magazine.
That’s to be expected. But the U.S. has gone through four years of anti-regulation rhetoric, at least at the national level, and now, under a new administration, a danger exists that it may seek to monopolize all digital assets — and snuff out innovation.
Doing nothing is bad, continues Cooper, but the U.S. government — or any other state — monopolizing digital assets, whether through a central bank digital currency or other means, is also undesirable. The challenge is “finding the sweet spot.”
When War Hits, Even Crypto Can’t Stay Neutral
Do the ends justify the memes?
When Russia began its invasion of Ukraine, cryptocurrency fans appeared to be trapped in a decadent fantasy. A batch of CryptoPunk NFTs (blockchain collectibles) had just been yanked from auction at Sotheby’s amid fading enthusiasm and a broader market sell-off.
The seller tweeted Drake memes to laugh off the canceled event, but considering the glitzy marketing campaign, it was a humbling moment.
A week later, another CryptoPunk is sitting in a Ukraine government account as part of a $51 million fundraising drive. Kyiv is using its tech-savviness to appeal for all sorts of assets that it can sell to finance the war effort.
Like the New Zealand lamb donated in the First World War, or chunks of the Berlin Wall sold as memorabilia for a good cause, NFTs are finding a new use in conflict beyond social status and virtual wealth.
Crypto evangelists have been quick to leap on the implications of their favorite asset as a “lifeline” in war after years of bad press over speculation, illicit money flows and criminal activity.
With financial markets cratering and sanctions piling up on Russia, digital tokens and artworks are being sought as an alternative to otherwise vulnerable forms of payment. Bitcoin trading in rubles and hryvnia is surging.
It may very well be that this is what wartime back-channels will look like in the future. Crypto has traditionally been user-agnostic, used by Ukraine-linked organizations that have been blocked because of military ties, or stolen to reportedly fund North Korea missile programs.
But there’s a bigger dose of reality here for crypto’s utopian narrative of “borderless” and “stateless” money as bombs rain down at Europe’s doorstep. In a world where even Switzerland is ditching historic neutrality, crypto is finding it hard to escape geopolitical facts on the ground.
Crypto is becoming less “meta.” Vitalik Buterin, co-founder of the Ethereum blockchain, tweeted support for Ukraine fundraising: “Ethereum is neutral, but I am not.” While one CryptoPunk owner a few months ago told Wired she felt like she was living in the metaverse and the physical world was slowing her down, today the Uniswap exchange has a Ukraine donation facility and Kyiv is telling Facebook parent Meta Platforms Inc. that it must ensure that there is “no place for war criminals in Metaverse.”
Just as crypto fans are feeling forced to choose sides, crypto exchanges are also being asked to confront their freewheeling, patchily regulated past. While the likes of Kraken Chief Executive Officer Jesse Powell insist that crypto is about making “arbitrary lines on maps” meaningless, governments are prodding exchanges to make sure it’s not being used to evade sanctions.
Finance ministers from the Group of Seven and European Union are working on a “maximum” sanctions toolkit that includes crypto assets, while U.S. financial regulators are probing whether NFT offerings run afoul of their rules.
Perhaps in the same way that Covid-19 saw the crypto market balloon but also spurred governments to drag it into the light, this conflict will likely intensify regulatory efforts. The narrative that the benefits of secrecy or anonymity (technically pseudo-nymity) outweigh the costs will cut little ice — coincidentally, it’s also one that was used by tax havens, which have found life a lot harder as the world counts the cost of leaking money to them.
Even as big exchanges push back against the idea of barring all Russian users, they are at pains to point out they’ve complied with sanctions. Blockchain analytics firm Chainalysis says dodging sanctions without detection would be “difficult.”
To be sure, the likes of Mike Novogratz predict that sanctions and geopolitical crisis will eventually boost the case for crypto. As capital gets squeezed out of other assets, more of it could find a home there — and even as bombs drop, the sector is having little trouble raising funds.
But history is still being written. It’s unclear if a post-war crypto market will be able to spread HODL memes with quite the same level of science-fiction frenzy. One Russian expat in the U.S. told Bloomberg News that even if crypto platforms offered alternatives, cash was still king in times of trouble: “You can’t pay everything by crypto, and anyway need to withdraw money on a debit card or exchange on cash.”
Maybe when swords are melted back into plowshares, crypto evangelists will have a new story to tell. But for the time being, this feels like a dose of reality after years of decadence. Like those Berlin Wall chunks before it, a CryptoPunk today might have value only because it was donated during a war and can be sold for cash. The ends sometimes justify the memes.
U.K. Has All The Tools To Sanction Oligarchs
But there are questions over the government’s will to use them.
French customs officials impounding a Russian billionaire Igor Sechin’s superyacht on the Cote D’Azur made for sensational headlines, but it was just one of the moves against a string of oligarchs by the U.S., Europe and U.K.
It is easy to mistake these actions simply as punishment. But hitting individual Russian billionaires with sanctions isn’t some mindless act of revenge for their country’s invasion of Ukraine. It isn’t even simply an attempt to upset powerful people in the hope that they can influence President Vladimir Putin.
Sanctions are there to disrupt the economy and finances of Putin’s regime directly. Their purpose is to frustrate Russia’s efforts to prosecute its unprovoked war against its neighbor. Western governments can’t just target any rich person they fancy for the spectacle of it; the targets need to be connected to the regime and its aims.
In the U.K., there’s a growing drumbeat of demands that the government go after more oligarchs moreaggressively, having sanctioned far fewer than the U.S. and European Union. Britain has sanctioned 13 people, including Putin and Foreign Minister Sergei Lavrov, since the invasion began.
The U.S. has put full blocking sanctions or visa restrictions on dozens of Russian elites and their families, and sanctioned other individuals accused of spreading misinformation in Ukraine. The European Union last week added 26 oligarchs, state company bosses and other individuals involved in Putin’s regime.
A number of prominent people have been sanctioned by the EU or U.S. or both and not the U.K., including Sechin, who runs Rosneft Oil Co. and Alexey Mordashov, chairman of steelmaker Severstal PJSC, who has interests in telecoms, media and banking groups, including the sanctioned Rossyia Bank. Mordashov’s yacht was impounded in Italy on Friday.
British government ministers have said they are slowed by U.K. law. But the country has all the legislation it needs to move just as quickly as other jurisdictions if it wanted to, according to experts.
Britain’s Sanctions and Anti-Money Laundering Act says the government must have reasonable grounds to suspect that an individual benefits from or is involved in supporting a sanctioned regime. “Reasonable grounds” is about the lowest evidentiary hurdle possible.
The person also must be relevant to the aim of the sanctions against the regime. The government has to say why the individual is being sanctioned but doesn’t have to disclose anything that could damage national security, criminal prevention or detection or the interests of justice.
The current laws were enacted only in 2018 and gave ministers a lot of leeway, according to Paul Feldberg, a London-based partner at Jenner & Block, a U.S. law firm. He has co-authored a guide to the U.K. laws.
“The legal basis for imposing sanctions under the U.K. Russia sanctions regime now is much broader than it was … in 2014 when the government imposed sanctions related to Crimea,” he said.
Others agree that there is nothing in EU or U.S. law that makes it easier to freeze assets there than in the U.K., despite the different legal systems. Oligarchs can challenge their sanctions in the U.K., initially with the Office of Financial Sanctions Implementation and after by seeking a judicial review at the High Court.
Government ministers have said they want to ensure they have watertight legal grounds for their sanctions in order to not lose later challenges. Feldberg said he saw no reason for this causing delays. Joshua Ray, a partner and sanctions expert at another law firm, Rahman Ravelli in London, said it didn’t make sense.
“The U.K.’s slow pace on designating individuals can’t really be explained by concerns that they are going to lose challenges,” he said. “It’s got to be something political behind the scenes.”
London is a home away from home for many Russian oligarchs and they are big clients for the city’s bankers, asset managers and lawyers. You don’t need to resort to conspiracy theories to realize that imposing sanctions on a large number of them would cause huge havoc for all the companies no longer allowed to deal with them — as well as a substantial loss of revenue.
But the lack of action also looks bad for the governing Conservative Party, which has received large contributions from wealthy Russian backers. A report in summer 2020 from the U.K. Parliament’s Intelligence and Security Committee said Russian donations to political parties had been part of the country’s effort to infiltrate U.K. society and politics.
The U.K.’s Foreign, Commonwealth and Development Office emailed some links to its sanctions announcements but didn’t answer any specific questions from Bloomberg Opinion.
Oligarchs can be private individuals or control state companies. Putin’s Russia has helped to enrich and empower them. But the critical thing is that western governments believe many ostensibly private business people remain deeply entangled with the state.
Alisher Usmanov, one of Russia’s richest oligarchs, has been sanctioned by the U.S., EU and U.K. All three said he had a close relationship with Putin and other high-profile people in the regime. The EU described him as “one of Russia’s businessmen-officials, who were entrusted with servicing financial flows, but their positions depend upon the will of the President.”
Usmanov issued a statement calling the sanctions unfair and describing the EU’s reasons as “false and defamatory allegations damaging my honor, dignity, and business reputation”.
His holding company, USM Holdings, didn’t respond to an emailed request for further comment.
Another individual sanctioned by the EU, is Petr Aven, a shareholder in Alfa Group, the parent company of Alfa Bank, a private company. He appears in the U.S. report on potential Russian interference in the 2016 presidential elections.
The report says Aven told Special Counsel Robert Mueller’s office that he was one of about 50 wealthy oligarchs who met regularly with Putin and that he understood any suggestions or critiques made by Putin were explicit directives that he should follow.
The reasons for sanctioning any oligarch is that their businesses, financial means and even yachts or private jets could be put at the service of Putin’s regime. It is their money and industrial capabilities that matter most, but boats or planes also have their uses and financial value.
It would be deeply unfair if Western governments were setting out to demonize or create paranoia about Russian-born people in general, or if they were trying to confiscate money or companies without any proper legal process. But that’s not what this is about. Freezing assets is a temporary measure, it is meant to disrupt their usefulness.
Going after oligarchs is just one part of the wider strategy meant to cut off Putin’s access to finance and resources that can in anyway help his brutal war. One wonders why the U.K. has not acted as swiftly and effectively as its allies.
Coinbase Proposes Crypto Tech To Promote Global Sanctions Compliance
Grewal points out that laundering of fiat currency through traditional financial institutions remains the most sought-after method for evading sanctions.
The United States-based crypto exchange Coinbase has proposed the use of cryptocurrencies to help ensure compliance with economic sanctions. This recommendation comes by highlighting the ease of laundering and sanction evasion of fiat currencies made possible by traditional financial infrastructures.
Written by Coinbase’s chief legal officer Paul Grewal, the blog talks about the growing range of global sanctions put forth amid the Russia-Ukraine conflict. The crypto exchange supported the government’s decision to impose sanctions on individuals and territories, highlighting its importance in “promoting national security and deterring unlawful aggression.”
https://t.co/h08YXYgAoM Sanctions play a vital role in promoting national security and deterring unlawful aggression, and @coinbase fully supports these efforts by government authorities. They are best placed to decide when, where, and how to apply them.
— Paul Grewal (@iampaulgrewal) March 7, 2022
Grewal points out that despite the sanctions put forth by governments over the years, laundering of fiat currency through traditional financial institutions remains the most sought-after method for sanction evasion:
“By transacting through shell companies, incorporating in known tax havens, and leveraging opaque ownership structures, bad actors continue to use fiat currency to obscure the movement of funds.”
On the other hand, Grewal argued that digital asset transactions are inherently public, traceable and permanent — an important feature that can be leveraged by governing authorities to detect and deter evasion.
2/ Every US company has to follow the law – it doesn’t matter if your company handles dollars, crypto, gold, real estate or even non financial assets. Sanctions laws apply to all US people and businesses.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) March 4, 2022
In addition, prominent crypto lawyer Jake Chervinsky also highlighted why it is impossible for governments to make use of cryptocurrencies to evade sanctions. Acknowledging the same, Grewal stated that actors who intend to counteract sanctions would require “virtually unobtainable amounts of digital assets,” adding:
“As a result, trying to obscure large transactions using open and transparent crypto technology would be far more difficult than other established methods (e.g., using fiat, art, gold, or other assets).”
Some of the proactive measures taken by Coinbase to implement a global sanction program include blocking access of flagged entities during the signup process, detecting evasion attempts and anticipating threats using a sophisticated blockchain analytics program.
Moreover, other crypto businesses have started taking measures to further deter the use of cryptocurrencies based on the sanctions recommended by the United States government. For example, Satoshi Labs, a Prague-based crypto wallet provider, announced to stop shipping crypto wallets into Russia.
Satoshi Labs spokesperson Kristýna Mazánkov said that while Bitcoin (BTC) is apolitical, the move to restrict the shipment of crypto wallets in Russia was made as “company employees have connections to the conflict that make it personal.”
In addition to helping law enforcement track suspicious activity over a transparent blockchain, cryptocurrencies play a vital role in protecting the privacy of individuals — a principle that exists within the traditional financial system. Grewal concluded:
“We believe we can balance these interests by continuing to support law enforcement efforts while promoting policy frameworks that respect individual privacy.”
In the first week of March, the New York State Department of Financial Services (DFS) announced the implementation of a blockchain-based technology to further enforce ongoing global sanctions.
#ICYMI: @GovKathyHochul announced new actions to strengthen #NYDFS enforcement of sanctions against #Russia. Read more here➡️https://t.co/y3QbVl0VxQ.
— NYDFS (@NYDFS) March 2, 2022
As Cointelegraph reported, the DFS plans to expedite the procurement of additional blockchain analytics technology to help identify Russian individuals and entities tied to DFS-licensed virtual currency businesses.
Coinbase Blocks 25,000 Crypto Wallets Linked To Russia Users
* Sanctioned Individuals Have Been Banned From Using The Site
* CEO Brian Armstrong Has Defended Use By Ordinary Russians
Cryptocurrency trading platform Coinbase Global Inc. said it blocked over 25,000 wallet addresses related to Russian individuals or entities that it believes to be engaging in illicit activity.
The blocked addresses represent about 0.2% of Coinbase’s 11.4 million monthly transacting users, based on 2021 data. In a company blog, Paul Grewal, Coinbase’s chief legal officer, said the largest U.S. crypto exchange has banned access for sanctioned individuals and is using blockchain analytics to identify addresses potentially linked to them, which it also adds to an internal blocklist.
“Today, Coinbase blocks over 25,000 addresses related to Russian individuals or entities we believe to be engaging in illicit activity, many of which we have identified through our own proactive investigations,” Grewal wrote. “We shared them with the government to further support sanctions enforcement.”
As Russia began its invasion of Ukraine, the Biden administration asked crypto exchanges to help ensure that Russian individuals and organizations aren’t using virtual currencies to avoid sanctions leveled on them by Washington, Bloomberg News reported, citing people with knowledge of the matter.
Major crypto exchanges including Coinbase and Binance have said they will comply with government mandates to restrict sanctioned individuals, but won’t ban all Russian users. Brian Armstrong, Coinbase’s Chief Executive Officer, earlier said some ordinary Russians are using crypto as a “lifeline now that their currency has collapsed.”
Rights Versus Privileges In A Global Financial System
Did We Just Enter the Beginnings of the Post-Dollar Hegemony Era?
FinCEN Includes Crypto In Alert On Russia Potentially Evading Sanctions
“Prompt reporting of suspicious activity contributes to our national security and our efforts to support Ukraine and its people,” said FinCEN acting director Him Das.
The United States Financial Crimes Enforcement Network, or FinCEN, a bureau of the Treasury Department, has warned financial institutions to consider crypto as a possible means Russia may attempt to use to evade sanctions related to the country’s military action in Ukraine.
In a Monday alert, FinCEN reminded U.S.-based financial institutions “with visibility into cryptocurrency” and convertible virtual currency, or CVC, to report any activity that could be considered a potential way for Russia to evade sanctions imposed by the U.S. and its allies.
While the U.S. watchdog said that the Russian government using CVCs to evade large scale sanctions was “not necessarily practicable,” financial institutions were obligated to report such activities from Russian and Belarusian individuals named in actions that many have dubbed “economic warfare.”
“In the face of mounting economic pressure on Russia, it is vitally important for U.S. financial institutions to be vigilant about potential Russian sanctions evasion, including by both state actors and oligarchs,” said Him Das, who has been the FinCEN acting director since August 2021. “Although we have not seen widespread evasion of our sanctions using methods such as cryptocurrency, prompt reporting of suspicious activity contributes to our national security and our efforts to support Ukraine and its people.”
Many U.S. lawmakers and agencies have spoken out on Russia-based individuals and banks potentially attempting to use crypto to evade the sanctions announced by President Joe Biden on Feb. 24.
The Treasury Department’s Office of Foreign Assets Control — the agency responsible for administering and enforcing U.S. sanctions — warned U.S. residents on Feb. 28 not to use digital currencies to benefit Russia’s government or central bank. OFAC’s guidelines equated crypto transactions to “deceptive or structured transactions or dealings.”
U.S. and EU lawmakers have also been calling attention to the potential of Russia using crypto assets as the country’s options dwindle amid being cut off from SWIFT payments network and its major banks named on sanctions lists.
Bloomberg reported on Monday that President Biden will sign an executive order creating a comprehensive regulatory framework on cryptocurrencies sometime this week in response to the escalating military situation in Ukraine.
There have been lots of fits and starts on the crypto EO but this week’s timeline is real. CNBC’s @kaylatausche is also confirming our reporting. https://t.co/6uFj8HFSjH
— Jennifer Epstein (@jeneps) March 7, 2022
Mykhailo Fedorov, the minister of digital transformation of Ukraine, has directly appealed to crypto exchanges on social media, urging them to block addresses of Russian users. However, many exchanges including Binance and Kraken have said tha they will not unilaterally act to block all users in Russia from accessing their coins unless there were a legal requirement for them to do so.
You Would Understand Bitcoin If You Were Under Cuba’s Embargo
More than 60 banks and fintechs rejected me just for my nationality. Bitcoin fixes that.
My name is Erich Garcia Cruz and I am a 35-year-old programmer. I don’t have a bank account or PayPal, and I don’t use a Mastercard or Visa credit or debit card. More than 60 banks and payment platforms have rejected me.
Why? Because I was born and currently live in Cuba, a country that since 1962 has been under an economic embargo imposed by the United States, which prevents American businesses, or those structured under U.S. law, from doing business with Cuba.
You are probably reading these lines in a country that has all kinds of financial solutions to send or receive payments. Banks, maybe, offer you discounts or better interest rates to attract your money. And you may even enjoy the luxury of opening accounts offered by global financial services such as PayPal or Wise.
Cubans do not have that privilege. Fintech companies like Venmo, Wise, Stripe and Revolut instantly block any Cuban startup or person from using them.
Making matters worse, Western Union, the last service available for Cubans living abroad to send money to their families, suspended U.S. dollar transfers to Cuba in November 2020 after sanctions by then-President Donald Trump’s administration.
Cuban businesses are also seriously affected by the embargo because they cannot receive payments through global platforms such as PayPal, Mastercard or Visa.
All these restrictions, however, have become a fertile ground for cryptocurrency in Cuba. Before crypto, no tool had been as effective in breaking through an embargo that predates the internet itself.
Cubans may not have Visa or Mastercard, but they have PayWithMoon, which allows us to fund a prepaid virtual card with bitcoin (BTC). They can’t use banks, but found in bitcoin a public peer-to-peer bank. They are not accepted by Stripe, the ubiquitous internet payment network, but can make transfers in seconds through Bitcoin’s Lightning Network.
Crypto, The Only Option
There are no crypto exchanges in Cuba that allow buying crypto with Cuban pesos. The only way to achieve this is through WhatsApp or Telegram groups.
In general, sellers and buyers coordinate an amount and price through messages and then must rely on pure trust. The crypto buyer will deposit Cuban pesos in a bank account and wait for sellers to keep their word and deposit bitcoin in the indicated wallet. Sadly, scams through these platforms are common, and buyers often receive nothing.
People have to do it that way because crypto exchanges like Coinbase, Binance and OpenNode instantly block crypto users because they need to comply with the embargo.
For businesses, it is impossible to use payment gateways to automate the sale of a book or a simple delivery service in Cuba over the internet, unless a business owner has a relative, friend or business partner abroad who can do that with a non-Cuban identity.
Bitcoin fixes this.
As of now, Cuban stores must have a personal wallet to accept bitcoin payments because they provide customers with a QR code to receive transactions. If bitcoin payment automation platforms such as OpenNode were available in this country, local businesses could automate payments both online and in person. But, due to the embargo, that has not happened so far.
In 2019, I jumped into bitcoin and created QvaPay, a company that allows Cubans to receive and send remittance payments through the Bitcoin network at high speeds and with low fees. As of today, the service has more than 48,000 users who find crypto the only way to move money.
I spend my days trying to promote bitcoin across the island. With a few friends, I created Cuba es Bitcoin, the first meeting of crypto entrepreneurs, artists and enthusiasts on the island. Our first event took place in February in Havana.
Here is a prediction: I believe Cuba will experience a kind of hyperbitcoinization in the private sector, a phenomenon that has already been happening organically and simply through the acceptance of bitcoin in businesses, such as restaurants, cellphone repair stores and delivery merchants.
Businesses that receive crypto as a form of payment often save in crypto or pay for supplies to another business with crypto. Also, they buy things in the U.S. through platforms such as Bitrefill or PayWithMoon. They can also convert crypto to Cuban pesos to buy supplies within the country.
Although there is no official data on crypto adoption in Cuba, I estimate there are now more than 20,000 Cubans using crypto on a daily basis. As many as 200,000 people have owned a wallet or used crypto at some point. QvaPay and Bitremesas, two companies I created, have sent crypto to more than 150,000 wallets so far. The numbers might seem tiny (up to 40 million American adults have invested or traded crypto), but given our financial obstacles, there is great potential for growth.
Crypto has also gotten onto the radar of the Cuban government. In August, the Central Bank of Cuba authorized the use of certain virtual assets for commercial transactions and the granting of licenses to virtual asset service providers, for the purpose of carrying out certain financial activities, such as the collection of payments.
It’s understandable that companies must obey local laws – in this case, the embargo imposed by the U.S. – and exclude Cubans from using their services. But this also prevents these companies from offering payment systems that empower their users economically.
The good news is that bitcoin is not subject to these same laws or geographical restrictions; it doesn’t care about embargoes.
FBI Director: Russia Overestimates Its Ability To Bypass US Sanctions Using Crypto
Christopher Wray cited the FBI’s recent work in seizing large amounts of crypto as evidence there were vulnerabilities in using digital assets to get around sanctions.
Christopher Wray, the director of the Federal Bureau of Investigation, said that fiat was a more likely avenue for Russia to explore in circumventing sanctions, given the United States’ ability to block efforts using crypto.
In a Thursday hearing of the Senate Select Committee on Intelligence, New Mexico Senator Martin Heinrich asked the FBI director if Russia might respond to the economic impact of the United States banning imports of the country’s oil and gas by using reserves of gold, China’s currency or cryptocurrency.
Director Wray said the FBI and its partners had “built up significant expertise” on digital assets, citing the department’s recent work in seizing large amounts of tokens as evidence there were vulnerabilities in using crypto to get around sanctions.
“The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others,” said Wray. “We are, as a community and with our partners overseas, far more effective on that than I think that sometimes they appreciate and there’s a lot of expertise in terms of tools and strategies to help block that kind of effort. Ultimately, what they really need to do is get access to some form of fiat currency, which becomes more challenging.”
Director of National Intelligence Avril Haines added that Russian President Vladimir Putin had likely anticipated sanctions from his actions against Ukraine and built up a reserve fund to lessen the economic impact. However, she said the U.S. Treasury Department and other foreign governments acting to sanction Russia had made it difficult to access the funds.
Following Russia’s military actions on Feb. 24, the United States and governments across the European Union announced sanctions aimed at financially harming the country. Many agencies and departments, including the U.S. Financial Crimes Enforcement Network and European Commission, said they would be looking at the possibility of Russia using digital currency to evade sanctions.
U.S. President Joe Biden also signed an executive order on Wednesday aimed at creating a regulatory framework for crypto that mentioned risks of circumventing sanctions.
How Wartime Tests Crypto’s Strengths And Vulnerabilities
Bitcoin and other cryptocurrencies promise transactions across borders in relative anonymity, mostly free of state oversight and unbothered by the formalities of traditional international banking. In normal times, those attributes inspire talk of privacy, freedom and community.
Less clear is how crypto’s anarchic culture works in a time of war. As governments around the world use the global financial system to impose sanctions on Russia over its invasion of Ukraine, crypto is one potential way for Russia to skirt the consequences. At the same time, digital currencies could have a positive role to play in helping victims of Russia’s aggression.
1. How Is Crypto Being Used For Good?
Donors have supported Ukraine using crypto payments after the government set up digital wallets to receive currencies including Bitcoin and Dogecoin. The Kyiv government and non-governmental organizations had received the equivalent of $63 million as of March 9, according to analytics firm Elliptic Enterprises Ltd. Suppliers of everything from food to bulletproof vests were accepting tokens including Bitcoin and Ether to help the military quickly purchase goods, Ukraine’s Deputy Minister of Digital Transformation, Alex Bornyakov, told Bloomberg. The ministry was even working on a potential collection of non-fungible tokens that could raise money for the war effort, he said. Coinbase Global Inc. said ordinary Russians were also using crypto as a “lifeline” after their currency collapsed.
2. How Might Crypto Be Used To Evade Sanctions?
The risk is that Russian individuals and entities targeted by sanctions will turn to digital currencies to buy goods and services and invest in assets outside the country, avoiding financial institutions that could trace the transactions. Cryptocurrencies can change hands without intermediaries via a peer-to-peer network and it can be hard to tie a digital identifier to the person behind it. Some users have multiple digital wallets (accounts that store encrypted payment information), which makes it easier to conceal undeclared crypto payments among regular transactions. Massachusetts Senator Elizabeth Warren called crypto a “shadow world” that Russians and other nationals could use to help “sanction-proof” themselves.
3. Are Russians Getting Around Sanctions That Way?
There’s no proof for now that any Russian individual or organization has used crypto to skirt sanctions. Early in the conflict, there was a spike in the amount of Bitcoin being traded in rubles. However, some observers attributed that to Russian retail investors buying crypto as an alternative to the ruble after its value plummeted. Since then, Russian crypto trading appears to have continued in relatively small volumes.
4. What Can Be Done So Crypto Doesn’t Undermine Sanctions?
It’s possible to identify digital currency addresses associated with sanctioned people, as the U.S. Treasury Department’s Office of Foreign Assets Control did for the first time in 2018 in a case involving Iranians accused of ransomware schemes. Some analytic services allow law enforcement to trace where money has flowed, including through the dark web or for illicit payments. Another opportunity to spot suspicious activity comes when crypto is converted back into traditional currencies via the regular banking system. “It’s very difficult to move millions — tens, hundreds of millions — of dollars in and out of crypto without touching a legacy financial institution,” Meltem Demirors, chief strategy officer of crypto fund-provider CoinShares, told Bloomberg TV.
5. Do Crypto Exchanges Police Their Networks?
Yes, but oversight can be patchy. The platforms used to buy and sell cryptocurrency are subject to different requirements depending on where they operate. Exchanges licensed in the U.S. or the U.K., such as Kraken and FTX US, must comply with local laws similar to those that banks follow, including on sanctions. So-called “know your customer” rules in those countries force banks to obtain some form of official identification from clients and establish where their money came from. Other exchanges operate in countries that haven’t imposed sanctions on Russia, and some don’t require detailed customer identification, making it harder to impose curbs. Some aren’t even sure how to comply with the restrictions.
6. Is Any Action Being Taken?
Coinbase, the largest U.S. crypto exchange, said it has blocked 25,000 addresses from its platform related to Russian people or businesses that may be engaging in illicit activities, although most were identified prior to the Ukraine invasion. Other major exchanges, including Binance, Circle and FTX, have pledged to comply with government-issued sanctions. However, Circle’s chief executive officer, Jeremy Allaire, acknowledged there’s not always complete information to spot when people are circumventing them. Finance ministers from the Group of Seven nations and the European Union are working on a “maximum” sanctions toolkit that includes crypto assets. On March 9, under pressure from Senate Democrats, U.S. President Joe Biden signed an executive order to probe the national security and economic impact of digital assets and explore potential changes to regulations around crypto.
7. What Bigger Issues Are Raised?
Some crypto advocates see the war as an opportunity for digital coins to prove their worth as a refuge for ordinary citizens from economic turmoil. But if they end up blunting the impact of sanctions, it could add to the pressure for tighter controls on the industry. Governments are already trying to crack down on digital tokens being used for money laundering. They’re also wary of their potential to undermine the effectiveness of everything from capital controls to monetary policy. If they end up forcing digital platforms to enact the kind of detailed oversight and costly compliance expected of banks, much of crypto’s utopian vision of “borderless” and “stateless” money may no longer hold. “Crypto is finding it hard to escape geopolitical facts on the ground,” said Bloomberg Opinion’s Lionel Laurent.
Bitfinex Refuses To Freeze Crypto Belonging To Non-Sanctioned Russians
The crypto community stands up for the rights of ordinary Russians amid hundreds of businesses leaving the country, but the final decision is up to regulators.
Amid global businesses boycotting the Russian residents over the military conflict in Ukraine, some companies in the cryptocurrency industry stand up for the rights of non-sanctioned Russian citizens.
Bitfinex, an affiliate firm of the world’s largest stablecoin provider, Tether (USDT), will not unilaterally freeze the accounts of ordinary Russian customers as part of the global sanctions unless it’s forced to do so, Bitfinex chief technology officer Paolo Ardoino told Cointelegraph on Thursday.
Ardoino emphasized that Bitfinex has taken appropriate action against the accounts of Russian users who have been sanctioned. “As with all our customer accounts, we work to ensure that there are no irregular movements or measures that might be in contravention of applicable international sanctions,” he noted.
According to Bitfinex, blocking all ordinary Russians over the ongoing conflict may be unfair on a human level as the actions of governments may not speak for individuals, the CEO said:
“Our view is that the actions of a government do not necessarily represent the wishes of individuals. Unless we are otherwise directed by the regulatory authorities by which we are governed, we want to protect the accounts of all our customers.”
Ardoino declined to comment on Bitfinex’s market in Russia, stating only that “Bitfinex does serve Russian customers.”
At the time of writing, Bitfinex’s terms of service read that a “sanctioned person” refers to any person or a digital token address that is either listed explicitly in any sanctions list directly or indirectly owned 50% or more by any person or group of persons in the aggregate with such a person.
The sanctioned person on Bitfinex also refers to a person that is subject to any government approval or otherwise sanctioned, restricted, or penalized under applicable economic sanctions, the legal statement notes.
Launched back in 2012, Bitfinex is one of the world’s largest crypto exchanges, with daily trading volumes amounting to more than $800 million at the time of writing, according to data from CoinGecko.
The Virgin Islands-based crypto exchange is known for being subject to regulatory litigations in the United States, with Bitfinex and Tether paying a $43 million fine over the U.S. Commodity Exchange Act violations in October 2021.
Bitfinex is not the only crypto exchange that wants to keep supporting ordinary Russians amid the ongoing global geopolitical issues.
Michael Carter, chief compliance officer at Bittrex, told Cointelegraph that the crypto exchange is committed to ensuring that it remains compliant with the sanctions requirements while also creating “minimal disruptions for law-abiding traders,” including those in Russia. London-based cryptocurrency exchange Exmo also continues to support its Russian customers.
“We are not gonna sanction regular people and block their accounts,” Exmo head of business development Maria Stankevich said. However, the exchange will have to comply if the United Kingdom’s Financial Conduct Authority orders the sanctioning of regular people, she admitted.
Jerry Brito, the executive director of non-profit crypto policy advocate group Coin Center, at the start of March also called for global crypto companies to continue serving non-sanctioned Russian people, stating:
Why won’t crypto exchanges cut off Russians?
In my newsletter this week I explain and argue it’s the right call. I also critique efforts to shame exchanges into submission.
You can read and subscribe to it here: https://t.co/BTMd9y4ek5
— Jerry Brito (@jerrybrito) March 7, 2022
US And EU Double Down On Measures Against Russia Potentially Using Crypto To Evade Sanctions
“The use of cryptoassets to circumvent economic sanctions is a criminal offence,” said U.K. regulators.
The United States and the European Union have announced new actions targeting Russia’s economy and wealthy individuals as a report suggests Vladimir Putin’s allies have attempted to circumvent sanctions using cryptocurrency in foreign countries.
In a Friday announcement, the White House said leadership from the United States, Canada, France, Germany, Italy, Japan, the United Kingdom and the European Union will take additional actions aimed at economically isolating Russia in response to President Vladimir Putin’s military invasion of Ukraine.
The announcement includes banning imports of many Russian goods, banning the export of luxury goods to Russia and guidance for the U.S. Treasury Department to monitor the country’s attempts to evade existing sanctions.
“Treasury’s expansive actions against Russia require all U.S. persons to comply with sanctions regulations regardless of whether a transaction is denominated in traditional fiat currency or virtual currency,” said the White House. “Treasury is closely monitoring any efforts to circumvent or violate Russia-related sanctions, including through the use of virtual currency, and is committed to using its broad enforcement authorities to act against violations and to promote compliance.”
Had a substantive conversation with @POTUS. Gave him the assessment of the situation on the battlefield, informed about the crimes of Russia against the civilian population. We agreed on further steps to support the defense of Ukraine and increase sanctions against Russia.
— Володимир Зеленський (@ZelenskyyUa) March 11, 2022
The United States’ policy is part of a coordinated effort with the European Union and G7 nations to “collectively ramp up pressure on Putin” and impose additional financial restrictions on Russia.
On Wednesday, the European Commission said its member states agreed to amend regulations with the goal of ensuring “even more effectively that Russian sanctions cannot be circumvented, including through Belarus,” specifically mentioning the possible use of crypto assets.
European Commission President Ursula von der Leyen said officials will introduce the measures against Russia starting on Saturday. Though many EU members have not said they will impose restrictions on Russia-produced oil and gas similar to the measures U.S. President Joe Biden announced earlier this week, Von der Leyen said there would be a “big ban” on European investments across Russia’s energy sector.
2. Continue pressuring Russian elites close to Putin.
3. Make sure that the Russian state and its elites cannot use crypto assets, to circumvent the sanctions.
4. Ban the export of any EU luxury goods from our countries to Russia.
— Ursula von der Leyen (@vonderleyen) March 11, 2022
Regulatory agencies and government departments across many countries enacting such economic measures against Russia have also warned individuals and businesses dealing in crypto of possible enforcement actions.
Bloomberg reported on Friday that the U.S. Justice Department will be forming a new task force aimed at freezing or seizing the crypto holdings of wealthy Russian individuals as well as investigating those banks and crypto firms that help entities named under sanctions for money laundering.
In the United Kingdom, the Financial Conduct Authority and Office of Financial Sanctions Implementation issued a joint statement warning crypto firms to “play their part in ensuring that sanctions are complied with.”
“Financial sanctions regulations do not differentiate between crypto assets and other forms of assets,” said the U.K. regulators. “The use of crypto assets to circumvent economic sanctions is a criminal offense.”
The economic measures against Russia have been swift and affected many industries. Private businesses from the fast-food chain McDonald’s, major bank Goldman Sachs and credit card companies including Visa and Mastercard have all cut ties with the country in the last seven days.
Though some U.S. officials have said Russian individuals and businesses will face difficulty using crypto to evade such sudden and comprehensive sanctions, a Friday report from Reuters suggested they may be turning to the United Arab Emirates for solutions.
The news outlet reported that crypto firms in the country had received multiple inquiries about using crypto to purchase property or liquidate large amounts of digital assets.
“We’ve been seeing a lot of Russians and even Belarusians coming to Dubai and bringing whatever they can bring, even in crypto,” said an unnamed real estate broker whose company partnered with a crypto firm.
Some crypto exchanges have refused requests from Ukraine to block all addresses from Russian users. However, Coinbase and Kraken — both with headquarters in the United States — said they would freeze assets of individuals named in sanctions.
Crypto exchange Binance said users with accounts from sanctioned Russian banks would not be able to use them, nor could the platform take payments from Mastercard and Visa cards issued in Russia.
Fact: there are about 350 banks in Russia. Only about a dozen are on the sanction list.
And everyone’s focused on crypto. ♂️
(ps, none of them work with crypto exchanges)
— CZ Binance (@cz_binance) March 7, 2022
The situation between Russia and Ukraine is still developing. While Ukraine has been under bombardment from Russian missile attacks since Feb. 24, Mykhailo Fedorov, the country’s minister of digital transformation, continues to put out tweets calling for financial services firms — including those involved in crypto — and major companies to stop doing business with Russia:
Today, the entire democratic world has united against Russia to punish the bloody invaders economically. I call on @tether_to @paoloardoino to stop any transactions with the Russians! For peace!
— Mykhailo Fedorov (@FedorovMykhailo) March 11, 2022
The First Crypto War May Lead To Lasting Peace
However the actual fighting in Ukraine ends, crypto will play a larger role in world affairs.
The Russian invasion of Ukraine is the first crypto war. The digital asset front follows only the actual fighting in importance.
Crypto has been a major focus throughout events, including the Ukraine government’s requests for bitcoin (BTC) and ether (ETH), the Ukraine DAO, both sides’ use of stablecoins as financial refuge, and European and U.S. bureaucrats’ angst over the use of cryptocurrency to bypass sanctions.
However the conflict ends, crypto will play a central role in world affairs. Moreover, the individual autonomy it brings could mean a more peaceful world, provided governments and global standard-setting bodies don’t kill this promise through overreaching regulation or forced public alternatives.
Crypto could give citizens of aggressor countries an informal “citizens veto” on war. If people flock to stablecoins amid host-country aggression or international sanctions, their actions could crush a nation’s ability to wage war. This veto is now happening as Russians ditch the ruble for stablecoins, and it may thwart Russia’s ability to finance hostile operations.
The Russia invasion could augur a return to the more limited conflicts of the pre-World War I (WWI), gold standard era. As Columbia Professor Saifedean Ammous explains in The Bitcoin Standard, before WWI (also known as the Great War), gold standard countries were limited by popular sentiment (and their own treasuries) to wage war.
Once national reserves sunk, governments had to raise taxes or sell bonds to continue fighting. But in WWI, as the initially localized conflict spread, fiscal discipline failed. As Ammous explains, within the first month “all major belligerents had suspended gold convertibility, effectively going off the gold standard and putting their population on a fiat standard.”
By leaving the gold standard, countries printed money until, through inflation, the whole population’s wealth was squandered before winning or capitulating. This had devastating results. A “citizen’s veto” via people ditching a nation’s fiat currency would lessen or preempt conflicts altogether.
But governments could thwart this more peaceful future in two ways. The first option is forcing all crypto into a global Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime. The second even worse option is to require everyone to use multi-jurisdictional central bank digital currencies (m-CBDC) with alternatives banned.
That AML/CFT is the primary concern of global and national financial regulators is no understatement. The United Nations estimates criminals and terrorists launder up to $2 trillion each year.
As CoinDesk columnist Nic Carter writes, stablecoins operate at least partially outside AML/CFT confines: “Stablecoin issuers treat the IOUs as bearer instruments, and generally do not seek to police user behavior when a transaction does not involve the issuer. … By granting a measure of transactional privacy and not embedding political conditions into transactions, stablecoins are the closest thing to digital cash we have today.”
Some might say this may appeal to criminals, and perhaps initially it would. But it would be strange to think ne’er-do-wells would rely on traceable, public ledgers common to most cryptocurrencies as transaction facilitators.
The risks of permanent and public recordation far outweigh the benefit of removing cash’s physical limitations. Some have discovered as much the hard way, like the New York City couple allegedly sitting on billions but unable to spend them. Even the famous 2016 DAO hacker who almost brought down Ethereum and forced a hard fork has allegedly been unmasked.
The Trade-Off For Privacy
Of course, criminals will create new ways to shield transactions that may temporarily succeed. But the public, through democratic means – not unelected central bankers and global financial bureaucrats – should decide how much of this monitoring they will tolerate in return for their privacy.
Further, as the Canadian Freedom Trucker Convey showed, those whom governments label terrorists expand with political expediency. (The Canadian government now admits the protests were not rife with money launderers and terrorists). Regardless, these actions should be unacceptable in a Western democracy.
An m-CBDC would be even worse. For example, the coming Chinese model forces every citizen to use the digital yuan, and every transaction is monitored, recorded and factored into people’s social-credit score. Western governments more sensitive to public relations would likely filter such scores through the softer veneer of Environmental, Social and Governance (ESG) metrics.
They could then deny transactions with companies deemed insufficient environment stewards or with inadequate corporate-board diversity etc. If this scenario sounds outlandish, terrorist designations for blue-collar protestors would have had a similar ring 12 months ago.
Neither of these models – granular AML/CFT or m-CBDC – allow for citizen vetoes in times of peace or war. As commentator Vivek Ramaswamy suggests, we may already be fighting a different war – the battle between the Great Reset imposed top down and the Great Uprising from the bottom up.
If so, crypto, with its promise of individual autonomy, control over one’s data and financial transactions, and potential to bypass entrenched institutions will be the main battlefield. If the latter wins, the first crypto war may bring a more peaceful world.
Sanctions Couldn’t ‘Pull The Plug’ On Tornado Cash: Chainalysis
While it has become harder to access the crypto mixer today, for better or worse, decentralization means it’s near impossible to put an end to it.
Sanctions aimed at decentralized crypto mixer Tornado Cash weren’t able to completely cut off its usage, though it has hamstrung the service, a blockchain analytics firm has shared.
On Aug. 8, the Office of Foreign Assets Control (OFAC) announced sanctions against the crypto mixer for its alleged role in the laundering of crime proceeds.
In a report published on Jan. 9, Chainalysis said the sanctions did have some effect, causing total inflows to the mixer to drop by 68% in the 30 days after the sanctions came into force.
1/ The first section preview of our 2023 Crypto Crime Report is here, and it’s all about sanctions.
In this we look at how the US’ crypto-related sanctions strategy has evolved over time and 3 of OFAC’s biggest #crypto service designations to date.https://t.co/gOp1rHOQgx
— Chainalysis (@chainalysis) January 9, 2023
However, the firm also emphasized that because Tornado Cash is a smart-contract-based decentralized platform, “no person or organization can ‘pull the plug’ as easily on Tornado Cash as they could with a centralized service.”
Chainalysis gave the example of darknet marketplace Hydra, which in contrast, saw its cryptocurrency inflows drop to zero after German police seized its servers as a result of sanctions.
Chainalysis explained that while sanctions applied to Tornado Cash saw its “front-end website taken down, its smart contracts can run indefinitely, meaning anyone can still technically use it at any time.” Chainalysis continued:
“That suggests sanctions against decentralized services act more as a tool to disincentivize the service’s use rather than cutting off usage completely.”
OFAC came down hard on Tornado Cash in August due to concerns that individuals and groups had allegedly used the mixer to launder billions worth of crypto since 2019, including the $455 million stolen by the North Korea-affiliated Lazarus Group.
The agency then amended those sanctions in November as it cracked down on the platform even further for: “enabling malicious cyber activities, which ultimately support the [North Korea weapons of mass destruction] program.“
In its latest report, Chainalsis’ research indicated that illicit use of Tornado Cash was primarily related to crypto hacks and scams, with a rough average of 34% of all inflows being attributed to having originated from such.
While the sanctions could not stop the mixer entirely, it did effectively work to spook people away from using that platform, with total inflows dropping by 68% in the following month.
Specific figures are not given, however the chart shows that daily inflows were at times hitting nearly $25 million per day in the 30 days prior to the sanctions, and then subsequently dropped under $5 million per day in the aftermath.
“Those incentives appear to have been powerful, as its inflows fell 68% in the 30 days following its designation. That’s especially important here given that Tornado Cash is a mixer, and mixers become less effective for money laundering the less funds they receive overall,” the report reads.
This week, a separate report from blockchain security firm SlowMist also gave some indications about the type of money that flowed through Tornado Cash in 2022. According to the firm’s research, 1,233,129 Ether worth $1.62 billion was deposited into the platform last year, with 1,283,186 ETH worth $1.7 billion pulled out.
3/ TornadoCash: In 2022, users deposited a total of 1,233,129 ETH to it and withdrew 1,283,186 ETH from it.
ChipMixer: In 2022, users deposited a total of 40,065.33 BTC to it and withdrew 22,582.44 BTC from it.
View the full PDF report for additional details. pic.twitter.com/ib2KnnpN9b
— SlowMist (@SlowMist_Team) January 9, 2023
Illicit Crypto Transactions Reached All-Time Highs In 2022: Report
The abnormal number of illicit transactions is caused by the equally record-breaking scale of international sanctions.
2022 set the record in illicit on-chain transactions, setting aside the criminal investigations of failed crypto businesses like FTX, Celsius, Three Arrows Capital, Terraform Labs and others.
According to a Jan. 12 report from Chainalysis, the total cryptocurrency value received by illicit addresses reached $20.1 billion last year.
The numbers aren’t final, as the measure of illicit transaction volume grows over time as the analysts identify new addresses associated with criminal activity. Moreover, it doesn’t include proceeds from non-crypto native crimes like drug trafficking and the funds on the balance of the above-mentioned failed companies, which are now under investigation in various jurisdictions around the globe.
At this point, the total value of $20.1 billion slightly exceeds the same measure in 2021 ($18 billion) by 10%. However, it still represents an all-time record and significantly (by 60%) transcends the 2020 marker, which stands at $8 billion.
Such numbers can be explained by the fact that 44% of 2022’s illicit transactions account for sanctioned entities: Last year, the United States Office of Foreign Assets Control (OFAC) launched some of its “most ambitious and difficult-to-enforce” crypto sanctions.
Sanctions-related transaction volumes rose so drastically that they couldn’t even be included on the graphs due to scale issues. Chainalysis evaluates this growth at the 10% million mark.
The report cites an example of crypto exchange Garantex. The Russian platform continued to operate while being listed on the OFAC sanctions register in April, and it hosted the majority of sanctions-related transaction volume in 2022.
As Eric Jardine, cybercrimes research lead at Chainalysis, explained to Cointelegraph that the report counts wallets as “illicit” when they are part of a known illicit entity, such as a darknet market or sanctioned platform. Personal or unhosted wallets may be tagged as illicit if they are holding funds stolen in a hack. However:
“If a personal/unhosted wallet sent money to Tornado Cash after its designation, that wallet would not be tagged as illicit for that activity, but the transaction volume would be considered ‘illicit’ because it involves funds received by an illicit entity.”
In early January, the United Kingdom’s National Cyber Crime Unit launched a cryptocurrency unit to investigate U.K. cyber incidents involving the use of cryptocurrencies. This move aims to increase enforcement focus on crypto assets in the country amid the government’s call to eliminate “dirty money” in the country.
Criminal Activity Thrived In Otherwise Tough Year For Crypto
* Crypto Transactions Tied To Illicit Activity Top $20 Billion
* Researchers Say Impact Of Crypto On Cybercrime Is Mixed
Cryptocurrency transactions may have taken a hit in 2022 with the onset of a bear market.
But criminal activity continued to thrive, with an estimated $20 billion in cryptocurrency transactions last year related to stolen funds, terrorism financing, darknet markets, digital ransoms and other scams, according to the blockchain analysis firm Chainalysis Inc.
That compares with $18 billion in 2021, according to the company’s researchers, who said they believe the total amount in 2022 will continue to grow as additional criminal endeavors are uncovered.
The company, which is based in New York, analyzes blockchain transactions by mapping cryptocurrency wallet addresses and tracing them to real-world entities.
The annual report on crime, released Thursday, doesn’t include doesn’t account for money that was laundered through cryptocurrency services, nor does it include transaction volumes associated with crypto firms that collapsed last year.
Thieves have become adept at exploiting digital vulnerabilities, conducting heists that resulted in more than $3 billion in losses last year.
“I was surprised at how hacking remained so persistent,” said Kim Grauer, head of research at Chainalysis. “I would have thought it would have trended down.”
The report concluded that criminal transactions continue to account for just a small amount of overall cryptocurrency activity, at just 0.24% last year.
Its publication followed a Chainalysis blog, published Monday, that attempted to assess the impact on sanctions by the US Treasury Department on cryptocurrency services that allegedly facilitated cybercrimes or other illicit activity. Chainalysis concluded that sanctions have had varying success.
Researchers compared the impact of sanctions on Hydra, once the largest darknet market, Garantex, a cryptocurrency exchange, and Tornado Cash, a mixer allegedly used by North Korea to launder stolen crypto.
According to Chainalysis, the location of a crypto service’s servers played an important role in eliminating money laundering, as did cooperation between governments and the technology upon which some of the services were built.
The sanctioning of Hydra was effective because its server was based in Germany, which shut down the service in cooperation with the US last year, Chainalysis determined. Authorities alleged that Hydra sold hacking tools and drugs and was used to launder money through affiliated cryptocurrency exchanges.
In contrast, the sanctioning of Garantex didn’t work out so well, according to Chainalysis. Although Garantex, which was designated at the same time as Hydra, is no longer considered a legitimate exchange, Russia hasn’t enforced sanctions on the service and its transaction volume increased post designation, the report found.
Tornado Cash, one of the most popular services to obfuscate crypto transactions, has continued to partially operate despite sanctions. However, Chainalysis found activity dropped 68% immediately after it was designated.
Tornado Cash’s website has been taken down but its underlying, decentralized infrastructure continues to run.
A spokesperson for the US Treasury Department declined to comment.
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