Business & Lobbying

Russian invasion thrusts crypto into spotlight

The Bitcoin logo appears on the display screen of a cryptocurrency ATM
Associated Press/Charles Krupa
In this Feb. 9, 2021, file photo, the Bitcoin logo appears on the display screen of a cryptocurrency ATM in Salem, N.H. 

Russia’s invasion of Ukraine is thrusting cryptocurrency into the spotlight as policymakers ramp up their scrutiny of digital currencies. 

Supporters of Ukraine are donating digital currencies to help fund the nation’s defense and aid humanitarian efforts in a movement that has bolstered crypto’s reputation. But Western officials have warned that Russian actors could use crypto to circumvent severe sanctions imposed by the U.S. and its allies. 

Biden administration officials have stressed that they will hold crypto firms accountable if they help Russian actors evade sanctions. Earlier this month, Group of Seven leaders announced measures to “ensure that the Russian state and elites, proxies and oligarchs cannot leverage digital assets as a means of evading or offsetting the impact of international sanctions.” 

“What we want to make very clear to crypto exchanges, to financial institutions, to individuals, to anyone who may be in a position to help Russia take advantage and evade our sanctions: We will hold you accountable,” Deputy Treasury Secretary Wally Adeyemo told CNBC’s “Street Signs Europe” on Tuesday. 

U.S. lawmakers skeptical of the cryptocurrency industry have long been concerned about its potential use for money laundering and other illegal transactions. Cryptocurrencies can be transmitted between individual users without an exchange or financial institution to facilitate the trade, which can limit visibility into who is on either side of a transaction. 

Sen. Elizabeth Warren (D-Mass.) recently introduced a sweeping bill that would block foreign crypto platforms from doing business with sanctioned companies and implement new reporting measures for large transactions. She is among several lawmakers, predominantly Democrats, who have urged stronger oversight of how crypto companies are complying with sanctions. 

Even so, the largest crypto exchanges have insisted that they will comply with Western sanctions and expose those who attempt to circumvent them. Many firms, including those based in the U.S., are subject to similar “know your customer” (KYC) standards and other regulations imposed on banks meant to prevent money laundering and sanctions evasion. 

“A lot of the bigger cryptocurrency exchanges are regulated, maybe not consistently, maybe not precisely in the way that that is optimal, but they do get KYC and they do have technological methods to identify potential sanctions risk,” said Alma Angotti, partner at compliance firm Guidehouse and former enforcement counsel at the Treasury Department’s Financial Crimes Enforcement Network. 

“This isn’t a new compliance regime for them.” 

Experts say that sanctioned Russian oligarchs could try to use crypto to evade sanctions, but they noted that digital assets can be tracked by regulators, and crypto isn’t an option for larger sanctioned players such as Russian state-owned companies. Blockchains — the distributed ledger system most cryptocurrencies run on — are also publicly accessible, giving law enforcement visibility into where each token is going. 

“Individual actors who are sanctioned will probably find ways to get around sanctions using crypto on a smaller scale, but the sanctions on, say, Russian banks are still going to bite because you can’t move all of your business into an anonymized crypto account and have it function,” said Reid Whitten, a partner at Sheppard Mullin who advises clients on sanctions. 

Sanctioned individuals could attempt to shuffle their money through a series of wallet addresses and convert their funds into various digital assets to throw off investigators, experts say. They might opt to use decentralized exchanges that allow users to trade without an intermediary or buy anonymity-enhanced cryptocurrencies that intentionally obscure transactions. 

Still, crypto exchanges, including decentralized platforms such as Binance, say that they regularly screen for sanctioned individuals and have the ability to track their transactions. 

Earlier this month, Coinbase blocked more than 25,000 wallet addresses that the popular crypto exchange believed were linked to Russian individuals or entities engaged in illicit activities. 

“Blockchain analytics yield critical intelligence to market participants that allows these assets and transactions to be tracked and traced. Governments and law enforcement can, and already do use these same tools and partner with digital asset platforms to identify bad actors and freeze their funds in real time,” Teana Baker-Taylor, chief policy officer for the Chamber of Digital Commerce, which represents crypto firms and major U.S. banks, said in a statement. 

The crypto industry says that while the digital assets market has grown substantially in recent years, it still doesn’t have enough liquidity to accommodate large transfers of funds from Russia. 

Carole House, director of cybersecurity and secure digital innovation on the National Security Council, said earlier this month that inadequate liquidity makes crypto an “ineffective primary tool” for the Russian government to lessen the impact of sanctions. 

Crypto exchanges have sought to cast the industry as a force for Ukraine, highlighting their users’ donations. 

Crypto.com aired ads during the Oscars urging viewers to donate to humanitarian efforts in Ukraine. The donations are converted into stablecoins, then euros, before going to the Red Cross and Red Crescent. The popular crypto exchange said it will match up to $1 million in donations. 

“In Ukraine, the basics are now the essentials,” the ad told viewers, referring to items that Ukrainians need such as food, blankets and medicine, before showing a QR code that links to a donation page. 

The Ukrainian government said that it has received $67 million in crypto donations as of March 26 and has spent about half of the funds on bulletproof vests, lunches and other key supplies. Ukraine hopes to raise $200 million through digital asset donations. 

“In this situation, there is clear and abundant evidence that cryptocurrencies are playing a critical role in humanitarian relief and defense funding for Ukraine, and very little, if any, evidence that this innovation is being used for sanctions evasion by Russian actors,” said Sheila Warren, CEO of the Crypto Council for Innovation, an industry trade group. 

Ukraine had ranked among the most active countries in the cryptocurrency space for several years leading up to the Russian invasion, said Kim Grauer, research director at Chainalysis, a cryptocurrency investigation and transaction monitoring firm. She said a combination of high public interest and investment from the Ukrainian government helped lay down “great infrastructure” to handle the surge of support. 

“The reason why this happened in cryptocurrency is because anyone can get a cryptocurrency wallet and send money to Ukraine, and do so in such a way where you can get it there instantaneously,” Grauer said. 

“It just proved to be a highly effective, highly effective marketing campaign for them.” 

Tags Elizabeth Warren Wally Adeyemo
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