Lawmakers and regulators on both sides of the Atlantic discuss how to enforce financial sanctions against Russia in the age of decentralized currencies.
Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain.
U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets. https://t.co/4lCUNcUC29
— Elizabeth Warren (@SenWarren) February 28, 2022
EU cuts off 7 Russian banks from SWIFT
The European Union has announced that several Russian banks, including Russia’s second-largest financial institute, VTB Bank, will be removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.
It is expected that this sanction will take a harsh toll on the Russian economy. As a reference, Iran was cut off from SWIFT in 2012, which led to a 30% loss in foreign trade.
On Wednesday, EU economy and finance ministers met in a video conference to address concerns that the Russian government might use crypto assets to evade the sanctions. The French finance minister Bruno Le Maire stated that the EU is “taking measures, in particular on cryptocurrencies or crypto assets”, to prevent this, adding:
We will be taking stock on a daily basis with regard to the implementation of these sanctions, their effectiveness and any additional measures which may be needed. When it comes to economic and financial sanctions, we want to remain flexible and mobilized.
Germany’s finance minister Christian Lindner agrees, adding that the EU should “take steps to prevent listed individuals and institutions from switching to unregulated crypto assets”. Earlier, ECB president Christine Lagarde stated that the proposed new regulatory framework dubbed Markets in Crypto Assets (MiCA) should be pushed through as quickly as possible to address the issue.
Jerome Powell calls for congressional action
Also on Wednesday, the House Financial Services Committee held a hearing concerning US sanctions against Russia. Federal Reserve Chair Jerome Powell said that the situation with Russia “underscores the need for congressional action on digital finance, including cryptocurrencies”. He added:
There isn’t in place the kind of regulation framework that needs to be there. […] What’s needed is a framework, in particular ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist financing and just general criminal behavior, tax avoidance and the like.
Connecticut Representative Jim Himes criticized the lack of regulatory clarity for cryptocurrencies in the US:
It is time, in fact, it is past time for all of us to lead on creating a regulatory environment in which we, rather than the world’s despots, terrorists, and money launderers, benefit from the emergence of cryptocurrency including a central bank digital currency.
In a letter to Treasury Secretary Janet Yellen, several members of the Senate Banking Committee led by Elizabeth Warren expressed concerns that crypto assets and decentralized finance could undermine the US ability to enforce financial sanctions against foreign nations.
New York State to invest in blockchain analytics tools
New York state Governor Kathy Hochul has announced that she wants to strengthen the enforcement of sanctions against Russia with the help of blockchain analytics.
According to a press release on the US state’s official website, the analytics tools seek to detect exposure to Russian individuals and entities among virtual currency businesses licensed in NYS.
Governor Hochul condemned Russia’s aggression and expressed her support for Ukrainians living in her home state:
We stand shoulder to shoulder with the people of Ukraine and will continue to do our part to enforce U.S. sanctions against Russia in response to their unwarranted attack. New York is proudly home to the nation’s largest Ukrainian population and we will use our technological assets to protect our people and show Russia that we will hold them accountable.
Worries are “totally unfounded” says Chervinsky
In an interview with Al Jazeera, Roman Bieda, head of fraud investigations at Coinfirm, pointed out that examples like North Korea, Venezuela, and Iran show that crypto “can be used to evade sanctions and hide wealth”. Overall, industry experts do not expect this to be the case with Russia at a large scale, though. Ari Redbord, head of legal and government affairs at TRM Labs, stated:
It is very difficult to move large amounts of crypto and convert it to usable currency. Russia cannot use crypto to replace the hundreds of billions of dollars that could be potentially blocked or frozen.
Jake Chervinsky, Head of Policy at the Blockchain Association, also refutes the notion that Russia might use crypto to evade sanctions. In a lengthy Twitter thread, he explains that “concerns about crypto’s use for sanctions evasion are totally unfounded”.
He argues that Ruble-denominated crypto trading pairs are far too illiquid to offer a practical way to achieve this goal. Furthermore, the transparent nature of blockchain networks makes it difficult for Putin and Russian oligarchs to hide their tracks. Chervinsky also said that if Russia would seek an alternative to SWIFT, the country is “far more likely to use China’s CIPS than a public network they can’t control”, adding:
The reality is Putin’s spent years trying to sanctions-proof Russia and crypto isn’t part of his plan. […] Putin could have built crypto infrastructure if he wanted. He didn’t. There’s no reason to think he will (or could) now.
Historically, Russia had a rather hostile stance on cryptocurrencies. In December 2021, Russian mutual funds were banned from investing in crypto assets, with the central bank proposing a blanket ban on crypto transactions a month later. In February, however, two weeks before the attack on Ukraine, the Russian government announced a more positive approach towards crypto regulation.