Should Russians be prohibited from trading cryptocurrency due to the conflict in Ukraine?

Should Russians be prohibited from trading cryptocurrency due to the conflict in Ukraine?
People line up to withdraw US dollars from an ATM at a Moscow supermarket.
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The impact of Western sanctions on Russia would be amplified if all cryptocurrency activity were blocked. Experts disagree, however, about whether it would cause more harm than good.

As Russia’s assault on Ukraine becomes more intense, the US and its allies have increased economic pressure on the Russian government in order to further isolate the country from the global financial system and weaken its military capabilities.

Russian assets have been blocked overseas, Russian institutions have been withdrawn from international financial networks, and all gas and oil imports have been outlawed, among other extraordinary sanctions imposed by Western partners. However, there is growing concern that Russian President Vladimir Putin and his followers would use cryptocurrency to circumvent economic sanctions.

Cryptocurrency exchanges — digital marketplaces where you can buy and trade digital currencies — have become an effective option for both Ukraine supporters and ordinary Russians seeking financial shelter from the country’s economic sanctions due to their ability to operate as alternatives to the traditional financial system.

As a result, both the Ukrainian government and proponents of harsher economic sanctions against Russia have become increasingly vociferous about the potential role of cryptocurrency exchanges in the conflict. Since the start of the war, hundreds of Western corporations, including oil giants Shell and BP, as well as digital giants Netflix and Microsoft, have reduced or stopped doing business in Russia.

Some claim that halting crypto operations in Russia would diminish Putin’s grip on the country’s economy and residents.

Mykhailo Fedorov, Ukraine’s vice prime minister and minister of digital development, tweeted Feb. 28: “I’m urging all major crypto exchanges to blacklist addresses of Russian customers.” “It’s critical to sabotage ordinary users as well as the addresses associated with Russian and Belarusian politicians.”

Fedorov also issued letters to eight cryptocurrency exchanges, including two of the most popular by volume, Coinbase, and Binance, requesting that they stop serving Russian users due to concerns that digital currencies are being used to circumvent sanctions.

The reaction was quick.

CEO Brian Armstrong tweeted on March 3 that “we are not proactively prohibiting all Russians from using Coinbase.” “Unless the law states differently, we believe everyone deserves access to fundamental financial services.” A Binance representative told CNBC hours after receiving Fedorov’s letter, “We are not going to suspend the accounts of millions of innocent people on our own.

Crypto is designed to provide people all across the world with more financial independence. It would be counterproductive to decide arbitrarily to prohibit individuals from accessing their crypto.”

However, the CEOs of multiple exchanges, including ones that received Fedorov’s letter, stated that they will continue to provide access to ordinary Russians while adhering to US sanctions laws. Coinbase reportedly announced on March 7 that it has blacklisted more than 25,000 wallet addresses associated with Russian persons or businesses suspected of engaging in criminal behavior and had reported them to the US authorities in order to aid sanctions enforcement.

“Some ordinary Russians are using crypto as a lifeline now that their currency has collapsed. Many of them likely oppose what their country is doing, and a ban would hurt them, too.”
Coinbase CEO Brian Armstrong

Ukraine’s call for an outright ban on Russian users, as well as most regulated crypto exchanges’ unambiguous rejection, has prompted a debate over the role of digital currency platforms in international warfare. Should crypto exchanges follow suit and go above and beyond what they’re needed to do by law as an increasing number of Western corporations decide to discontinue doing business in Russia? Would ban all Russian users from crypto exchanges, even if they did, make a difference in delaying Russia’s invasion of Ukraine?

Some crypto experts interviewed by CNET, including executives from crypto startups and government officials seeking to prevent Russia from exploiting digital assets to evade economic sanctions, believe that a complete ban on crypto platforms will harm regular Russians more than help them. And some argue that, even if it tried, the total volume of the crypto market is still too small to truly assist Putin’s regime in mitigating the impact of Western economic sanctions.

Other experts on the role of the private sector in global conflicts, on the other hand, believe that grinding the Russian economy to a halt is the only nonmilitary means to stop Putin’s assault on Ukraine and that crypto exchanges can only help if they quit operations in Russia entirely.

Cryptocurrencies are digital assets that are recorded on a blockchain, which is a decentralized digital ledger that cannot be tampered with. They aren’t usually backed by an actual asset like fiat currency. That is why, in the face of a surge of economic penalties, they could be a perfect safe haven.

Why are crypto exchanges so adamant about Russia?

Cryptocurrency exchanges claim that kicking regular Russians off their platforms will further harm Russian citizens who are already suffering from the war’s economic effects and may consider buying cryptocurrencies as a strategy to defend their financial standing.

“We all seen those photographs of Russian folks running ATMs — lineups around the block in Moscow,” Todd Conklin, advisor to the US Treasury Department’s deputy secretary, said. “It’s possible that regular citizens were looking for a substitute for the ruble.” Conklin made the comments during a TRM Labs-hosted webinar on March 4 about the likelihood of Russia using cryptocurrencies to circumvent economic sanctions.

According to Reuters, the ruble, Russia’s national currency, has lost about half of its value versus the US dollar since the beginning of the year. The West’s pressure on Russia to stop its aggressiveness in Ukraine has also had an influence on other sections of the country’s financial system. Apple Pay, Google Pay, and Samsung Pay, among other digital payment services, are no longer available in Russia. In addition, Visa, Mastercard, and PayPal have all suspended operations in the country. Worried that economic sanctions will further wreck the Russian economy, ordinary Russian citizens have hurried to ATMs and banks to withdraw as much cash as possible before it is too late.

“Now that their currency has collapsed, some regular Russians are using crypto as a lifeline,” said Armstrong, the CEO of Coinbase. “Many of them are likely to oppose what their country is doing, and a ban would be detrimental to them as well.”

“Crypto could be a vital lifeline for ordinary Russians to preserve their savings [and] receive familial remittances,” Michael Parker said in an email. As long as US crypto businesses follow US laws in ensuring that sanctioned individuals or entities aren’t using their platforms, “crypto could be a vital lifeline for ordinary Russians to preserve their savings [and] receive familial remittances.” Parker, a former federal prosecutor, is currently the head of Ferrari & Associates’ anti-money laundering and sanctions practice in Washington, DC.

Jesse Powell, co-founder and CEO of Kraken Exchange, a cryptocurrency exchange, said on Twitter that while he understands Ukraine’s wish to ban all Russians from crypto exchanges, Kraken “cannot freeze the accounts of our Russian clients without a legal necessity to do so.”

Powell tweeted, “I would estimate the great majority of crypto holders on @krakenfx are anti-war.” “#Bitcoin is the personification of libertarian values, which emphasize individualism and human rights.”

According to Yale University professor Jeffrey Sonnenfeld, president of the Chief Executive Leadership Institute, a nonprofit focused on CEO leadership and corporate governance, the refusal of crypto exchange executives to stop operations in Russia isn’t surprising given the anti-authority libertarian streak that fuels so much of the cryptocurrency sector.

Sonnenfeld claims that crypto executives dislike “being instructed what to do.” “And yet, there’s a startling naivete [in] working in support of [Putin], the greatest autocrat living today, the most constrained world leader, [who] they are tacitly supporting by providing a bypass if it’s even for the cognoscenti, elites, and oligarchs if it’s as limited as some claim.”

The reason more than 300 Western corporations have gone out of Russia so far, according to Sonnenfeld, isn’t because the government told them to. “It’s the maverick streak of these CEOs,” he continued, “courageous CEOs who had the moral integrity to pull out and start this thundering herd.”

What a complete ban on Russia would entail and what it would not.

Blocking crypto for all Russians, according to some experts, would not only harm millions of innocent civilians but would also do little to intensify the West’s sanctions on Russia’s economy. What is the explanation for this? Russia lacks the digital infrastructure needed to tap into crypto assets at a high enough level to avoid the economic sanctions imposed by the US and its allies.

During a webinar given by blockchain intelligence company TRM, Conklin said, “You can’t turn a switch overnight and run a G20 economy on cryptocurrencies.” He explained that in recent years, Russia has focused on bolstering the ruble and increasing its reserves rather than laying the foundations for cryptocurrency.

That’s why the United States has concentrated its economic sanctions on stopping Russia from accessing its foreign reserves. “In a healthy economy, big banks require genuine liquidity,” Conklin added. “It’s conceivable that doing large-scale transactions in virtual currency will be slow and costly.”

Crypto pricing, according to Anthony Citrano, creator of Los Angeles-based NFT platform Acquicent, is a signal of what’s going on. “You’d expect to see absolutely tremendous growth in prices of big crypto [currency] if the Russian government was genuinely embracing crypto as a major piece of their foreign financing strategy,” he said, “which we haven’t seen.” Time will tell, but there is currently no proof that this is occurring.”

“If you can show [Putin] to be truly impotent over the economy, that he doesn’t have control over civil society, then he and the oligarchs fall flat on their face, and that’s what cryptocurrency mavericks can do.”
Yale University professor Jeffrey Sonnenfeld

Former federal prosecutor Ari Redbord, who is now TRM’s head of legal and government affairs, stated that the economic sanctions imposed so far have been “severe and harsh in their measures,” and that Russia would require much more than crypto assets to offset them.

“We’re talking about the loss of hundreds of billions of dollars in frozen [Russian] Central Bank assets, or the inability to access them. We’re talking about a potential trade loss of $1.5 trillion “he stated, “The entire crypto market cap doesn’t even come close to what Russia would need to prop up a G20 [economy] government and fight a war that is only going to get more expensive.”

But it doesn’t rule out the possibility that the Russian government or Putin’s followers will try to use cryptocurrency to get around economic restrictions. “Russian actors are very good at money laundering and have been for a long time,” according to Redbord. They’ll be looking for “non-compliant exchanges in order to shift those monies” in the case of cryptocurrency.

Platforms like Suex, which was blacklisted by the Biden administration in September for allegedly assisting in the laundering of ransomware money, are examples of such exchanges. TRM has identified around 340 exchanges in Russia or Russia-related jurisdictions that lack compliance standards, “and that is where illegal actors will attempt to go on as on-ramps and off-ramps for crypto,” according to Redbord.

However, those digital sites are already operating illegally. “There is still a full compliance duty for any US corporation, including businesses in the crypto industry, to not engage with sanctioned parties or interests in prohibited property,” stated Parker of Ferrari & Associates. “To achieve legal compliance with US sanctions, US crypto firms must, and generally do implement robust compliance programs, including advanced analytics tools.”

Bringing Russia to a complete halt

According to Yale’s Sonnenfeld, whether Putin and his followers can actually get their hands on enough digital assets to counteract the impact of Western sanctions is irrelevant. Crypto exchanges, he suggested, may help to increase pressure on Putin’s regime by ceasing all activities in Russia, until it reaches a tipping point.

Even if they’re a concerted effort amongst many international entities like the US, EU, UK, Australia, Japan, and the UN, “government-ordered sanctions have limits,” Sonnenfeld said. “They operate best when the private sector’s volunteer initiatives come together.”

That’s what happened in South Africa in the late 1980s, when international pressure helped remove apartheid, a system of institutionalized racial segregation that had dominated the country for more than four decades, according to Sonnenfeld. Only when dozens of significant private corporations joined in did the US government’s economic penalties have any effect. “It brought civil society to a halt,” he explained.

After Russia’s invasion of Ukraine, Sonnenfeld and his Yale research team developed a list of companies that continued to operate in Russia.

Following the publishing of a Washington Post article stating that McDonald’s and Starbucks were on the list, both companies stated that they would cease operations in Russia. The list currently includes “almost 330 companies [that] have announced their exit from Russia in protest” of the Ukraine war since it was formed and made public.

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According to Sonnenfeld, the only nonmilitary alternative the West has to counter Putin’s advances in Ukraine is to paralyze Russia’s economy.

“The humanitarian thing to do is to strangle civil society rather than use bombs and bullets,” he stated, in order to dispel Putin’s image as a tyrant with complete control over all sectors. “If you can show Putin that he has no authority over the economy, that he has no control over civil society, then he and the oligarchs will fall flat on their faces, and that’s what bitcoin mavericks can accomplish” if they decide to stop operating in Russia. “They could be really useful in this situation.”

Allowing regular Russians to access digital assets through cryptocurrency exchanges is “not humane,” according to Sonnenfeld. Due to an economic collapse brought on by government-ordered sanctions and private enterprises denying Russian citizens access to services, commodities, and money, “people should be thrown out of a job, they should be out on the street.” “Do you think that’s cruel?” Sonnenfeld stated the following. “No, it’s preferable than shooting them or bombing them, which is where we’re at right now.”

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