The wallets, storage locations in which the Bitcoin or other currencies are located, are not subject to the same requirements as bank accounts. That is why it is difficult for the authorities to understand and cut off the financial flows there.
So far, however, the EU states have not been able to agree on tackling the problem with new means: the EU states have so far rejected the proposal to impose sanctions on all trading platforms and to ban them from doing business with Russians and Russian companies. Although the sanctions go very far, they should still only affect oligarchs and the Russian state and as little as possible the general public.
At the end of their meeting on Friday, the heads of state and government will therefore probably only agree on the statement that cryptocurrencies should be affected by sanctions just like other assets. “That’s not enough,” says CSU MEP Markus Ferber. “The EU needs to get better at understanding cryptocurrency financial flows. That is already planned for the future, but it has to be brought forward now.” The corresponding law called “Mica” has been in the works for two years. It will be some time before it comes into force.
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ECB boss Christine Lagarde said at the end of February: “There are always criminal ways to circumvent a ban. That is why it is so important that mica is enforced as soon as possible.”
There is also pressure in the US. Democratic senators led by Elizabeth Warren wrote to Treasury Secretary Janet Yellen: “We must ensure sanctions against Russia and other adversaries are effective. As such, we request more information on how the Treasury Department is ensuring crypto industry compliance with sanctions.”
The US Treasury Department had already reported in October – long before the outbreak of the Ukraine war – that the increasing use of cryptocurrencies could lead to “risks in compliance with sanctions”.
EU decides against tougher sanctions
Cryptocurrencies are particularly widespread in Russia. Singapore-based trading platform Triple A estimates that 17 million Russians own cryptocurrency, or 12 percent of the population. Anyone who wanted to park their money in crypto accounts has probably already done so. The trading volumes from the Russian region have increased significantly in the past few days, according to the analysis company Chainalysis, which also works with various US authorities.
However, that does not have to mean that sanctions are circumvented in this way. It is unlikely that sanctioned Russians will want to salvage their cryptocurrency assets, said Chainalysis manager Salman Banaei. The transactions are believed to come from “ordinary citizens trying to protect their household wealth,” a spokeswoman said. So far, no cases of large-scale breaches of sanctions have been identified.
>> Read here: The Russia sanctions show the power of the crypto world
Whether the authorities can find out more about this also depends on the willingness of the trading platforms to cooperate. Shortly after the invasion, Ukraine asked crypto exchanges to ban Russian users from trading. The blockchain addresses of ordinary Russian users should also be frozen.
Exchanges are willing to cooperate in different ways
The Viennese start-up Bitpanda, on the other hand, has now stopped all deposits and withdrawals from and to Russian banks and thus completely stopped payment transactions.
The large US platform Coinbase was initially skeptical. “Some ordinary Russians are now using crypto as a lifeline after their currency collapsed. Many of them are likely against what their country is doing and a ban would hurt them too,” Coinbase CEO Brian Armstrong tweeted.
Earlier in the week, Coinbase froze 25,000 Russian accounts and reported them to US authorities. There is a suspicion that Russian users are involved in “unauthorized activities”. Coinbase is listed on the US stock exchange Nasdaq and, if only to placate its own shareholders, maintains close ties to the regulator. However, the closures are not a specific response to the Russian invasion of Ukraine, the company said most of the addresses had already been “identified before the invasion” and that there was no “increase in sanctions evasion activity” after the invasion observed.
>> Read here: Sanctions on seven Russian banks: A list of major loopholes
There are also platforms like Binance, which is registered in the Cayman Islands. Binance has no imprint, has meanwhile resided in Malta and has been on the run from the regulatory authorities for years. In the past, the exchange made a name for itself with serious hacks, but it is still one of the big players in the market. In view of the US sanctions, Binance boss Changpeng Zhao said he did not want to exclude Russian users – for reasons of “financial freedom”.
The large US stock exchange Kraken occupies an intermediate position. Kraken CEO Jesse Powell said they will not shut down Russian accounts unless legally required to do so. However, since trading in cryptocurrencies is stored in blockchains, every transaction can be traced forever.
Problem when exchanging in euros or dollars
Although no names are included in the data, investigators would at least have a lead in the event of larger movements. “The circumvention of sanctions via cryptocurrencies is more difficult to detect from the outset,” said a spokesman for the EU Commission. “But once it’s uncovered, it’s very easy to investigate because crypto transactions are fully traceable and it’s virtually impossible to change that.”
There is a similar problem when the cryptocurrency is exchanged back into normal fiat currency, such as euros or dollars. Financial investigators become aware of this for larger amounts. The tools for this are the same as for money laundering.
The FDP member of the Bundestag, Frank Schäffler, therefore sees no further need for action. Sanctioning cryptocurrencies would have little chance of success and would drive “vendors and millions of users” into illegality.
Richard Clark, governance expert at Princeton University, believes that concerns about criminal activities involving cryptocurrencies are justified. In an article for the influential think tank Brookings, however, he warns not only to pay attention to the trading platforms, but also to currencies that rely particularly on privacy and are traded without the help of platforms.
More: From “Crypto as a Lifeline” to Payment Suspensions: Here’s How Crypto Exchanges Are Responding to War