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Russia sanctions put spotlight on crypto: 5 things to know

  • March 7, 2022
  • , Nikkei Asia , 12:33 p.m.
  • English Press

TSUBASA SURUGA, Nikkei staff writer

 

TOKYO — The U.S., Europe and now Japan are all considering measures to ensure that cryptocurrencies are not used as a tool for dodging financial sanctions imposed on Russia over its invasion of Ukraine.

 

Japan’s crypto industry group and government officials began discussing possible new rules on Thursday, including banning exchanges from facilitating transactions involving Russian individuals.

 

But what measures could governments take, and how effective would they be?

 

Why are Japan, the European Union and the U.S. targeting cryptocurrencies?

 

They fear that cryptocurrencies could become a loophole for wealthy Russians to send money offshore, circumventing sanctions against Russia. Those sanctions include an agreement by the U.S., Japan and the EU to block major Russian banks from the SWIFT global payment network. EU finance ministers agreed on Tuesday to “further investigate actions to avoid any circumvention of the sanctions, especially by the use of crypto assets.”

 

It would not be the first time cryptocurrencies have been used in this way, according to Naoyuki Iwashita, a former head of the Bank of Japan’s financial technology center and now a professor at Kyoto University.

 

During the financial crisis in Cyprus in 2013, the government imposed capital controls to prevent bank runs, including a deposit freeze. The country had long been a tax haven for wealthy Russians, and it is thought that many rushed to exchange their cash for bitcoin when the controls were announced.

 

“This was one of the first major cases where cryptocurrency was used for money laundering,” Iwashita said. “The West fears Russians are already taking the same method.”

 

Sam Bankman-Fried, CEO of cryptocurrency exchange FTX, said on Monday that his company is on the alert for any suspected use of cryptocurrencies to get around sanctions.

 

“We basically have not seen coming from Russia any coordinated attempts to use digital assets to avoid sanctions,” Bankman-Fried said in an interview with CNBC. “We haven’t seen it from oligarchs, either, but I would be less surprised if there were attempts at that going forward.”

 

How many Russians own cryptocurrency?

 

There is little official data on how many Russians invest in cryptocurrency, but crypto payments company TripleA estimates it is over 17.3 million people, or 12% of the country’s population.

 

Tass, the Russian news agency, quoted a lawmaker in the country’s lower house last December as saying Russian nationals have invested 5 trillion rubles (around $45 billion at current rates) in cryptocurrencies.

 

Trading between the ruble and bitcoin hit a nine-month high on Feb. 24, according to research firm CryptoCompare, and though it had halved to $6.6 million on Thursday, that was still double what it was the day before the invasion.

 

Russia ranked 18th worldwide in terms of cryptocurrency adoption, according to a recent report by Chainalysis, another research firm. It had the third largest share of overseas transfers, after Turkey and Ukraine.

What measures could be taken?

 

The details are unknown. The EU may order companies like cryptocurrency exchanges and firms engaged in the issuance of crypto assets, or providing related services, not to deal with clients in Russia. The U.S. is warning crypto exchanges not to facilitate transactions for Russian oligarchs and entities that are on its sanctions list.

 

Japan is also considering taking action. An official from Japan’s Financial Services Agency, the regulatory body for cryptocurrency exchanges, said: “Crypto assets are meaningless unless they are eventually converted into cash, so it is conceivable that governments could ask exchanges to block any cash-outs by Russian individuals.”

 

How effective would that be?

 

Crypto assets traded through crypto exchanges can track individuals based on their registered bank accounts. Even so, most major exchanges, like Binance and FTX, are offshore exchanges. They have no physical headquarters or fixed location, enabling them to slip through global regulatory nets.

 

Still, enforcement will be challenging. Direct transactions between cryptocurrency wallets, outside of exchanges, essentially cannot be regulated. The decentralized design of bitcoin provides anonymity and makes it technologically impossible to track all transfers among individuals.

 

“These applications are completely unregulated, and no matter how powerful a country is, it’s difficult to track every computer’s transactions, said Iwashita of Kyoto University.

 

What is the reaction from the crypto community?

 

The Japan Virtual and Crypto Assets Exchange Association (JVCEA), the industry’s self-policing organization, began discussing new rules on Thursday, including a possible ban on exchange-mediated transactions involving Russian parties.

 

JVCEA head Satoshi Hasuo, president of Tokyo-based exchange Coincheck, told Nikkei: “We’ll work with the Financial Services Agency to consider what specific measures are possible.”

 

But even among the community, the reactions are mixed. Several exchanges said broad restrictions would hurt ordinary Russians and run contrary to cryptocurrencies’ founding libertarian ideology.

 

“We are not going to unilaterally freeze millions of innocent users’ accounts,” Binance said last week when asked about how it was handling Russian customers.

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