Initial concerns and political reactions
On 25 February, the European Central Bank (ECB) expressed concern about the use of cryptocurrencies to circumvent recently imposed international sanctions. She further emphasized that compliance with the sanctions applies to transactions with cryptocurrencies and the transactions of the corresponding service providers. To this end, she called for an acceleration in the development and implementation of cryptocurrency legislation, also known as Markets in Crypto Assets (MiCA).
On March 1, the US Government (White House and Treasury Department) urged US-based companies and individuals not to support cryptocurrencies addressed to certain Russian individuals and banks. As a result, on March 4, the G7 and the EU announced measures to restrict the use of cryptocurrencies to circumvent sanctions. Then, on March 12, the US Treasury Department made it clear that it would take legal action against the use of virtual currencies. Thus, the first effect of the ongoing war on cryptocurrency regulation has been a sense of urgency.
Countries and stock exchanges impose sanctions
Cryptonations including Switzerland and its federal government have announced plans to freeze cryptocurrencies held by Russian citizens and businesses. This decision came in addition to the sanctions decided at EU level adopted by Switzerland. On the same day, Singapore and Japan announced sanctions against the Russian Federation, which, among other things, prohibits digital payment providers from facilitating sanction evasion transactions. Britain followed suit on March 11, explicitly urging crypto firms to comply with the sanctions. Another impact of the ongoing war on the regulation of the crypto industry has materialized in a number of features. Large cryptocurrencies have taken these against users to protect their own status and increase the effectiveness of sanctions.
Crypto exchanges such as Coinbase and Binance also responded to regulators’ expectations by clarifying their obligation to comply with the sanctions. They reported that they have improved monitoring and detection of attempts to circumvent the sanctions through crypto transactions. Finally, they blocked such users from using their exchange services. Binance has also stopped accepting Russian-owned Mastercard and Visa cards as a way to interact with the stock market.
There is some evidence that the Russians bought more cryptocurrencies after the sanctions. It is clear, however, that this was more a reaction to the brief depreciation of the ruble. In the first half of April, the US Securities and Exchange Commission (SEC) called for increased oversight of centralized crypto exchanges, and announced a partnership with the Commodity Futures Trading Commission (CFTC) to oversee such platforms. The SEC reaffirmed its intention to regulate cryptocurrencies like traditional securities exchanges. A third consequence of the ongoing war to regulate the crypto industry had therefore emerged: an acceleration of the pressure on centralized crypto exchanges to comply with the rules on customer identification (KYC) and anti-money laundering (AML) and monitoring of related transactions.
Cryptocurrencies as a means of circumventing sanctions?
Analysts doubted that cryptocurrencies could be used effectively to circumvent sanctions. They argued that cryptocurrencies as an asset class are not enough to absorb the damage caused by the sanctions. In addition, their large-scale use (by states, institutions and individuals) would exacerbate price fluctuations. In addition, individuals who use cryptocurrencies to circumvent sanctions will have to deal with the traceability of their transactions. It became clear that the Russian state, institutions and individuals probably did not use cryptocurrencies to circumvent international sanctions.
On April 21, the International Monetary Fund (IMF) concluded that there is no concrete evidence that governments, corporations or individuals use cryptocurrencies to largely circumvent international sanctions. The statement was in line with the US Treasury Department’s view. The compliance efforts of the major crypto exchanges have certainly contributed to this result.
An urgent need to regulate cryptocurrencies has prompted major cryptocurrencies to take immediate action. Large crypto exchanges have also been pressured to increase compliance. After all, these are not the only consequences of the ongoing war, but also the mining of (energy-intensive) PoW coins has been regulated. In connection with the mining, fears arose that it could be used by Russia to redirect its enormous energy resources. The redirection could then generate revenue to circumvent sanctions. This aspect also includes fears that the ongoing war could lead to greater adoption of cryptocurrencies in new markets and through decentralized financing applications (DeFi). This fear prompted the International Monetary Fund (IMF) in its annual report to call for regulatory action in the form of comprehensive global standards for cryptocurrencies, including governance regimes for DeFi platforms and the use of anonymous cryptocurrencies. In this context, the European Parliament decided on 31 March to ban anonymous crypto transactions.
War emphasizes the importance of regulation
The need to ensure the effectiveness of international sanctions against Russia has increased the need to regulate the industry. Several leading crypto countries have taken concrete measures to protect their status and contribute to the cause. On the one hand, centralized crypto exchanges have increased their efforts to comply with the KYC and AML rules and to monitor transactions, on the other hand, the US authorities have increased their efforts to regulate crypto exchanges in the same way as traditional securities exchanges. The war has shown that cryptocurrencies can be a powerful tool for facilitating transactions in war zones; pr. On March 12, cryptocurrencies to Ukraine exceeded $ 100 million, while Ukraine was able to cover about 20% of its military equipment costs worth $ 30 million with cryptocurrencies.
The regulatory aftermath of the ongoing war takes the form of an increased focus on DeFi governance and an acceleration in the (further) development and implementation of crypto-regulatory frameworks around the world. We believe that the net effect of these consequences will support, rather than undermine, the widespread adoption and development of a sustainable crypto industry.