The Russian invasion of Ukraine on February 24 detonated the cryptocurrency market. The first 24 hours of Putin’s ‘special military operation’ triggered an 8% drop in Bitcoin and a 12% reduction in Ethereum’s market capitalization. 

The asset class is volatile at the best of times, but when war breaks out and investors rush to shore up safer bets it is wildly unpredictable. The conflict has highlighted the good and bad sides of crypto, and renewed calls from some to accelerate regulation. Others argue that this will prevent innovation and halt progress. But there are two sides to every story, and to every coin.

“The sanctions on Russia are fully avoidable using crypto,” argues Siobhan McArdle, CEO at L3COS, which claims to be the world’s first regulated blockchain-based operating system. “Crypto allows a level of anonymity that enables Russia to move funds locally or internationally without being detected by sanctions. So any sanctions will likely hit the poorest people in Russia the hardest, as anyone with any wealth can simply move their wealth into crypto and use it to get flights, rent a car, or even start a new life elsewhere.”

She continues, “There are very obvious benefits to blockchain technology but, at times like this, it’s clear that transparency and regulation are key to achieving its potential. In a fully transparent ecosystem, every piece of data is verified, removing anonymity and enabling governing bodies to impose sanctions.” 

Evading restrictions

London-based leading trial lawyer Michael Goodwin QC, specializing in business and financial crime, agrees. “The current Ukraine situation has revealed for the world in startling simplicity how crypto, being unregulated by central banks, may be allowing the bypassing of sanctions and restrictions placed on individual wealth. Global concerns have gained traction, as it has been widely reported that Russians are converting roubles to cryptocurrency to evade global restrictions on their assets and sanctions. The devaluation of the rouble has further fueled this,” he says.

Goodwin notes that cryptocurrency platforms and exchanges have been “deluged with requests” to liquidate billions of dollars of cryptocurrency, as Russians seek a haven for their finances. Coinbase has been reported to have blocked more than 25,000 e-wallet addresses related to Russia.

He points out that the net is being tightened in key jurisdictions. In March, a coalition of Democratic Senators in the US introduced the Digital Asset Sanctions Compliance Act, imposing restrictions on Russian crypto users’ transactions. “This follows the US Government’s request that new measures be considered by the EU to ensure sanctions are not being evaded,” he adds.

“There’s not much you can do with crypto compared to dollars. If two banks want to transact in dollars, even in this big globalized world, it happens in New York. That’s how tight the US grip on dollars is.”

Duncan Weldon, economist and author

But not everyone is convinced that Russians are embracing crypto to evade sanctions. “The problem they will find is that there’s not much you can do with crypto compared to dollars,” argues English economist and author Duncan Weldon. “As ridiculous as it sounds, if two banks want to transact in dollars, even in this big globalized world, it happens in New York. That’s how tight the US grip on dollars is.”

He holds up Carrie Lam, CEO of Hong Kong, as an example of how avoiding financial penalties is not straightforward. The US imposed sanctions on Lam during the pro-democracy protests in 2020. “You might think that Lam would want to bank with a Chinese bank, but the Chinese banks don’t want to deal with her because they will risk being cut off from dollar transactions,” he says. “And the idea that Chinese banks will step in to bail out Russia when they won’t even bail out their own appointee running the Hong Kong region tells you what a tight grip the US has on international finance.”

Other commentators are more unequivocal. “It is frustrating to see fictions peddled about the use of blockchain technology for sanctions-busting purposes,” says Viktor Fischer, Managing Partner at Rockaway Blockchain Fund, a leading European venture capital firm specializing in crypto. “Cryptocurrencies are by their very nature traceable because transactions exist on a public ledger. It would be extremely difficult for a sanctioned individual to move assets and escape notice, with law enforcement agencies closely monitoring transactions on the ledger.”

Ownership economy

He stresses that while the industry needs to be better regulated, “politicians must not rush to fix a problem that doesn’t exist because they risk instead curtailing the industry’s potential.” He goes further and says, “The war in Ukraine has shown the importance and benefits of decentralized technologies. Social media empowered user-generated content, and blockchain technology will empower the coming ownership economy.”

He adds, “Just like with adoption of the internet, there will always be some bad actors, but policymakers shouldn’t overreact to the 0.15% and instead focus on constructive regulation that fosters continued innovation by the industry.”

Dr Kimmo Soramäki, founder and CEO of London-headquartered regulation technology company FNA, agrees, “As the Bank of Russia has a tradition of confronting cryptos, which recently included banning their use as a means of payment, Russian merchants accepting crypto are likely rather scarce,” he says. “Therefore, as the public can withdraw cash and make local electronic payments, as usual, crypto is an improbable and unnecessary way to avoid sanctions. 

“Furthermore, as this is not the first time sanctions have been imposed on Russia and other countries, it is most likely that a significant portion of the wealth of many Russians targeted by those sanctions was outside Russia long ago before the Ukraine situation escalated.”

“Ukrainians are using crypto to pay for essentials, such as bread and electricity, and keep their daily lives going amid the ruins of their shattered economy.”

Tom Spiller, senior associate, Rosenblatt

The Ukraine conflict has revealed the other side of cryptocurrency, points out Tom Spiller, senior associate at law firm Rosenblatt. “Ukrainians are using crypto to pay for essentials, such as bread and electricity, and keep their daily lives going amid the ruins of their shattered economy, in the absence of the orthodox financial system that they previously relied upon,” he says.

“En masse, the crypto sphere turned to provide immediate help to Ukraine. On February 24, one of the world’s largest crypto exchanges, FTX, donated US$25 to each Ukrainian account holder. Two days later, the Ukrainian government tweeted details that allowed anyone in the world to donate funds directly to it in various major cryptocurrencies. By March 2, they had received US$40m in cryptocurrency and a further US$7m in NFTs.”

Caroline Malcolm, Head of International Public Policy and Research at Chainalysis, a blockchain data platform, is also ambivalent about crypto. But she warns that those that use it to evade sanctions will likely be caught sooner or later. “The transparent, permanent, and immutable nature of public blockchains means that, as we gather more information over time about the crypto ecosystem and its use by sanctioned entities, those sanctions-evading activities will be detectable and investigated in the months and years ahead,” she says. 

Clearly, the Ukraine conflict has shone a light on the murky world of cryptocurrency. In turn, the inevitable tightening of regulations will speed up and benefit more people in the longer term – just not oligarchs, those attempting to evade sanctions, and other criminals using it to launder money. And that will be a unique and welcome victory against Putin and his associates.