How Wartime Tests Crypto’s Strengths and Vulnerabilities

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1. How is crypto being used for good?

Donors have supported Ukraine using crypto payments after the government set up digital wallets to receive currencies including Bitcoin and Dogecoin. The Kyiv government and non-governmental organizations had received the equivalent of $63 million as of March 9, according to analytics firm Elliptic Enterprises Ltd. Suppliers of everything from food to bulletproof vests were accepting tokens including Bitcoin and Ether to help the military quickly purchase goods, Ukraine’s Deputy Minister of Digital Transformation, Alex Bornyakov, told Bloomberg. The ministry was even working on a potential collection of non-fungible tokens that could raise money for the war effort, he said. Coinbase Global Inc. said ordinary Russians were also using crypto as a “lifeline” after their currency collapsed.

2. How might crypto be used to evade sanctions?

The risk is that Russian individuals and entities targeted by sanctions will turn to digital currencies to buy goods and services and invest in assets outside the country, avoiding financial institutions that could trace the transactions. Cryptocurrencies can change hands without intermediaries via a peer-to-peer network and it can be hard to tie a digital identifier to the person behind it. Some users have multiple digital wallets (accounts that store encrypted payment information), which makes it easier to conceal undeclared crypto payments among regular transactions. Massachusetts Senator Elizabeth Warren called crypto a “shadow world” that Russians and other nationals could use to help “sanction-proof” themselves.

3. Are Russians getting around sanctions that way?

There’s no proof for now that any Russian individual or organization has used crypto to skirt sanctions. Early in the conflict, there was a spike in the amount of Bitcoin being traded in rubles. However, some observers attributed that to Russian retail investors buying crypto as an alternative to the ruble after its value plummeted. Since then, Russian crypto trading appears to have continued in relatively small volumes.

4. What can be done so crypto doesn’t undermine sanctions?

It’s possible to identify digital currency addresses associated with sanctioned people, as the US Treasury Department’s Office of Foreign Assets Control did for the first time in 2018 in a case involving Iranians accused of ransomware schemes. Some analytic services allow law enforcement to trace where money has flowed, including through the dark web or for illicit payments. Another opportunity to spot suspicious activity comes when crypto is converted back into traditional currencies via the regular banking system. “It’s very difficult to move millions — tens, hundreds of millions — of dollars in and out of crypto without touching a legacy financial institution,” Meltem Demirors, chief strategy officer of crypto fund-provider CoinShares, told Bloomberg TV.

5. Do crypto exchanges police their networks?

Yes, but oversight can be patchy. The platforms used to buy and sell cryptocurrency are subject to different requirements depending on where they operate. Exchanges licensed in the US or the UK, such as Kraken and FTX US, must comply with local laws similar to those that banks follow, including on sanctions. So-called “know your customer” rules in those countries force banks to obtain some form of official identification from customers and establish where their money came from. Other exchanges operate in countries that haven’t imposed sanctions on Russia, and some don’t require detailed customer identification, making it harder to impose curbs. Some aren’t even sure how to comply with the restrictions.

6. Is any action being taken?

Coinbase, the largest US crypto exchange, said it has blocked 25,000 addresses from its platform related to Russian people or businesses that may be engaging in illicit activities, although most were identified prior to the Ukraine invasion. Other major exchanges, including Binance, Circle and FTX, have pledged to comply with government-issued sanctions. However, Circle’s chief executive officer, Jeremy Allaire, acknowledged there’s not always complete information to spot when people are circumventing them. Finance ministers from the Group of Seven nations and the European Union are working on a “maximum” sanctions toolkit that includes crypto assets. On March 9, under pressure from Senate Democrats, US President Joe Biden signed an executive order to probe the national security and economic impact of digital assets and explore potential changes to regulations around crypto.

7. What bigger issues are raised?

Some crypto advocates see the war as an opportunity for digital coins to prove their worth as a refuge for ordinary citizens from economic turmoil. But if they end up blunting the impact of sanctions, it could add to the pressure for tighter controls on the industry. Governments are already trying to crack down on digital tokens being used for money laundering. They’re also wary of their potential to undermine the effectiveness of everything from capital controls to monetary policy. If they end up forcing digital platforms to enact the kind of detailed oversight and costly compliance expected of banks, much of crypto’s utopian vision of “borderless” and “stateless” money may no longer hold. “Crypto is finding it hard to escape geopolitical facts on the ground,” said Bloomberg Opinion’s Lionel Laurent.

• Bloomberg Opinion’s Tim Culpan writes about crypto and the Ukraine conflict

• A Bloomberg newsletter on the existential threat to crypto from sanctions

• A Brookings Institution article on Bitcoin, money laundering and sanctions

• Bloomberg QuickTakes on the rise of Bitcoin and the role of crypto in cybercrime

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