Quickly after the start of the Russian offensive against Ukraine on February 24, the dynamics of the crypto-asset markets in both countries raised surprise and questions. However, despite the amounts raised in record time, Ukraine’s collection of digital asset donations has generated little debate, whereas the possibility for Russian leaders to circumvent European and U.S. sanctions and asset freezes has raised more questions.
Given the weight of the crypto-asset market to date, it seems unlikely that they would alone be enough to sustain the Russian economy while confronting sanctions imposed through traditional payment systems. However, it is legitimate to ask whether they would theoretically allow this to happen.
- Circumventing sanctions: a risk already covered by the regulations
It is true that crypto-assets based on a decentralized blockchain, as is the case with Bitcoin, can hardly be controlled or sanctioned by a state or an administration. In essence, these networks are accessible to all and belong to all. However, anyone wishing to profit from purchasing or holding one or more digital assets will have to exchange them for legal currency, a product or service. However, in all three situations, the holder of crypto-assets will inevitably have to pass them through an intermediary and/or pass them on to a beneficiary who remains subject to the legal obligations incumbent upon them in their jurisdiction of residence.
That is the basis of anti-money laundering and anti-terrorist financing measures. These measures aim to make all stakeholders aware of the potential risk of financial fraud by subjecting them to an obligation of vigilance throughout the business relationship. As a result, the said operators can verify the principal’s identity and accept or not to carry out the transaction according to the assessed risks.
The beneficiary or the transaction’s intermediary, being established in a country that has enacted sanctions against Russia – as in the European Union, for example – is forced to apply the local constraints. Consequently, it will have to refuse the transaction in crypto-assets.
Conversely, suppose the beneficiary in question is established in a jurisdiction free of such restrictions. In that case, the crypto asset holder would indeed be able to engage in financial or merchant transactions, as he could in any case with a legal currency.
Any transaction between Russia and the European Union, whether or not it uses crypto-assets, will therefore involve an identifiable actor, able to apply the regulations in force on the territory and who, otherwise, would expose himself to civil and criminal sanctions.
Let’s note here that, in France, the crypto asset service providers (CASPs) that regularly act as intermediaries in transactions are exemplary. Since the PACTE law’s entry into force in May 2019, the latter must indeed register in a mandatory manner with the Autorité des marchés financiers (AMF), following a procedure that requires involvement and rigour. As such, they must comply with regulatory requirements that are sometimes stricter than those of traditional financial players. For instance, the obligation to set up a Know Your Customer (KYC) system from the first euro of a transaction, whereas traditional operators only need to implement such systems over 250 euros for a transaction or 1,000 euros for a transfer.
2. Technological properties not well suited to fraudulent activity
From a technical point of view, crypto-assets are regularly put forward for their traceability and transparency. These properties are not likely to meet the expectations of either a state that wishes to keep its financial flows confidential or individuals who wish to transfer their assets abroad discreetly.
The traceability allowed by crypto-assets facilitates, in fact, the good respect of the obligations in force for the companies and reinforces their effectiveness in time, whatever the number of intermediate operations.
Indeed, if an individual on the sanctioned registry buys crypto-assets and tries to use them after several years, he will be able to be identified without any difficulty. Similarly, suppose this individual exchanges its crypto-asset several times through different wallets before attempting to use it on European territory. In that case, the underlying blockchain technologies will allow tracing the transaction history back to the source of the financial flow. Such property does not exist on cash or metals, which makes them much better tools than digital assets for fraudulent operations.
Added to this is the notion of transparency that digital assets allow, as everyone has free access to the data stored on blockchain technologies. This functionality also ensures that donations sent to Ukraine are not diverted for corrupt purposes.
Furthermore, transactional analytics company Chainalysis has developed new online tools to help decentralized finance projects with their regulatory compliance to enhance the deterrence of crypto-assets for fraudulent purposes. It allows them to identify better wallets targeted for sanctions.
3. A good application of regulatory requirements contingent on the presence of major players on the territory
The existing regulations in France and those being implemented at the European level are therefore more than sufficient to cover the risks mentioned above since they subject service providers with activities related to digital assets to anti-money laundering and anti-terrorist financing obligations.
Implementing additional restrictions on them would not be more effective in ensuring compliance with the sanctions or asset freezing measures. On the contrary, the intrinsic properties of digital assets can not only fit into existing regulations but can also contribute to strengthening them.
However, their proper application requires that companies be under the scope of these obligations and, therefore, located in the territory where the measures are pronounced. However, the major crypto-asset trading platforms, which act as intermediaries for transactions, are established outside European borders. Consequently, they meet requirements that do not stem from our laws but from those of the countries in which they are established and whose will may differ from that of Europe.
The United States, although very attached to the hegemony of the dollar and its monetary sovereignty in general, has understood the stakes. In an executive order dated March 9, 2022, President Joe Biden asked his administration to study the project of issuing a digital dollar to reinforce the country’s leadership in the global financial system while improving its economic competitiveness.
Therefore, a balance must be found in Europe to prevent overly restrictive regulations from ultimately leading to the closure or expatriation of European companies, and consequently, to the impoverishment of the Union’s levers of influence.