How the Conflict in Ukraine Became a Turning Point for Cryptocurrency

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Many major cryptocurrency exchanges make provocative statements this week when Ukraine asked them to freeze all accounts Russian-owned, with some exchanges calling on the history of crypto libertarian ideals to back up their decisions.

More quietly, however, many were complying with the sanctions plan aimed at devastating the Russian economy.

The discrepancy between the words and actions of the biggest crypto players underscores the challenges the crypto community now faces as a mainstream industry amid a geopolitical and humanitarian crisis – a crisis that now looks like a moment decisive for cryptocurrencies such as bitcoin and ethereum. .

On the Ukrainian side, digital coins lived up to their reputation for easily moving money across international borders, as supporters of the Ukrainian cause raised the equivalent of over $54 million through cryptocurrency donations.

But on the Russian side, the supposedly borderless form of currency has instead come up against the reality of international sanctions triggered by a major European conflict — and also the moral question of whether participants in crypto markets might be unwittingly contributing to fuel a war of aggression or help Russian oligarchs preserve their wealth.

In between, cryptocurrency exchanges and bitcoin hardliners — both of whom have embraced what they say is the libertarian ethos built into crypto — have had to wrestle with tough questions about the the extent to which they want to embrace a technology that critics say has little practical value other than money laundering and investment hedging while requiring huge amounts of electricity and the burning of fossil fuels.

And they also had to face the reality that making crypto big means accepting things like international sanctions.

“There is a libertarian streak running through cryptocurrency, but I think the pushback of many people in the crypto space is against net surveillance and foreclosures,” said Ryan Selkis, CEO of Messari, a crypto research and data company. “We all respect the rule of law and respect the system in which we operate.”

In recent years, crypto has evolved from a fringe technology to the kind of mainstream industry that pushes multiple Super Bowl ads from companies backed by hundreds of millions of dollars in investment. The underlying blockchain technology relies on distributed computing power to create public, unbreakable digital ledgers that can track who owns what without a central authority.

A question now is how much of the crypto anti-authority streak is still a reality, and how much carefully chosen marketing slogans.

At the start of the sanctions against Russia, one of the most strident statements came from Binance, the world’s largest crypto exchange. A Binance spokesperson told CNBC on Monday that limiting Russians’ access to crypto would “go against the very reason crypto exists.”

But on Friday, Binance CEO Changpeng Zhao took a different tone, saying in a 1,500-word blog post Publish that the company applies the same rules of sanctions as banks and noting the company’s fundraising efforts. (Binance donated $10 million for humanitarian needs.)

“Why won’t Binance go further and sanction/freeze all Russian user assets?” Zhao wrote. “The most important point: we don’t think we have the power to do that.”

Other major exchanges have also made it clear that they will comply with US and European sanctions, but will go no further than required laws. The US Treasury Department has not accused any exchange of being non-compliant.

Experts have said that Russian President Vladimir Putin will not be able to use virtual currency to evade large-scale sanctions, because even at 2 trillion dollars the crypto market is not big enough and crypto exchanges have dedicated compliance departments to detect money laundering.

“We have a number of sophisticated toolsets that allow us to understand who are sanctioned individuals, sanctioned nations, to be able to track cryptocurrency and fiat deposits and withdrawals, and to ensure that we block these users, as we have done since our inception.”, Brett Harrison, the president of the FTX.US exchange, Recount CNBC.

The reality of virtual currency is different from how early technologists imagined it – as something so powerful that governments could never touch it.

“Various criminal and foreign elements will be active users of CryptoNet. But that won’t stop the spread of crypto-anarchy,” said physicist Timothy May. wrote in “The Crypto Anarchist Manifesto” in 1988, two decades before the introduction of bitcoin made the idea a reality.

A legendary outlaw image may once have benefited digital coins by adding to their appeal, but that image is now a potential liability as regulators and lawmakers swarm around the community.

Cryptocurrency related crime broke a record last yearwith illegal addresses receiving $14 billion in digital currency, according to research firm Chainalysis, although this represents 0.15% of total crypto transaction volume.

This may be the time for longtime critics of crypto to achieve what they wanted: tighter regulation of cryptocurrencies, which they see as an end circumventing traditional securities market regulation. movables.

Sen. Elizabeth Warren, D-Mass., joined three other Democratic senators this week in sending a letter to Treasury Secretary Janet Yellen seeking assurances that Putin would not be able to use digital coins to escape punishment.

“Cryptocurrency can allow financial criminals, drug dealers and tax evaders to move money behind the scenes – potentially opening the door for Putin and his cronies to evade the economic sanctions that form the centerpiece of the international response to Russia’s invasion of Ukraine,” Warren said in a statement to NBC News.

“Financial regulators must address this urgent threat to ensure crypto does not undermine our national security,” she said.

But criticism of the cryptocurrency has also come from Republicans, adding possible bipartisan momentum to the push for regulation.

“Cryptocurrency is coming in here,” Sen. Lindsey Graham, RS.C., said this week after a classified briefing on the Russian-Ukrainian conflict. He said he feared the Russians would use virtual currency to evade sanctions.

Federal Reserve Chairman and Republican Jerome Powell has repeatedly called for new US laws to govern the crypto industry, a stance he reiterated Wednesday in testimony to Congress.

In defending the cryptocurrency, its supporters pointed to the plight of ordinary Russians who had no say in Putin’s decision to send troops to Ukraine.

“If you are a middle-class Russian right now and your whole financial system has been seized and blocked, is it legitimate for you to be able to put $100 or $1,000 of your savings in a hard crypto wallet that you could take with you if you leave the country with the clothes on your back?” said Selkis.

“It’s something that should be celebrated,” he said.

It is not known how many Russians are in this situation, but it is certainly a minority. Russia ranked 18th out of 154 countries last year in on-chain analysis report on the popular adoption of cryptocurrency, and a more recent report showed that Russians haven’t flocked to crypto in recent weeks.

Around the world, retail cryptocurrency investors are increasingly overshadowed by hedge funds and other institutional firms.

The overall effect of the Russian-Ukrainian conflict could be to separate crypto myth from reality, which has already happened in the last two years.

US authorities have partially unraveled the oft-repeated crypto mantra that digital coins are ‘unforfeitable’, seizing $3.6 billion in bitcoins in one confiscation last month. Agents in this case used a search warrant to gain access to an online account where one of the alleged thieves held the private keys needed to access his digital wallet.

People who own cryptocurrency can add layers of security to make government seizures more difficult, including storing their coins offline in a device called a “cold wallet” or “hard wallet.” People can then take these devices around the world.

But for Russians who might want to get such a device now, even that has become more difficult.

“We do not ship to Russia,” said Kristýna Mazánkov, a spokeswoman for Satoshi Labs, which claims to have sold over 1 million of its Trezor crypto wallet. She said the company halted shipments immediately after the sanctions were imposed.

Satoshi Labs is based in the Czech Republic, where Mazánkov said sympathy for Ukraine was high. In 1968, the then Soviet Union invaded the country known as Czechoslovakia.

“Bitcoin is very apolitical,” she said. “I would like to imagine that bitcoin is a solution for different situations, and it will remain so.” But she said some company employees had ties to the dispute that made it personal. “We are affected by the situation in Ukraine.”

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