The Banking Executive Magazine - June 2022 Issue

Digital Currency Yaffe-Bellany, the Russia-Ukraine war is the first major conflict with a prominent role for cryptocurrencies. Since Russian forces invaded Ukraine on February 24, 2022, the United States and its partners have levied an unprecedented series of sanctions on Russia. Cryptocurren- cies can be used by Russian actors to bypass sanctions. More broadly, the Russia-Ukraine crisis comes at a time when policymakers are trying to de- cide how to regulate digital assets. United States President, Joe Biden, signed an executive order calling for a government strategy on digital as- sets, including to mitigate national security risks and illicit finance. The European Parliament is debating whether to impose energy-use stan- dards on cryptocurrencies. The prominence of crypto in Russia- Ukraine conflict could influence global perceptions of the technology, including governments considering new regulations. Decentralized digitized assets are emerging as democratizing force in global finance. In the context of Rus- sia’s invasion of Ukraine, crypto can provide an alternative to the Russian Ruble, facilitating capital flight from Russia. Moreover, crypto can pro- vides average Russians and Ukraini- ans a store of value and medium of exchange that could reduce the hu- manitarian costs of the sanctions and war. Crypto is also considered as an important medium for donations to the Ukrainian government that com- plements Western aid. However, the decentralized and underregulated nature of crypto may be a vehicle for illicit transactions and a mean for Russian individuals and entities to bypass sanctions. Crypto can be leveraged for illicit purposes such as evading sanctions, but in practice, technological barri- ers, market structures, and limited liquidity will make it difficult for the sanctioned Russian actors to evade sanctions at scale using crypto as de- tailed below: • Technological barriers: Cryptocur- rencies rely on blockchain tech- nology, digital public ledgers that are transparent and permanent. Be- cause all transactions are logged on the blockchain, cryptocurren- cies are the digital equivalent of “marked bills”. Bitcoin and many other crypto assets are pseudony- mous, not anonymous, meaning that their transactions and wallets can be traced. If a wallet can be linked to an entity or person, the actor can be identified. • Market structure: Most crypto is transacted on centralized ex- changes such as Binance and Coinbase because they offer con- venient platforms and custodial services for crypto wallets. These exchanges must abide by Know Your Customer, Anti-Money Laun- dering, and Countering the Financ- ing of Terrorism (KYC/AML/CFT). This means that authorities can identify who holds the crypto as- sets and can order the accounts of certain entities to be suspended or frozen. Russia’s crypto exchange rules are more relaxed. Conse- quently, it might not be clear which entities hold crypto assets in Russia. • Limited liquidity: Crypto trading volumes between Russian Ruble and the two most liquid cryptocur- rencies, bitcoin and tether, have more than doubled. However, the value of these transactions remains relatively small. Since the war began, the Ukrainian government has used crypto to facil- itate donations and for military and other purchases. Kyiv was relatively well positioned to take advantage of crypto networks. Ukraine was ranked fourth globally for crypto adoption. In September 2021, Ukraine formally legalized crypto. The Ukrainian government is pub- licly soliciting crypto donations on- line. After initially accepting only bitcoin and tether, the Ukrainian government has expanded its capac- ity to now accept over 70 forms of crypto. Ukraine’s largest crypto ex- change, Kuna, helped organize this effort. Though some institutions have donated to Ukraine using crypto, most donations come from individu- als around the world. As of March 9, 2022, the Ukrainian government claimed to have raised nearly $100 million from crypto donations. The crypto donations allow Kyiv to ob- tain funding instantly and are faster than soliciting donations settled through traditional financial chan- nels. According to Euronews, digital cur- rency donations have helped fund Ukraine’s army, bolstered relief ef- forts and will help the country re- build. According to Tradingplatforms.com, crypto donations reached over $100 million ( € 94 million). According to New York Times, Rus- sia could use cryptocurrency to blunt the force of United States Sanctions. Russian companies have many cryp- tocurrency tools at their disposal to evade sanctions, including a so- called digital ruble and ransomware. The Russian government is develop- ing its own central bank digital cur- rency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dol- lars. Hacking techniques like ran- somware could help Russians steal digital currencies and make up rev- enue lost to sanctions. While cryp- tocurrency transactions are recorded on the underlying blockchain, mak- ing them transparent, new tools de- veloped in Russia can help mask the origin of such transactions. That would allow businesses to trade with Russian entities without detection. DIGITAL CURRENCY REULATIONS Counter Terrorism Finance (CTF) ef- forts often focus on tracking money and preventing financial transactions the BANKING EXECUTIVE 12 ISSUE 162 JUNE 2022