The United States and the European Union, considering banning Russia from using cryptocurrency, can they succeed?

Technically and theoretically, it is feasible to extend sanctions to the field of cryptocurrency, but in practice, the “decentralization” and borderless of cryptocurrency will make supervision difficult.

After excluding some Russian banks from the swift system, foreign media quoted sources as saying that Washington is considering a new area that may further sanction Russia: cryptocurrency. Ukraine has made clear relevant appeals on social media.

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In fact, the Russian government has not legalized cryptocurrency. However, after a series of financial sanctions in Europe and the United States, which led to the sharp depreciation of the ruble, the trading volume of cryptocurrency denominated in ruble has soared recently. At the same time, Ukraine, the other side of the Ukrainian crisis, has repeatedly used cryptocurrency in this crisis.

In the view of analysts, it is technically feasible to extend sanctions to the field of cryptocurrency, but preventing cryptocurrency transactions will be a challenge and will bring the sanctions policy into unknown areas, because in essence, the existence of private digital currency has no borders and is largely outside the government regulated financial system.

Although Russia has a large volume in global cryptocurrency transactions, before the crisis, the Russian government has not legalized cryptocurrency and has maintained a strict regulatory attitude towards cryptocurrency. Shortly before the escalation of the situation in Ukraine, the Russian Ministry of Finance had just submitted a draft cryptocurrency regulation bill. The draft maintains Russia’s long-standing ban on the use of cryptocurrency to pay for goods and services, allows residents to invest in cryptocurrency through licensed institutions, but limits the amount of rubles that can invest in cryptocurrency. The draft also limits the mining of cryptocurrencies.

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However, while banning cryptocurrency, Russia is exploring the introduction of the central bank’s legal digital currency, the cryptoruble. Sergei glazyev, an economic adviser to Russian President Vladimir Putin, said when announcing the plan for the first time that the introduction of encrypted rubles would help avoid Western sanctions.

After Europe and the United States offered a series of financial sanctions against Russia, such as excluding major Russian banks from the swift system and freezing the foreign exchange reserves of the Russian Central Bank in Europe and the United States, the ruble fell 30% against the US dollar on Monday, and the US dollar hit a record high of 119.25 against the ruble. Then, the Central Bank of Russia raised the benchmark interest rate to 20% The ruble rebounded slightly on Tuesday after major Russian commercial banks also raised the deposit interest rate of the ruble, and the US dollar was now reported at 109.26 against the ruble this morning.

Fxempire had previously predicted that Russian citizens would officially turn to encryption technology in the Ukrainian crisis. In the context of the devaluation of the ruble, the transaction volume of cryptocurrency related to the ruble did soar.

According to the data of binance, the world’s largest cryptocurrency exchange, the trading volume of bitcoin to ruble surged from February 20 to 28. About 1792 bitcoins were involved in ruble / bitcoin trading, compared with 522 bitcoins in the previous nine days. According to the data of Kaiko, a Paris based Encryption Research provider, on March 1, with the escalation of the crisis in Ukraine and the follow-up of European and American sanctions, the transaction volume of bitcoin denominated in rubles has soared to a nine month high of nearly 1.5 billion rubles in the past 24 hours. At the same time, the volume of bitcoin transactions denominated in Ukrainian hryvna has also soared.

Boosted by soaring demand, bitcoin’s latest trading price in the U.S. market was $43895, up about 15% since Monday morning, according to coindesk. This week’s rebound offset the decline since February. Prices of most other cryptocurrencies also rose. Ether rose 8.1% this week, XRP rose 4.9%, avalanche rose 9.7% and Cardano rose 7%.

As the other side of the Russian Ukrainian crisis, Ukraine completely embraced cryptocurrency in this crisis.

In the year before the crisis escalated, Ukraine’s fiat currency, the hryvna, fell by more than 4% against the US dollar, while Ukrainian Finance Minister Sergei samarchenko said that in order to maintain exchange rate stability, the Central Bank of Ukraine had used US $1.5 billion in foreign exchange reserves, but it could only barely maintain that the hryvna would not continue to depreciate. To this end, on February 17, Ukraine officially announced the legalization of cryptocurrencies such as bitcoin. Mykhailo federov, Deputy Prime Minister and Minister of digital transformation of Ukraine, said on twitter that the move would reduce the risk of corruption and prevent fraud on emerging cryptocurrency exchanges.

According to a 2021 Research Report by market consulting firm chainalysis, Ukraine ranks fourth in the number and value of cryptocurrency transactions in the world, second only to Vietnam, India and Pakistan.

Subsequently, after the escalation of the crisis in Ukraine, cryptocurrency became more and more popular. Due to the implementation of a number of measures by the Ukrainian authorities, including prohibiting the withdrawal of foreign exchange cash and limiting the amount of cash withdrawal (100000 hryvnas per day), the trading volume of the Ukrainian cryptocurrency exchange has risen rapidly in the near future.

The trading volume of Kuna, Ukraine’s largest cryptocurrency exchange, soared 200% to $4.8 million on February 25, the highest one-day trading volume of the exchange since May 2021. In the previous 30 days, Kuna’s average daily trading volume was basically between $1.5 million and $2 million. “Most people have no choice but cryptocurrency,” Kuna’s founder Chobanian said on social media

At the same time, due to the increasing demand for cryptocurrency in Ukraine, people must pay a high premium for buying bitcoin. On the cryptocurrency exchange Kuna, the price of a bitcoin traded with grifner is about $46955 and $47300 on coin. This morning, the market price of bitcoin was about $38947.6.

Not only ordinary Ukrainians, the blockchain analysis company elliptic said that the Ukrainian government had previously called on people to donate bitcoin and other cryptocurrencies to support them on social media, and released the digital wallet addresses of bitcoin, Ethereum and other tokens. As of Sunday, the wallet address had received $10.2 million in cryptocurrency donations, of which about $1.86 million came from the sale of NFT.

Europe and the United States seem to have noticed this. Foreign media quoted a US government official as saying that the Biden administration is in the early stage of extending sanctions against Russia to the field of cryptocurrency. The official said that the sanctions on Russia’s cryptocurrency field need to be formulated in a way that does not damage the broader cryptocurrency market, which may make it more difficult to implement the sanctions.

On Sunday, mikheilo fedrov said on twitter that he asked “all major cryptocurrency exchanges to block the addresses of Russian users”. He not only called for the freezing of encrypted addresses related to Russian and Belarusian politicians, but also the addresses of ordinary users.

Although cryptocurrency has never been legalized, Marlon Pinto, head of investigation at London based risk consulting firm anotherday, said that cryptocurrency accounts for a higher proportion of the Russian financial system than most other countries due to distrust of the Russian banking system. According to the data of Cambridge University in August 2021, Russia is the third largest bitcoin mining country in the world, with 12% of the cryptocurrency in the global cryptocurrency market. A report of the Russian government estimates that Russia uses cryptocurrency for transactions worth US $5 billion every year. Russian citizens have more than 12 million cryptocurrency wallets storing cryptocurrency assets, with a total capital of about 2 trillion rubles, equivalent to US $23.9 billion.

In the view of analysts, a possible motivation for sanctions targeting cryptocurrency is that cryptocurrency may be used to circumvent other sanctions against traditional banks and payment systems.

Taking Iran as an example, elliptic said that Iran has long faced severe sanctions from the United States to limit its access to global financial markets. However, Iran successfully used cryptocurrency mining to evade sanctions. Like Russia, Iran is also a major oil producer, enabling it to exchange cryptocurrency for fuel for bitcoin mining and use the exchanged cryptocurrency to buy imported goods. This makes Iran partially evade the impact of sanctions on Iranian financial institutions.

A previous report by U.S. Treasury officials warned that cryptocurrency allows sanctions targets to hold and transfer funds outside the traditional financial system, which may “damage the U.S. sanctions capacity”.

For this prospect of sanctions, industry insiders believe that it is feasible in theory and technology.

“Technically, exchanges have improved their infrastructure over the past few years, so they will be able to enforce these sanctions if necessary,” said Jack McDonald, CEO of polysign, a company that provides storage software for cryptocurrency exchanges

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Michael Rinko, venture capital partner of Ascendex, also said that if the Russian government uses bitcoin to manage its central bank reserves, the review of the Russian government will become easier. Due to the publicity of bitcoin, anyone can see all the money inflows and outflows in the bank accounts owned by the central bank. “At that time, Europe and the United States will exert pressure on the largest exchanges such as coinbase, FTX and coin security to blacklist addresses related to Russia, so that no other large exchanges are willing to interact with relevant accounts from Russia, which can have the effect of freezing bitcoin or other cryptocurrencies related to Russian accounts.”

However, elliptic pointed out that it would be difficult to impose sanctions on cryptocurrency, because although due to the cooperation between large cryptocurrency exchanges and regulators, regulators can require large cryptocurrency exchanges to provide information about customers and suspicious transactions, the most popular peer-to-peer transactions in the cryptocurrency market are decentralized There are no borders, so it is difficult to be regulated.

In addition, the original intention of “decentralization” of cryptocurrency may also make it unwilling to cooperate with regulation. After the Deputy Prime Minister of Ukraine sent a request last week, the spokesman of responded to the media that it would not “unilaterally freeze the accounts of millions of innocent users” because it would “run counter to the reasons for the existence of cryptocurrency”.

According to a commentary in the New York Times, “After the Crimea incident in 2014, the United States banned Americans from doing business with Russian banks, oil and gas developers and other companies, which dealt a rapid and huge blow to the Russian economy. Economists estimate that the sanctions imposed by western countries will cost Russia $50 billion a year. Since then, however, the global market for cryptocurrencies and other digital assets has declined The explosion is bad news for the sanctions executors and good news for Russia “.

Post time: Mar-14-2022