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Crypto industry says it is complying with Russian sanctions, as some policymakers ring alarms

A technician on a cherry picker inspects racks of illuminated mining rigs at the Minto cryptocurrency mining center in Nadvoitsy, Russia, on Friday, December 17. Amid calls for more scrutiny, cryptocurrency companies say they are cooperating with U.S. sanctions on Russia. (Andrey Rudakov/Bloomberg)
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Top policymakers continue ringing alarms about potential Russian efforts to dodge sanctions with cryptocurrencies, even as crypto industry leaders say they have seen no evidence of such evasion and are fully complying with U.S. measures targeting the country over its invasion of Ukraine.

Crypto advocates are making the case that digital assets present an unworkable alternative to the Russian government and any oligarchs aiming to end-run Western penalties. They argue the roughly $2 trillion crypto market is too small to meet the financing needs of the Russian state.

And they say authorities’ ability to track big transactions on the blockchain, the transparent digital ledger that underlies cryptocurrencies, makes it all but impossible for billionaire Russian oligarchs to use it for moving meaningful amounts of their wealth undetected.

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“The scale of the sanctions we’re seeing are so massive, there just isn’t the depth in crypto for the kinds of evasion we’re trying to prevent. And if an oligarch tries to move $10 billion, it will be completely obvious and spotted by people in the industry who run the on- and off-ramps,” said Jerry Brito, executive director of the crypto think tank Coin Center. “This is such a red herring.”

Key officials from the Biden administration and on Capitol Hill are not convinced.

“I think it really underscores the need to have a strong regulatory regime that permits appropriate activity but that prevents inappropriate activity,” Federal Reserve Chair Jerome H. Powell said in Thursday testimony before the Senate Banking Committee.

“We do have laws on the books and all that,” Powell said. “But for digital finance generally we need a legal framework that would take away as much as possible the possibility people could use unbacked cryptocurrencies as a way to evade the law or to finance terrorism or hide their ill-gotten gains.”

Powell was responding to a question from Senate Intelligence Committee Chairman Mark R. Warner (D-Va.), who along with three Democratic colleagues wrote to Treasury Secretary Janet L. Yellen on Wednesday asking what the department is doing to ensure targeted Russians don’t use crypto to circumvent sanctions.

“Strong enforcement of sanctions compliance in the cryptocurrency industry is critical given that digital assets, which allow entities to bypass the traditional financial system, may increasingly be used as a tool for sanctions evasion,” they wrote.

Yellen, in remarks Wednesday after a speech in Chicago, called crypto a “channel to be watched,” and said the Treasury Department could address loopholes that the technology presents in its sanctions, according to the Wall Street Journal. She added many crypto participants already face anti-money laundering and sanctions rules.

The United States has imposed punishing sanctions on Russia meant to cripple the country economically for invading its neighbor. They include cutting off the Russian central bank and freezing its U.S. assets; adding a number of top Russian banks and other companies to a sanctions list; closing U.S. airspace to Russian flights; working with European allies to disconnect the nation from the international financial network known as SWIFT, and personally targeting Russian President Vladimir Putin and his inner circle.

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The biggest crypto-trading platforms, including Coinbase and FTX, say they are complying with sanctions and already abide by the same requirements as traditional financial institutions to collect data on their customers and guard against suspicious activity.

The industry takes sanctions compliance “very seriously and employ a host of tools, including the use of blockchain analytics, trade surveillance and Internet geo-tagging,” said Michelle Bond, CEO of the Association for Digital Asset Markets, an industry trade group. “We are entering a time where diligence to the utmost degree will be necessary and continued public-private information sharing will be key.”

The major crypto exchanges have rejected a call from Ukraine’s deputy prime minister, Mykhailo Fedorov, to block all Russians from their platforms to “sabotage ordinary users.” Kraken, one top exchange that spurned Federov’s request, said in a statement that “freezing access to digital assets of citizens from an entire country does not necessarily punish those who are actually responsible and who may have already prepared for the possibility of blanket sanctions.”

More than 17 million Russians, roughly 12 percent of its total population, own cryptocurrency, according to TripleA, a Singapore-based crypto-payments company. Adoption is even higher in Ukraine, where nearly 13 percent of the population, more than 5.5 million people, own digital assets.

Demand for crypto has been spiking in both countries since the conflict erupted, with Ukrainians and Russians racing to buy up bitcoin and Tether, a so-called stablecoin whose price is pegged to the U.S. dollar, according to data from Kaiko, a Paris-based crypto-analysis firm. The price of bitcoin has rallied by 18 percent over the past week.

Meanwhile, the Ukrainian government has collected more than $42 million in crypto donations, some of which it has already converted into traditional currency to buy critical supplies, including drones, bulletproof vests and gasoline.

Crypto advocates point to that fundraising campaign as proof of crypto’s ability to advance a cause that has united much of the world. They aim to use it to argue that Washington policymakers should tread carefully in writing rules for the industry, even as they hunt for gaps that crypto may present in the new sanctions.

“This, right now, is the fog of war. I think there are opportunities within crypto for sanctions evasion,” said Adam Zarazinski, CEO of Inca Digital, a data firm that works with both the crypto industry and government agencies. “We don’t necessarily know what all of them are yet.”