Cryptocurrencies may finally face regulation over evasion of Russia sanctions

04 March 2022 15:44 by Fiona Maxwell

Crypto

The use of cryptocurrencies to circumvent Russian economic sanctions looks set to fail as policymakers pledge to crack down on illegal activity — but regulators will need to do more to ensure they face the full force of the law in the longer term.

Despite their seemingly secretive nature, transactions made via virtual currencies can be traced on the blockchain. Policymakers are already pledging to act if institutions or individuals are finding ways to get around the multitude of sanctions put in place against Russia following its invasion of Ukraine.

But the wider issue of which policymakers have long been aware — that cryptocurrencies and the exchanges that trade them operate in a dark corner of the web, away from most legal repercussions — could prompt the regulatory action that financial supervisors have long been calling for.

The use of crypto to evade these sanctions may look to be an easy short-term workaround, but law enforcers will be able to take action against offenders.

In this particular situation, in theory, criminals have nowhere to hide. In the UK, financial sanctions cover funds and economic resources of all type, including crypto assets. Any attempt to circumvent the sanctions is a criminal offense like it would be for a fiat currency. That means the Office of Financial Sanctions Implementation can take enforcement action against any offenders.

Similar threats can be expected in the US, with lawmakers pushing for clarity from the Treasury on how it will enforce the crypto sector’s compliance with economic sanctions.

The EU, meanwhile, has pledged to take measures to ensure virtual currencies can't be used to circumvent the sanctions. Bruno Le Maire, France’s finance minister, declined to offer specific details but said EU economic leaders were united in their aims to stop illegal activity after a report presented by European Central Bank President Christine Lagarde on the issue on Wednesday.

— Long-term fix —

While grand action is being promised to crack down on those who circumvent Russian sanctions, the situation has shone a light on the need for a longer-term fix for cryptocurrencies, which by their nature offer an opaque, virtually anonymous way of making payments.

US Federal Reserve Chair Jerome Powell told lawmakers on Wednesday that this event highlights the need for a specific regulatory regime for virtual currencies, saying that for the industry, “there isn't in place the kind of regulatory framework that needs to be.”

Similar calls are taking place across Europe. In Brussels, influential lawmaker Markus Ferber urged the European Commission in a statement today to come up with specific proposals to close loopholes in the sanctions regime for crypto assets. But he also criticized European legislators for holding up the proposed Markets in Crypto-Assets file, saying it is “absolutely crucial” the policy is adopted.

In the UK, regulators including the Bank of England and Financial Conduct Authority have long called for Bitcoin and other electronic coins to be subject to more stringent legislation. But they still remain outside the scope of financial policy.

Both regulators come at the issue from different angles: for the BOE, financial stability is at risk as lenders’ activities become increasingly intertwined with cryptocurrencies. For the FCA, consumer safety is threatened as retail investors don’t appear to understand the risks they’re taking on, leaving them vulnerable to losing money or falling victim to fraud.

Leading technocrats have warned for years about the potential dangers of cryptocurrencies — to no avail. It could be that a concern over sanctions evasion is the final nail in the coffin for virtual currencies’ freedom.

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