Selva Ozelli is an international tax lawyer and CPA. She writes monthly Expert Take columns about the intersection of emerging technologies and sustainability.
The United Nations High Commissioner For Refugees (also known as the UN Refugee Agency) estimates that nearly 4 million Ukrainians fled their homes after bullets and bombs began flying on February 24, when the bombs fell. Most of them are now heading to Central European countries. Alex Bornyakov (deputy minister of digital transformation) said that over $100 million has been sent by people worldwide in crypto donations to Ukraine. Volodymyr Zelenskyy, the Ukrainian president, signed a bill legalizing cryptocurrency on March 16.
Robby Houben is a Professor at the University of Antwerp. He co-authored a study about the illegal use of cryptocurrency and blockchain for the European Parliament. On March 1, he published an article titled “Crypto assets as a blind spot for sanctions against Russia?”. In it, he calls for crypto sanctions to be put in place to stop Russia from invading Ukraine. Russia is leading a multilateral stablecoin initiative that includes BRICS countries (Brazil Russia, India China, South Africa, China, South Africa, and South Africa). The initiative will issue CBDCs, digital currencies of central banks, this year. These currencies can be used to exchange money on smartphones that are not connected to the SWIFT or CHIPS systems.
On March 22, the Bank of International Settlement reported that Project Dunbar, a collaboration between the central banks of Australia and Malaysia, Singapore, South Africa, and Singapore, had confirmed that cross-border CBDC payment are technically possible.
Related: Russia leads the multinational stablecoin initiative
Houben explains that “numbers show that crypto-assets have already been quite widely adopted in this region, and therefore the scenario is definitely not utopian.” Russians hold at least $200 billion worth crypto (12% of the total market), according to the Russian government. Elliptic, a blockchain analytics platform, has identified over 400 virtual asset service suppliers where one can purchase cryptocurrency using rubles. There are hundreds of thousands crypto addresses that are linked to sanctioned Russian entities or individuals, as well as 15 million Russian addresses involved in illicit transactions. Adam Zarazinski (CEO of Inca Digital), explained to me the company’s digital asset data and analytical technology to the United States Commodity Futures Trading Commission.
“Since February 24, when Russia invaded Ukraine, on Binance, BTC/RUB trading volumes increased approximately tenfold and USDT/RUB trading volumes increased about sevenfold. Then, on March 7, Visa and Mastercard pulled from Russia, trades in BTC/RUB dropped to zero. Similar to this, Russian Google searches to convert rubles into Tether rose fivefold in the same time period.
On March 4, the Swiss government took the lead and a wave of synchronized, crypto-related sanctions began to fall on Russia. Singapore followed suit on March 5. On March 9, the European Union was established. The European Union was established on March 9.
Many of the countries that imposed these sanctions are still considering crypto regulation. I was curious if their legal infrastructure would permit them to implement crypto regulation. Here’s what I found:
Related: Cybercrime Task Force Monitoring the Global Digital Financial System
The first country to impose sanctions on Russia was Switzerland. A Swiss member of parliament filed a criminal case against Credit Suisse on the same day for possible sanctions violations in relation to the destruction and transfer of loan documents by Russian oligarchs. They had begun moving billions of dollars of crypto assets from Switzerland into the United Arab Emirates. On March 9, the UAE passed its first national cryptocurrency law.
Isabelle Rosch (press officer at the Swiss Federal Department of Finance) explained everything to me:
“The March 4th sanctions ordinance applies to crypto assets in the exact same way that they apply to other assets. This includes asset freezes for entities and persons. Authorities must be notified by crypto companies and financial institutions about cases involving crypto sanctions enforcement. Violation of the Embargo Act of2002, to which Article 32 refers, can lead to criminal charges.
James Reardon is a senior associate of MLL Meyerlustenberger Lachenal Froriep, based in Geneva. He added: “For example, if someone fails to freeze crypto assets belonging to a listed individual, or entity, that person could be criminally liable with imprisonment up to one and a fine of 500,000 Francs (about $534,000). In extreme cases, the perpetrator could be sentenced to up to five years imprisonment and a 1,000,000 Franc (about $1770,000) fine.
Related: Why Switzerland is becoming a crypto nation with a flourishing ICO marketplace
Singapore was the first Asian country that imposed unilateral sanctions against Russia through the Monetary Authority of Singapore. This included cryptocurrency transactions and a ban on Russian currency. Its Ministry of Foreign Affairs provided details on its website.
Jacqueline Ong (deputy director of communications at MAS) said in an interview that the sanctions applied equally to all financial institutions in Singapore, even digital payment token service providers. Because of the interconnectedness among many players in the financial sector, this is to ensure that Singapore’s financial systems are impervious to attempts at circumventing the sanctions. All FIs that deal in cryptocurrency must comply with the sanctions. All FIs need to have strong controls, such as procedures for knowing their customers and beneficial owners. To avoid dealing with prohibited activities or entities, they must screen all customers as well as their counterparts. If FIs have information about prohibited entities or activities they must immediately inform MAS. They must also demonstrate compliance with MAS and are subjected to inspection and scrutiny by MAS.” she added.
“MAS will take the appropriate regulatory action against FIs and impose financial penalties if they are found in violation of the sanctions.”
Related: Why Singapore is the crypto-friendly country
Andrea Puccio, founding partner at law firm Puccio Penalisti Associati, explained:
“The EU crypto sanctions against Russia, which were implemented on March 9, are designed to target crypto assets of Russian individuals and entities. The EU law states that member states have the responsibility for implementing the EU crypto sanctions at the state level by imposing specific civil or penal penalties are responsible. Legislative Decree no. 221/2017 in Italy is an example. For violating EU export restrictions, 221/2017 imposes civil and criminal sanctions.”
Niklas Schmidt, a partner in law firm Wolf Theiss, said that there is no loophole to allow sanction dodgers to use crypto in Austria. The UN and EU sanctions are implemented by the Sanctions Act of 2010. (Sanktionengesetz 2010). This act permits the Austrian National Bank to freeze crypto assets of sanctioned persons and entities. Courts can also note freezes of crypto assets in companies registers. The minister of the Interior can impose travel restrictions for sanctioned people. The Sanctions Act of 2010, which was passed in 2010, provides that administrative and judicial penalties can be imposed on anyone who violates sanctions. Maximum penalties include imprisonment for up to 1 year and a fine up to 360 per day. Administrative bodies are not required to inform the EU Commission about the sanctions.
EU sanctions legislation includes a whistleblower provision. Member states may or not have adopted it into law. Puccio pointed out:
“Crypto assets appear to be included in the very broad definition of ‘financial products, markets and prevention of money laundering or terrorist financing’ under Directive 2019/1937. This directive aims to protect whistleblowers reporting breaches of EU law, but does not offer financial rewards.
Intersentia, a legal publishing company based in Cambridge (UK), stated that EU sanctions can be used against both regimes and suspected terrorist financing. These sanctions were developed “organically” without adequate thought to basic issues. […] This has led to a lot of litigation before the Court of Justice. Although the CJEU has recently ruled in favor of a new legal base, there are still many problems. However, “taking sanctions seriously” means new challenges for national implementation. These include criminal law, constitution law, international law, and European law.” — and, perhaps, the Markets in Cryptoassets (MiCA), regulation when it is enacted.
Similar: European MiCA regulation on digital assets: What are our options?
The Economic and Monetary Affairs Committee voted for the MiCA legislation on March 14. This will allow crypto firms to expand across the EU’s 27 member countries. It also facilitates a “passportable license” that would be valid in all other countries once it is ratified. Next, informal negotiations will take place between the European Parliament and European Commission. Once they have reached a consensus, the law is adopted with a six month transition period in which all EU member countries can regulate all crypto-asset service providers and issuers — excluding CBCDs.
The Bank of England issued a report in 2021 and has now begun to develop a regulatory framework for crypto-assets.
Jonathan Brogden is a partner at law firm DAC Beachcroft. He explained in an interview that: “As a matter U.K. sanction law, although it was not specifically named, there’s no doubt that crypto assets are included within the very broad definition of ‘economic resource’ which makes them subject to the U.K. Sanctions regime. Recently, the Financial Conduct Authority (UK) issued guidance which confirmed its belief that financial sanctions regulations apply to crypto assets in the same way as other assets. To attempt to bypass economic sanctions using crypto assets would be a criminal offense under the U.K. money laundering laws and the sanctions regulations. The FCA has recently contacted registered U.K. cryptoasset firms and reminded them of the imposition of sanctions. Regulated firms are required to report suspicious activity to U.K. criminal and regulatory authorities. If you suspect or know that you have the funds or resources of a sanctioned individual, you must immediately freeze them and not allow them to be dealt with or made available to them. You can be punished for violating U.K. sanctions with varying terms of imprisonment, fines and civil penalties.
According to Annabel Goulding of law firm K&L Gates, there are 150 unregistered cryptocurrency firms in the U.K. which can avoid sanctions regulation.
Similar: Brexit and fintech – A spring stocktake
Danielle Prenevost, Canadian Securities Administrators, explained to me that the Canadian Securities Administrators (CSA), issued a statement on March 14th imposing crypto sanctions by amending Russia’s Special Economic Measures (Russian) Regulations. This applies to all participants in the crypto market, including issuers and clearing agencies, custodians, custodians, all types of registrants including mutual funds, pension, investment, and trading platforms. This was done by the CSA to encourage market participants to do their research and seek expert advice in order to understand, follow, and continuously monitor their obligations under regulations.
Tae Young Bae is a reporter for Association of Certified Sanctions Specialists. He highlighted the fact that Canadian sanctions law has not been effectively enforced until now.
Related: Why Canada is a leader in crypto and blockchain technology
Japan’s Financial Services Agency issued sanctions on digital assets on March 14. The sanctions were announced in response to Russia’s possible ability to use crypto to bypass sanctions. Non-compliancers could face imprisonment for up to three years, or a fine of around 1 million yen (around $9,100).
The United States Treasury Department released new guidance on March 11 clarifying that Russia-related sanctions by the Office of Foreign Assets Control also apply to cryptocurrencies. On March 24, additional sanctions against Russian Harmful Foreign Activity were issued by the Treasury Department.
After it had published earlier regulations to address Russian sanctions, the Treasury Department made its announcements. To enforce the broad sanctions, Task Force KleptoCapture was established by the Department of Justice on March 2.
The Executive Order on Ensuring Responsible Digital Asset Development was signed by President Joe Biden on March 9. This order came after Russia invaded Ukraine, which raised crypto’s importance in national security. This executive order emphasizes the importance of digital assets for retaining the United States technological leadership in a world that is increasingly competitive. It also highlights how to strike the right balance between sustaining innovation, protecting investor rights, and mitigating national security risks from the illicit use digital assets. Further, the executive order requests interagency reports from many stakeholders in executive branches, including the Federal Reserve which previously released a report on CBDCs.
Related: Powers on… Biden accepts Blockchain technology, recognizes its advantages and pushes adoption
On March 17, the Committee on Banking, Housing and Urban Affairs hosted a hearing titled “Understanding Digital Assets in Illicit Finance.” It focused on digital assets’ use in the Russia-Ukraine War.
Emin Gun Sirer (founder and CEO of Ava Labs) pointed this out to me:
“Cryptocurrencies, including tumblers and mixing services, would not be a good tool to evade Russian sanctions. This is because (1) there is transparency in understanding what flows are taking place in the entire cryptocurrency economy. (2) there isn’t enough liquidity to run a G20 economic with cryptocurrencies.
Some participants in the crypto industry have been reluctant to comply with OFAC’s sanctions compliance guidelines, which has cross-border implications. Dean Zerbe, a partner at ZMFF&J, and co-author on the U.S. tax regulations regarding whistleblowing, stated that the G7, EU and Switzerland need to “learn what the U.S. knows” — whistleblowers are crucial in uncovering and exposed hidden money. He also said: “Efforts by the U.S. to pursue the crypto of Russian Oligarchs must include an effective program to reward whistleblowers. The oligarchs are assisted by a small group of bankers, accountants, cryptocurrency brokers, and lawyers.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Selva Ozelli, Esq. CPA is an international tax lawyer and certified public accountant. She frequently writes about tax, legal, and accounting issues for Tax Notes and Bloomberg BNA as well as other publications such the OECD.