Fintech

How the Ukraine war jolted the crypto lobby

Russia’s invasion of its neighbor forced crypto to grapple with KYC questions like: How do you know if that wallet belongs to Vladimir Putin?

Bitcoin

The crypto industry had already geared up for big battles over regulation this year.

Illustration: Christopher T. Fong/Protocol

A few days after Russia invaded Ukraine, Jake Chervinsky, the Blockchain Association’s head of Policy, underlined one of crypto’s big concerns about the war in a tweet.

“Russia can't and won't use crypto to evade sanctions,” he wrote. “Concerns about crypto's use for sanctions evasion are totally unfounded.”

It’s not clear the right people heard his message. The next day, Senate Democrats led by Elizabeth Warren expressed fears in a letter to the Treasury Department that crypto had been used to “hide cross-border transactions for nefarious purposes” and that Vladimir Putin and his allies could use it to evade sanctions.

The crypto industry had already geared up for big battles over regulation this year. But the Ukraine war has led the industry to focus more attention on a new and thorny debate: crypto’s potential role in geopolitical conflict, and how it could be used by authoritarian rulers and their allies to thwart U.S. foreign policy.

Kristin Smith, executive director of the Blockchain Association, said the war was essentially a curveball. First, the group had to do “our due diligence” to “see what was actually going on so we could tell the right story.”

“We haven't, as an association, done much around sanctions policy,” she told Protocol. That prompted a cautious approach as the war got underway. “What we didn't want to do was sort of predict what was going to be happening without having some sort of evidence … We were just mindful to not get out ahead of our skis.”

The industry had already skirmished with regulators over whether cryptocurrencies are securities that should be more strictly regulated, or whether consumers and investors have enough protection.

But with the war, the debates over whether crypto offers enough protections against money laundering and other financial crimes has taken center stage.

The issue got “a crazy level of public awareness,” ComplyAdvantage CEO Charles Delingpole told Protocol. “There's never been a more complex time for companies to understand what's happening in terms of who the underlying clients are. It's never been more under the public eye.” He called it “a prime-time moment for crypto.”

Smith didn’t mention the Warren letter specifically, but she said one concern was that “there's a small number of senators that are posing questions around this … and trying to use this example to bring more regulation to this space.”

The crypto industry’s position got a boost after key government agencies, from FinCEN to the FBI, said they didn’t think it was practical for Russian oligarchs to use crypto to bypass sanctions because of the blockchain’s inherent transparency and traceability.

The crypto industry has also been sending strong signals that it takes anti-money laundering and other financial crimes seriously. Shortly before the war began, major companies like Coinbase and Circle unveiled initiatives for blockchain-based KYC and a system for complying with the Treasury Department’s Travel Rule.

The role of crypto in national security was already a big deal before the Ukraine invasion, Michael Philipp, a partner at Morgan Lewis & Bockius, said. The sanctions and the war “put a sharper point on it,” he told Protocol. “But I don't think it is going to substantively change the debate.”

In fact, the war could highlight a positive side of crypto. “Ukraine has been able to fundraise [with] crypto even though there's a foreign adversary trying to shut down their financial system,” Diogo Mónica, co-founder and president of Anchorage Digital, told Protocol.

He said the relief effort is a “recognition that crypto is a force for good. I think these socially uplifting use cases are really the glimpse into the future of the digital asset ecosystem,” more so than the negative aspect of sanctions evasion.

Fears of a coming government clampdown on crypto eased this week with President Joe Biden’s executive order affirming both the need to make sure protections are in place while endorsing the importance of the technology and the industry.

But for the crypto lobby, there are still reasons for worry.

The Biden order didn’t offer clear guidance on how federal regulators should approach the industry, critics said. And in a curious twist, the title of the order posted on the White House website was revised, replacing the word “innovation” with “development,” a last-minute change that some thought suggested a more cautious attitude toward crypto.

The industry is keeping an eye out for how the discussion evolves, Smith said. The big worry is that an idea or proposal “will get momentum and get jammed through or attached to some must-pass bill, or something like that,” she said, without vetting it with the Treasury Department or the industry.

She cited last year’s battle over the infrastructure bill, which ended up including tax-reporting requirements for crypto industry brokers that critics say are too broad and would cover miners, node operators and software developers who maintain the blockchain networks.

“We're trying to make sure that there aren't any quick moves,” she said. “I think the industry has a good story to tell.”

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