What is the next step in U.S. sanctions against Russia, extending to cryptocurrencies?

After excluding some Russian banks from the SWIFT system, foreign media quoted sources as saying that Washington is considering a new area that could further sanction Russia: cryptocurrencies. Ukraine has made explicit appeals on social media.

In fact, the Russian government has not legalized cryptocurrencies. But ruble-denominated cryptocurrency trading volumes have soared recently after a series of financial sanctions in Europe and the United States led to a sharp depreciation of the ruble. Meanwhile, the other side of the Ukraine crisis, Ukraine, has used cryptocurrencies several times during the crisis.

In the view of analysts, it is technically feasible to extend sanctions to the cryptocurrency space, but stopping cryptocurrency trading will be a challenge that will bring sanctions into uncharted territory, because in essence, the existence of private digital currencies is borderless and largely outside the government-regulated financial system.

The ruble-denominated cryptocurrency's one-day trading volume rose to a new 9-month high

Although Russia is not small in global cryptocurrency trading, before the crisis, the Russian government has not legalized cryptocurrencies and has maintained a strict regulatory attitude towards cryptocurrencies. Shortly before the situation in Ukraine escalated, the Russian Ministry of Finance had just submitted a draft cryptocurrency regulation bill. The draft upholds Russia's longstanding ban on the use of cryptocurrencies to pay for goods and services, allowing residents to invest in cryptocurrencies through licensed institutions, but limiting the amount of rubles that can be invested in cryptocurrencies. The draft also restricts the mining practices of cryptocurrencies.

However, while banning cryptocurrencies, Russia is exploring the launch of a central bank fiat digital currency, cryptoruble. Sergei Glazyev, an economic adviser to Russian President Vladimir Putin, said when the plan was first announced that the introduction of crypto rubles would help circumvent Western sanctions.

After a series of financial sanctions against Russia, such as excluding major Russian banks from the SWIFT system and freezing the Russian central bank's foreign exchange reserves in Europe and the United States, the ruble fell 30% against the dollar on Monday, and the dollar against the ruble hit a record high of 119.25, followed by a rebound on Tuesday after the Central Bank of Russia raised the benchmark interest rate to 20% and russia's major commercial banks also raised the ruble deposit rate, and the dollar against the ruble was quoted at 109.26 this morning.

FXEmpire had previously predicted that Russian citizens would officially begin to switch to crypto in the wake of the Ukraine crisis. Against the backdrop of the ruble's depreciation, the volume of ruble-related cryptocurrency trading did spike sharply.

According to Binance, the world's largest cryptocurrency exchange, between February 20 and 28, the volume of bitcoin-to-ruble transactions surged, with about 1,792 bitcoins involving rubles/bitcoin transactions, compared to 522 bitcoins in the previous nine days. Data from Kaiko, a Paris-based crypto research provider, showed on March 1 that the volume of bitcoin transactions denominated in rubles has soared to a nine-month high of nearly 1.5 billion rubles in the past 24 hours as the crisis escalates in Ukraine and the ensuing sanctions in Europe and the United States. At the same time, the volume of Bitcoin transactions denominated in the Ukrainian hryvnia has also soared.

Boosted by a surge in demand, Bitcoin's latest trading price on the U.S. market is $43,895, up about 15 percent since Monday morning, and this week's rally offset the decline since February, according to Coindesk data. The prices of most other cryptocurrencies also moved higher. Ether is up 8.1 percent this week, Ripple (XRP) is up 4.9 percent, Avalanche is up 9.7 percent, and Cardano is up 7 percent.

Ukraine has used cryptocurrencies heavily during the crisis

As the other party in the Russian-Ukrainian crisis, Ukraine has completely embraced cryptocurrencies in this crisis.

In the year before the crisis escalated, Ukraine's fiat currency, the hryvnia, fell more than 4 percent against the dollar, while Ukrainian Finance Minister Sergei Samarchenko said that in order to keep the exchange rate stable, the Ukrainian central bank had used $1.5 billion in foreign exchange reserves, but could only barely maintain that the hryvnia would not continue to depreciate. To this end, on February 17, Ukraine officially announced the legalization of cryptocurrencies such as Bitcoin. Mykhailo Federov, Ukraine's deputy prime minister and minister of digital transformation, tweeted that the move would reduce the risk of corruption and prevent the emergence of cryptocurrency exchanges from breeding fraud.

According to a 2021 research report by market consultancy Chainalysis, Ukraine ranks fourth in terms of the number and value of cryptocurrency transactions in the world, behind Vietnam, India and Pakistan.

Subsequently, after the escalation of the crisis in Ukraine, cryptocurrencies became more and more popular. The volume of cryptocurrency exchanges in Ukraine has climbed rapidly in recent times due to a number of measures implemented by the Ukrainian authorities, including a ban on the withdrawal of foreign exchange cash and a restriction on the amount of cash withdrawals (100,000 hryvnia per day).

Trading volume at Kuna, Ukraine's largest cryptocurrency exchange, surged 200% to $4.8 million on Feb. 25, the highest single-day trading volume since May 2021. In the previous 30 days, the average daily trading volume of Kuna was basically between $1.5 million and $2 million. Chobanian, the founder of Kuna, noted on social media that "most people have no choice but cryptocurrencies." ”

At the same time, due to the increasing demand for cryptocurrencies in Ukraine, people have to pay a high premium for the purchase of Bitcoin. On cryptocurrency exchange Kuna, the price of trading a bitcoin in hryvnia is about $46,955, on Binance it is $47,300, and this morning, bitcoin's market price was about $38,947.6.

Not just ordinary Ukrainians, blockchain analytics firm Elliptic said the Ukrainian government had previously called on people on social media to donate bitcoin and other cryptocurrencies to support them, and released digital wallet addresses for tokens such as Bitcoin, Ethereum and so on. As of Last Sunday, the wallet address had received $10.2 million worth of cryptocurrency donations, of which about $1.86 million came from the sale of NFTs.

The next sanctions could involve cryptocurrencies?

Europe and the United States seem to have noticed this situation. Foreign media quoted a US government official as saying that the Biden administration is in the early stages of extending sanctions against Russia into the cryptocurrency space. The official said sanctions on Russia's cryptocurrency space need to be formulated in a way that does not disrupt the broader crypto market, which could make it more difficult to impose sanctions.

On Sunday, Mikhailo Federov even said on Twitter that he requested that "all major cryptocurrency exchanges block the addresses of Russian users." He not only called for the freezing of encrypted addresses linked to Politicians in Russia and Belarus, but also the addresses of ordinary users.

While cryptocurrencies have never been legalized, Marlon Pinto, head of investigations at London-based risk consultancy AnotherDay, said cryptocurrencies account for a higher proportion of the Russian financial system than most other countries due to distrust of the Russian banking system. According to data from the University of Cambridge in August 2021, Russia is the third largest bitcoin miner in the world, owning 12% of the cryptocurrencies in the global crypto market. A report by the Russian government estimates that Russia uses cryptocurrencies for $5 billion worth of transactions every year, and Russian citizens own more than 12 million cryptocurrency wallets that store crypto assets, with a total amount of about 2 trillion rubles, equivalent to $23.9 billion.

In analysts' view, one possible motivation for targeting cryptocurrencies for sanctions is that cryptocurrencies could be used to circumvent other sanctions against traditional banks and payment systems.

Elliptic cites Iran as an example, saying iran has long faced harsh U.S. sanctions that limit its access to global financial markets. But Iran successfully used cryptocurrency mining to circumvent sanctions. Like Russia, Iran is a major oil producer, giving it the ability to exchange cryptocurrencies for fuel for Bitcoin mining and to buy imported goods in exchange for cryptocurrencies in exchange. This allows Iran to partially circumvent the impact of sanctions on Iranian financial institutions.

A previous report by U.S. Treasury officials warned that cryptocurrencies could "undermine U.S. sanctions capabilities" by allowing sanctions targets to hold and transfer funds outside the traditional financial system.

For this sanction prospect, industry insiders believe that it is theoretically and technically feasible.

Jack McDonald, CEO of PolySign, a company that provides storage software for cryptocurrency exchanges, said, "Technically, exchanges have improved their infrastructure over the past few years, so they will be able to implement these sanctions if needed." ”

Michael Rinko, venture capital partner at AscendEx, also said that if the Russian government uses bitcoin to manage its central bank reserves, then the scrutiny of the Russian government will become easier, and due to the public nature of bitcoin, anyone can see all the money flowing in and out of bank accounts owned by the central bank. "At that time, Europe and the United States will put pressure on the largest exchanges such as Coinbase, FTX and Binance to blacklist Russia-related addresses so that no other large exchange will be willing to interact with relevant accounts from Russia, which can have the effect of freezing Bitcoin or other cryptocurrencies involving Russian accounts."

However, Elliptic noted that imposing sanctions on cryptocurrencies will be difficult because while regulators can require large cryptocurrency exchanges to provide information on customers and suspicious transactions out of cooperation between large cryptocurrency exchanges and regulators, peer-to-peer transactions, the most popular peer-to-peer transactions in the cryptocurrency market, are decentralized, borderless, and therefore difficult to regulate.

In addition, the original intention of cryptocurrency "decentralization" may also make it reluctant to cooperate with regulation. Following a request from Ukraine's deputy prime minister last week, a binance spokesperson 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 cryptocurrencies."

An opinion piece in The New York Times said, "After the crimea in 2014, the United States banned Americans from doing business with Russian banks, oil and gas developers and other companies, which hit the Russian economy quickly and dramatically." Economists estimate that the sanctions imposed by Western countries cost Russia $50 billion a year. But since then, the global market for cryptocurrencies and other digital assets has exploded, which is bad news for sanctions enforcers and good news for Russia."