Sanctions may cripple Russia’s multibillion-dollar crypto industry

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Sanc­tions imposed on Rus­sia over the country’s unpro­voked inva­sion of Ukraine could ham­per the growth of its multi­bil­lion-dol­lar cryp­to sec­tor, accord­ing to experts. 

Recent­ly, the Unit­ed States offi­cials tar­get­ed Russ­ian bit­coin min­ing firm BitRiv­er in its lat­est round of sanc­tions aimed at hurt­ing Russia’s economy. 

The Trea­sury Department’s Office of For­eign Assets Con­trol says it is con­cerned Rus­sia may mon­e­tise its vast oil reserves and oth­er nat­ur­al resources for pow­er-inten­sive cryp­to min­ing as a way to raise funds and get around West­ern sanctions. 

Accord­ing to CNBC, vice pres­i­dent of pol­i­cy and reg­u­la­to­ry affairs at cryp­to com­pli­ance firm Ellip­tic, David Carlisle, said, “This is a pow­er­ful sig­nal from OFAC that it will use every tool in its arse­nal to pre­vent Rus­sia from evad­ing sanc­tions through crypto.”

The sanc­tions will crip­ple BitRiv­er and its var­i­ous sub­sidiaries, block­ing them from access­ing U.S. cryp­to exchanges or min­ing equip­ment. Cryp­to min­ing — the process of val­i­dat­ing new dig­i­tal cur­ren­cy trans­ac­tions — requires spe­cial­ized com­put­ers that con­sume lots of energy. 

The move shows US offi­cials are “deeply con­cerned that Rus­sia could lever­age its nat­ur­al resources to con­duct cryp­to min­ing to evade sanc­tions,” some­thing Iran and North Korea has been known to engage in the past, Carlisle said. 

The poten­tial exploita­tion of bit­coin pro­duc­tion for Russ­ian sanc­tions eva­sion remains a key con­cern for glob­al reg­u­la­tors, includ­ing the Inter­na­tion­al Mon­e­tary Fund. 

“Cryp­to min­ing, while nowhere near a replace­ment for the assets frozen by Russ­ian sanc­tions, avoids the fiat-to-cryp­to ‘on-ramps’ and cryp­to-to-fiat ‘off-ramps’ at cen­tral­ized vir­tu­al cur­ren­cy exchanges, there­by bypass­ing sanc­tions screen­ing,” said coun­sel at Crow­ell & Mor­ing and a for­mer tri­al attor­ney in the crim­i­nal divi­sion of the Depart­ment of Justice’s asset for­fei­ture and mon­ey-laun­der­ing sec­tion, Anand Sithian. 

Mean­while, Binance, the world’s largest cryp­to exchange, said it is lim­it­ing its ser­vice for Russ­ian users in response to the fifth wave of EU sanc­tions on Moscow. 

Russ­ian Binance accounts with over 10,000 euros in dig­i­tal cur­ren­cy will be pre­vent­ed from mak­ing deposits or trades and can only with­draw funds, the com­pa­ny said.

“While these mea­sures are poten­tial­ly restric­tive to nor­mal Russ­ian cit­i­zens, Binance must con­tin­ue to lead the indus­try in imple­ment­ing these sanc­tions,” Binance said in an update on its web­site. “We believe all oth­er major exchanges must fol­low the same rules soon.” 

Rus­sia is home to a huge cryp­tocur­ren­cy mar­ket. The Krem­lin esti­mates Rus­sians own rough­ly 10 tril­lion rubles ($124bn) worth of dig­i­tal assets. 

It is not clear where this data comes from, but there is grow­ing evi­dence that Rus­sians are turn­ing to cryp­to as an alter­na­tive to the ruble as the cur­ren­cy crash­es in response to the country’s eco­nom­ic isolation. 

Accord­ing to data from Cryp­to­Com­pare, ruble-denom­i­nat­ed cryp­to trad­ing vol­umes reached 111.4 bil­lion rubles ($1.4bn) in March, much high­er than in ear­li­er months. Activ­i­ty has dipped in April, with total month-to-date vol­ume reach­ing only 19.2 bil­lion rubles. Binance was the most pop­u­lar exchange for ruble-cryp­to vol­ume in March, account­ing for 77 per cent of trades.

In the six months end­ing March 2022, ruble-cryp­to trad­ing vol­ume topped 420 bil­lion rubles, or more than $5bn, accord­ing to CryptoCompare. 

Mean­while, Cam­bridge Uni­ver­si­ty fig­ures show the coun­try is a pow­er­house in the field of cryp­to min­ing. In August 2021, Rus­sia account­ed for about 11 per cent of the glob­al pro­cess­ing pow­er used for mint­ing new units of bit­coin, accord­ing to the Cam­bridge Cen­tre for Alter­na­tive Finance, mak­ing it the third-biggest min­ing hub behind Kazakhstan. 

Giv­en Kazakhstan’s polit­i­cal unrest led to inter­net shut­downs that knocked bit­coin min­ers offline, there’s a chance Russia’s share of the sec­tor may be even high­er now. 

How­ev­er, there could end up being an exo­dus of min­ers from Rus­sia to the “stans” — Kaza­khstan, Kyr­gyzs­tan, Tajik­istan, Turk­menistan, and Uzbek­istan — where they may “uti­lize strand­ed gas to pow­er their oper­a­tions,” Chief Exec­u­tive Offi­cer of Cryp­to­Com­pare, Charles Hayter said. 

The Russ­ian gov­ern­ment has a “love-hate rela­tion­ship” with dig­i­tal assets, Hayter said. While Russia’s cen­tral bank is push­ing for a ban on the use and min­ing of cryp­tocur­ren­cies, Pres­i­dent Vladimir Putin wants to reg­u­late them instead. 

Accord­ing to Hayter, the Russ­ian regime and its oli­garchs “might see dig­i­tal assets as a way to fund activ­i­ties out­side of Russia.” 

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