Russia’s invasion of Ukraine has illustrated the need for cryptocurrency regulations to stay in lockstep with the evolving industry it seeks to police, said panelists at the latest “Crypto Rising,” virtual monthly event organized by Forkast.
The panel drew an audience from over 58 countries and was hosted by Angie Lau, founder and Editor-in-Chief of Forkast.
Cryptocurrencies emerged as a factor on both sides of the conflict: Used by supporters to funnel funds to Ukraine, while also raising concern that the technology could be used by Russia to avoid sanctions. Hence, the war brought a new focus on crypto regulations, beyond previous discussions since 2020 that concentrated on hacking and other illicit threats as the market grew.
“I think one of the things that the crisis has forced is a much deeper understanding of the technology and its applications,” said panelist Caroline Malcolm at Chainalysis Inc.
“With the invasion of Ukraine, those discussions [around crypto policy and regulations] have been moved forward dramatically,” the head of international policy at the crypto data and research firm said.
In the weeks following the Feb. 24 invasion of Ukraine, Western nations agreed to a package of sanctions, including a ban on seven Russian banks from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global banking communication platform. The move dramatically limited the ability of these banks to send or receive remittances, with one Russian ex-pat describing the development to Forkast as a “financial nuclear bomb.”
As the financial sanctions started to bite, Russians saw the value of the ruble plummet against the U.S. dollar and other developed market currencies. This led to some Russians buying Bitcoin and other cryptocurrencies to protect their savings.
In reaction, cryptocurrency exchanges started to block some Russians from accessing their services to comply with sanction requirements.
Coinbase, the largest crypto exchange in the U.S. by volume, blocked more than 25,000 addresses linked to Russian individuals, with other major exchanges following suit.
Binance, the world’s largest crypto exchange by volume of transactions processed, limited services to Russians and claimed to have implemented sanction requirements, as specified by the European Union. Firms such as Mastercard, Google and Apple either limited or completely withdrew from Russia.
On the other side of the conflict, more than US$100 million in crypto donations piled into Ukraine as people were moved by the humanitarian crisis unfolding.
Binance pledged US$10 million to the Ukrainian Humanitarian Effort while launching a crypto-first crowdfunding effort that has received at least 155 BTC (US$6 million at the time) in donations.
The Unchain Fund, a decentralized autonomous organization started by crypto entrepreneurs — including Illia Polosukhin, a “Crypto Rising” panelist and co-founder of decentralized applications platform NEAR Protocol — raised US$9.6 million.
The crisis “shone a light on some of the very positive use cases of cryptocurrency and how it does remain as a lifeline for people in crisis situations,” Malcolm said.
But the conflict also showed that cryptocurrencies could be used to evade sanctions, and that crypto exchanges, brokers, and custodians all have an obligation to help prevent this, Malcolm added.
The challenge in that is Bitcoin and other cryptocurrencies have their genesis in rejecting centralized oversight, be it for privacy or other reasons.
Keeping up with the cryptos
There are two distinct reasons why people turn to crypto — blockchain and cryptocurrencies fall outside the control of centralized systems that suffer during crises, and because digital assets offer a hedge when fiat currencies weaken, Polosukhin said.
While it may be next to impossible to completely regulate crypto, governments have been trying through traditional financial institutions to control transactions in crypto assets.
However, the conflict in Ukraine showcased what the broader crypto ecosystem was capable of — coming to a consensus of not engaging with Russian entities, in harmony with the decentralized ethos of cryptocurrencies and blockchain technology, Polosukhin said.
“To regulate decentralized platforms and decentralized finance, we need decentralized regulations,” he added.
One means to achieve that would be “using the blockchain itself as a means to actually structure this process” of regulating crypto, Polosukhin said.
For instance, regulators can use blockchain registries to keep track of and approve decentralized projects and allow blockchains to build self-regulatory frameworks that involve auditing protocols before launch, he added.
“This is where regulators either need to work with the industry a lot more, asking [blockchains] to build a self-regulatory framework” so they can monitor and provide feedback, Polosukhin said. “… or they need to hire their own blockchain teams to build some of this stuff.”
Policymakers could also tap into the information available via blockchain to formulate “sensible and proportionate regulation,” Malcolm said.
Importantly, to effectively regulate the emerging world of crypto, policymakers need to ensure that the old rules and laws are not just rehashed and applied to the space.
“If we simply place the old rules on top of this new system, we’re going to engender the same sorts of problems in terms of de-banking for people who don’t have access to financial systems, to cutting off access to things like the donations that we’ve seen in Ukraine,” Malcolm said.