In her monthly Expert Take column, Selva Ozelli, an international tax attorney and CPA, covers the intersection between emerging technologies and sustainability, and provides the latest developments around taxes, AML/CFT regulations and legal issues affecting crypto and blockchain.
According to the United Nations High Commissioner for Refugees, also known as the UN Refugee Agency, nearly 4 million Ukrainians have fled their homes since bombs began falling and bullets started flying on Feb. 24, with most heading to neighboring Central European countries. At the same time, people around the world have sent over $100 million in crypto donations to support Ukraine, according to Alex Bornyakov, deputy minister of digital transformation. This necessitated Ukrainian President Volodymyr Zelenskyy to sign a bill legalizing crypto on March 16.
Robby Houben, a professor at the University of Antwerp who co-authored a study for the European Parliament about the illicit use of cryptocurrencies and blockchain, published an article on March 1 titled “Crypto-assets as a blind spot in sanctions against Russia?” in which he urges crypto sanctions be implemented to further dry up funding for Russia’s invasion of Ukraine. After all, Russia has been leading a multinational stablecoin initiative with BRICS (Brazil, Russia, India, China and South Africa) and Eurasian Economic Union countries. This year, the initiative is scheduled to issue central bank digital currencies (CBDCs) that will be exchanged on smartphones, outside of the SWIFT and CHIPS systems.
The Bank of International Settlement reported on March 22 that “Project Dunbar” — a collaboration with the central banks of Australia, Malaysia, Singapore and South Africa — has confirmed that cross-border CBDC payments are technologically possible.
“Numbers show that crypto-assets are already quite widely adopted in the region, and the scenario is therefore definitely not utopian,” Houben emphasizes in his article. The Russian government has estimated that at least $200 billion worth of crypto, or 12% of the overall market, is held by Russians. Blockchain analytics platform Elliptic has identified more than 400 virtual asset service providers where one can use rubles to purchase cryptocurrencies, hundreds of thousands of crypto addresses linked to sanctioned Russia-based individuals or entities, and 15 million Russian crypto addresses involved with illicit transactions. Adam Zarazinski, CEO of Inca Digital — which provides digital asset data and analytics technology to the United States Commodity Futures Trading Commission and Department of Defense — explained to me:
“Since the Ukrainian invasion by Russia on Feb. 24, on Binance, BTC/RUB trades increased about tenfold, and USDT/RUB trades increased about sevenfold and then begin to drop on March 7 when Visa and Mastercard pulled out of Russia. Similarly, Russian Google searches for how to convert rubles to Tether increased fivefold during the same period.”
With the Swiss government taking the lead on March 4, a wave of synchronized sanctions that extend to crypto began falling on Russia. On March 5, Singapore followed suit. Then came the European Union on March 9. And on March 11, the Group of Seven (G7) countries — including Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — instituted sanctions “to hold Putin accountable for his continued assault on Ukraine and further isolate Russia from the global financial system.”
Given that crypto regulation is still being contemplated by many of the countries that imposed these sanctions, I wondered whether their legal infrastructure would allow for their implementation when it comes to cryptocurrencies. Here is what I found:
Switzerland was the first to adopt sanctions against Russia. That same day, a Swiss member of parliament filed a criminal complaint against Credit Suisse for potential sanctions violations relating to the destruction of the loan documents of Russian oligarchs, who began moving their billions worth of crypto assets from Switzerland to the United Arab Emirates. The UAE adopted its first nationwide cryptocurrency law on March 9.
Isabelle Rösch, press officer at the Swiss Federal Department of Finance, explained to me:
“The provisions of the sanctions ordinance of March 4 apply to crypto assets in the same way as they do to other assets, including asset freeze for listed persons and entities. Crypto companies/financial institutions must notify the authorities concerning crypto sanctions enforcement cases. Criminal charges apply for violation of prohibitions in accordance with the Embargo Act of 2002, to which the ordinance refers in Article 32.”
James Reardon, a senior associate at MLL Meyerlustenberger Lachenal Froriep based in Geneva, added: “For instance, if someone — per Article 15, Paragraph 1 of the Ordinance — fails to freeze crypto assets owned by a listed individual or entity, that person may be held criminally liable by imprisonment up to one year and a 500,000 franc (about $534,000) fine. In severe cases, the perpetrator may be sanctioned by imprisonment up to five years and a 1,000,000 franc (about $1,070,000) fine.”
Singapore became the first Asian country to impose unilateral sanctions on Russia, by way of the Monetary Authority of Singapore (MAS), including on cryptocurrency transactions, for its invasion of Ukraine. The sanctions were detailed on the website of its Ministry of Foreign Affairs.
Jacqueline Ong, deputy director of communications at MAS, said to me in an interview: “The sanctions apply equally to all financial institutions (FIs) in Singapore, including digital payment token service providers. This is to ensure that Singapore’s financial system is impervious to attempts to circumvent the sanctions, given the extensive interlinkages among different players in the financial system. FIs dealing in cryptocurrencies are required to comply with the sanctions. All FIs must have robust controls such as procedures to know their customers and the beneficial owners of customers. They are required to screen their customers and their transacting counterparties to avoid dealing with prohibited entities or activities. If FIs have any information on prohibited entities or activities, they are required to inform MAS immediately. They are also required to demonstrate their compliance to MAS and are subject to scrutiny and inspection by MAS.” She also added:
“MAS will take appropriate regulatory action against FIs, including imposing financial penalties, if they are found to have breached the sanctions.”
Andrea Puccio, founding partner at law firm Puccio Penalisti Associati, explained:
“The EU crypto sanctions on Russia implemented on March 9 are intended to target crypto assets of Russian entities and individuals. According to European law, member states are responsible for the implementation of the EU crypto sanctions by providing specific civil or criminal penalties at the state level. For example, in Italy, Legislative Decree no. 221/2017 provides civil and criminal penalties for breaches of EU restrictive measures regarding export.”
Niklas Schmidt, a partner at law firm Wolf Theiss, added that “There is no loophole for sanction dodgers by using crypto in Austria. The Sanctions Act of 2010 (Sanktionengesetz 2010) regulates the implementation of sanctions of the UN and the EU. The act allows the Austrian national bank to freeze crypto assets of sanctioned individuals and entities, allows courts to note freezes of crypto assets in the companies register, allows the minister of the interior to impose travel restrictions on sanctioned individuals, etc. Most importantly, the Sanctions Act of 2010 provides for judicial and administrative penalties to be imposed on persons violating sanctions. The maximum penalty provided for is imprisonment of up to one year or a fine of up to 360 daily rates. The act also does not contain an obligation for administrative bodies to notify the EU Commission of the sanctions.”
The EU sanctions legislation contains a whistleblower provision, which member states may or may not have adopted into law. Puccio pointed out:
“Crypto assets seem to fall within the very wide definition of ‘financial services, products and markets, and prevention of money laundering and terrorist financing’ under Directive (EU) 2019/1937, which aims to protect whistleblowers who report breaches of EU law but does not provide financial rewards for doing so.”
Intersentia, a legal publishing house based in Cambridge, U.K., has said: “EU sanctions are used both against regimes and suspected terrorist financing. But these sanctions have developed ‘organically,’ without sufficient thought being given to certain basic issues. […] This has resulted in considerable litigation before the Court of Justice (CJEU). The new legal basis and the recent judgments from the CJEU have solved some difficulties, but ‘taking sanctions seriously’ means new problems for national implementation, spanning over a variety of areas: criminal law, constitutional law, international law and European law” — and perhaps, when enacted, the Markets in Crypto-assets (MiCA) regulation as well.
On March 14, the Economic and Monetary Affairs Committee voted in favor of the proposed MiCA legislation, which will sustainably regulate digital assets, making it easier for crypto firms to expand throughout the EU’s 27 member states by facilitating a “passportable” license that would be valid between countries once ratified. The next step for MiCA will be informal negotiations between the European Parliament, European Commission and European Council. When they reach a consensus, the law will be enacted with a six-month transition period for all EU member states to regulate all crypto-asset issuers and service providers — excluding CBCDs.
After issuing a report in 2021, the Bank of England has begun developing a crypto-asset regulatory framework.
Jonathan Brogden, partner at law firm DAC Beachcroft, explained to me in an interview: “As a matter of U.K. sanctions law, although not specifically named, there is no doubt that crypto assets fall within the very wide definition of ‘economic resources,’ which make crypto assets subject to the U.K. sanctions regime. The U.K. regulator, the Financial Conduct Authority (FCA), recently issued guidance that confirms its view that financial sanctions regulations treat crypto assets the same as other forms of assets. The use of crypto assets to attempt to circumvent economic sanctions would amount to criminal offenses under both U.K. money laundering and sanctions regulations. Registered U.K. crypto-asset firms have been contacted by the FCA recently and reminded of the application of sanctions. There are obligations on regulated firms to report suspicious activity to the U.K. regulatory and criminal authorities. Under the U.K.’s sanctions regime, if you know or have reasonable cause to suspect that you are in possession or control of the funds or economic resources of a sanctioned person, you must freeze them, not deal with them or make them available to, or for the benefit of, the sanctioned person, and report the circumstances to the authorities. The breach of U.K. sanctions is punishable by varying terms of imprisonment and fines as well as civil penalties.”
However, there are 150 unregistered crypto firms in the U.K. that can avoid sanctions regulation, according to Annabel Goulding and Michael Ruck of law firm K&L Gates.
Danielle Prenevost of the Canadian Securities Administrators explained to me: “On March 14, the Canadian Securities Administrators (CSA) issued a statement imposing crypto sanctions by amending the Special Economic Measures (Russia) Regulations, which are applicable to all crypto market participants — including issuers, marketplaces, clearing agencies, custodians, all categories of registrants, including crypto-asset trading platforms, and pension, investment and mutual funds and their managers. The CSA took this step to encourage all market participants to do their due diligence and consider obtaining expert advice to understand, follow and continually monitor their obligations under the regulations.”
Tae Young Bae, a reporter for the Association of Certified Sanctions Specialists, highlighted that Canadian sanctions law had not been meaningfully enforced up until now.
On March 14, citing Russia’s potential ability to rely on crypto to bypass sanctions, Japan’s Financial Services Agency announced sanctions on digital assets, with noncompliers subject to penalties such as imprisonment of up to three years or a fine of 1 million yen (around $8,100).
On March 11, the United States Treasury Department issued new guidance clarifying that the Office of Foreign Assets Control’s Russia-related sanctions extend to cryptocurrencies. It later followed up with additional Russian Harmful Foreign Activities Sanctions on March 24.
The Treasury Department’s announcements came after it earlier published new regulations to address the Russian sanctions on March 1. The Department of Justice established Task Force KleptoCapture on March 2 to enforce the sweeping sanctions.
On March 9, U.S. President Joe Biden signed his Executive Order on Ensuring Responsible Development of Digital Assets, with Russia’s invasion of Ukraine having elevated crypto’s national security significance. The executive order highlights the importance of digital assets in retaining the United States’ technological leadership in a world of increasing competition and striking the right balance between sustainably fostering innovation, protecting investor rights and mitigating the national security risks posed by the illicit use of digital assets. The executive order further requests a set of interagency reports from a wide range of executive branch stakeholders, including the Federal Reserve, which earlier released a report about CBDCs.
The Committee on Banking, Housing and Urban Affairs held a hearing on March 17 titled “Understanding the Role of Digital Assets in Illicit Finance,” which focused on how digital assets are used in the Russia–Ukraine War.
Emin Gün Sirer, founder and CEO of Ava Labs, pointed out to me:
“Cryptocurrencies — including tumblers or mixing services — would be a poor tool for evading Russian sanctions for two reasons: (1) There is transparency available in understanding in real time what flows are occurring in the entire cryptocurrency economy; (2) There just isn’t the liquidity to run a G20 economy with cryptocurrencies.”
Some crypto industry participants have been reluctant to implement the OFAC’s sanctions compliance guidance, which has cross-border reach. Dean Zerbe, partner at law firm ZMFF&J and co-author of the U.S. tax regulations for whistleblowing, said the G7, EU, Singapore and Switzerland “need to learn what the U.S. already knows — whistleblowers are critical in uncovering and exposing hidden money.” He also added: “Efforts to go after the crypto of Russian oligarchs must include a robust program to reward whistleblowers. A small army of lawyers, accountants, crypto brokers and bankers are involved in helping the oligarchs hide their money.”
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Selva Ozelli, Esq., CPA, is an international tax attorney and certified public accountant who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.