Bitcoin regulation and the war in Ukraine. A review of expert opinions

Bitcoin regulation and Russia's assault on Ukraine

The role of cryptocurrencies such as Bitcoin was a key talking point during the first days of the Russian invasion of Ukraine. It was an important topic during the introduction of sanctions and the subsequent financial market turmoil.

• Can cryptocurrencies such as bitcoin be used by Russia to avoid sanctions? Is bitcoin regulation required - and will it happen? This is one of the major questions raised by the war with Ukraine.
• Experts point to the ease of identifying transactions and the lack of liquidity as reasons why it would be very difficult for Russians to use cryptocurrency to avoid sanctions.
• A debate has also flared up over whether bitcoin has earned the status of "digital gold" as a result of the war.

The dictator's armed assault on Ukraine has moved the world to find answers to 3 fundamental questions. The first is:

Can human rights violator Putin use cryptocurrencies to evade sanctions?

As is widely known, after the invasion of Ukraine, Russia was subjected to a series of economic sanctions aimed at cutting it off from the global financial system.

Key Russian personalities and financial institutions have been placed on the U.S. sanctions list, effectively barring American companies from doing business with them. Meanwhile, the United States, European allies and Canada have removed key Russian banks from the interbank transfer system called SWIFT, which now prevents Russia from accessing global financial markets. Let's mention right now that Bitcoin ATMs bitcoin, such as those Bitcoin ATMs in Warsaw, do not operate on the SWIFT protocol.

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The sanctions caused the Russian ruble to plummet and the country's economy to collapse.

Cryptocurrencies unregulated Putin's way to avoid sanctions?

It has also led to a debate about whether cryptocurrencies, especially Bitcoin, can be a way for those on sanctions lists to circumvent restrictions.

This is because bitcoin and other digital currencies are often decentralized, meaningthey are not issued or controlled by a central entity such as a central bank. When crypto is sent to other users, it does not go through a traditional process that can be regulated. Nor is there a building to be destroyed or seized here, as is the case with the central banks of countries such as Ukraine.

However, there are a number of challenges for someone who wants to use cryptocurrencies to circumvent sanctions.

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First, blockchain, the technology on which bitcoin is based, is like a public ledger of transactions. It makes it fairly easy to track the movement of funds from one account to another. This does not make it a good tool for avoiding sanctions.

"The biggest misconception about cryptocurrencies is that they are undetectable and are mainly used for nefarious purposes - which is not true." 

- Vijay Ayyar, vice president of corporate development and international crypto exchange Luno, announced to CNBC.

Meanwhile, Russian oligarchs and companies do not have enough liquidity to be able to turn their money around.

"Liquidity in cryptocurrencies is still a fraction of the global foreign exchange market, so moving large amounts of money via cryptocurrencies is difficult." 

- Ayyar said.

Cryptocurrency exchanges will also be on high alert.

Cryptocurrencies undergo global test

A defining moment for cryptocurrencies is said to be taking place. Russia's invasion of Ukraine is a test of both the blockchain system and the value placed on it in difficult times.

"Exchanges that operate according to moral codes of conduct will undoubtedly be doubly wary of funds that have suspicious origins - Russian ones - at this point." 

• Charles Hayter, CEO of CryptoCompare, told CNBC.

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On Thursday, Brian Armstrong, CEO of cryptocurrency exchange and wallet Coinbase, backed up this statement. He said that every business in the US must comply with the law, both exchanges.

"It doesn't matter if your company deals in dollars, cryptocurrencies, gold, real estate or even non-financial assets. Sanctions laws apply to all people and companies in the US." 

- Armstrong said.

"So it would be a mistake to think that crypto companies like Coinbase will not comply with the law. Of course we will. That's why we check people who sign up for our services against global watch lists and block transactions from IP addresses that may belong to sanctioned individuals or entities, just like any other regulated financial services company."

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However, according to CryptoCompare, since Russia's attack on Ukraine, there has been a surge in transactions from the ruble to bitcoin, and so-called stablecoin pegged to the US dollar. Hayter said this is "a flight to the dollar by any means possible, where cryptocurrencies are just another way to avoid losing your livelihood.

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Armstrong of Coinbase said.

 "Mainly ordinary Russians are using cryptocurrencies as a lifeline now that their currency has collapsed."

Is Russia able to avoid sanctions with crypto?

Earlier this week, lawmakers, including Senator Elizabeth Warren, called on the Treasury Department to make sure crypto companies comply with sanctions on Russia. A U.S. government official said it was unlikely that Russia could evade sanctions using cryptocurrencies.

"The scale it would take for the Russian state to successfully bypass all US and partner financial sanctions are almost impossible to bypass with cryptocurrencies."

- Carol House, director of cybersecurity at the National Security Council, said during a webinar on Wednesday, Reuters reported.

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Is bitcoin just becoming "digital gold"?

For years, supporters of bitcoin have called the digital currency "digital gold." The idea is that bitcoin can be a "safe haven," or a stable store of value in volatile times of global market turmoil - just like gold.

These approaches have not worked out in practice in recent years, as bitcoin trading has been associated with risk assets, particularly stocks, more so than gold. Will the timing of the conflict change this?

As the war in Ukraine escalated this week, bitcoin saw a huge one-day spike, prompting speculation that its time as a "safe haven" or "stable medium of value in unstable times" had come.

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Several experts disagreed. First, Lux Thiangarajah's opinion.

"We have read in several different publications that BTC is regaining its status as a secure medium of value. We completely disagree with this view."

- Lux Thiagarajah, head of trading and account management at cryptocurrency services firm BCB Group, said in a memo on Thursday. Does the opinion stem from fear of outlawing cryptocurrencies that are part of BCB Group's business model?

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"A safe and stable medium of value is an asset that retains its value in times of market turmoil. Crypto sold off aggressively as it became clear that the FED (Federal Reserve System) was going to raise rates faster than expected, which in turn caused stocks to sell off. Any asset reacting so violently is not the definition of a safe medium of value, so we also can't compare bitcoin to gold right now."

Ayyar of Luno recently commented on Bitcoin: 

"The public's approach to Bitcoin has changed slightly - shifting the definition towards stocks and gold, which is a positive, albeit weak, indication regarding its use as a safe carrier of value during Putin and the oligarchs' war against Ukraine."

He added that bitcoin will continue to mature and grow over the coming weeks and months, taking away market share from gold, but this narrative is tied to the redefinition of bitcoin

Has blockchain technology proven its utility in times of conflict?

Cryptocurrency advocates often extol blockchain as a way to make transactions more efficient and traceable. One reason is that, unlike traditional financial transactions, there is no middleman to transfer money.

However, many cryptocurrencies still suffer from high fees and low transaction speed. No one expects mass adoption of such entities for payments.

However, during the war, Ukraine began accepting donations via cryptocurrencies to fund its military, among other things. According to analyst firm Elliptic, Ukraine has raised more than $50 million through cryptocurrencies.

Accepting donations through traditional banking methods can be difficult, given the high cost of sending money abroad. It can also take a long time to receive money through Ukraine.

Here, cryptocurrencies have an advantage - at least according to Garrick Hileman, a guest at the London School of Economics.

"When critical infrastructure is unavailable or there are concerns about how quickly something can go through the traditional banking system, you always still just have the Internet and a computing device from which to transact. That's one of the huge advantages of cryptocurrencies."

- Hileman said.

In conclusion, cryptocurrencies do not require the existence of banking in the country. Even if computers and buildings are destroyed or seized, cryptocurrencies will continue to exist.

Because the transactions are on the public ledger, said Hileman, you can see to some extent where the money you send goes, and how it is used once you receive it.

"This is the time when we realize the previously hidden value of cryptocurrencies."

- He added.

"We were not aware of some of the features of Bitcoin before, that is, before the dictator's armed aggression against Ukraine."

Now, these previously unnecessary features are coming to light - especially the independence of BTC from the institution of a bank in a country where the institution's building can be destroyed or seized. In this sense, cryptocurrencies remain above the conflict between Russian oligarchs and the civilized world.

Can cryptocurrency be regulated?

Currently, cryptocurrencies are regulated in the US by several institutions: CFTC, SEC, IRS, which makes it difficult to create overarching regulatory guidelines. In short, Bitcoin can be regulated. In fact, its regulation has already begun with the introduction of strict KYC and AML (anti-money laundering law) regulations. In this sense, Bitcoin is regulated, while absolute control of this virtual asset is impossible.

Why isn't bitcoin fully regulated?

Bitcoin is not regulated because it operates on a distributed network, meaning it exists simultaneously in many different locations. This makes it very difficult for a single regulator to enforce the law on it. This means that no government or third party can simply take over some office or building responsible for BTC.

Will Joe Biden regulate cryptocurrencies?

President Joe Biden on Wednesday signed an executive order directing agencies across the federal government to coordinate efforts to regulate cryptocurrencies and other digital assets.

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What is the Executive Order on Ensuring Responsible Development of Digital Assets submitted by Joe Biden?

Biden's "Executive Order" focuses on updating U.S. financial regulations to address the problem of unregulated cryptocurrencies, specifically by ordering federal agencies to examine cryptocurrencies and propose new rules to regulate them. The regulatory process has been accelerated as a result of Putin and Russian oligarchs' armed assault on Ukraine.

In conclusion, how are cryptocurrencies regulated?

Cryptocurrencies are regulated so that only cryptocurrency withdrawals to traditional currencies are taxed and transactions require verification of the identity of the buyer or seller.

Is bitcoin regulated in Russia?

Bitcoin is being regulated in Russia. The Russian Finance Ministry has proposed new regulations on the use, investment and digging of cryptocurrencies. The bill mentions new regulations for Russians investing in cryptocurrencies and the platforms that allow them to do so. The new law reiterates the central bank's suggestion to ban the use of cryptocurrencies as currency in Russia.

What is Russia's position on cryptocurrencies?

On the one hand, the Central Bank of Russia has proposed banning cryptocurrency operations, calling for a ban on cryptocurrency issuance and operations, stopping banks from investing in them, and blocking the exchange of cryptocurrencies for non-government-backed currencies.

However, information about Russia's attitude is contradictory, as Putin is likely trying to ban and censor information about cryptocurrencies, and direct its citizens to CryptoRuble (maximum centralized token, controlled by the government) projects.

For example, on Feb. 8, 2022, the Russian government approved the legalization of cryptocurrencies and said the regulation would bring the crypto industry out of the gray zone and create opportunities for legitimate business activity. Could it be that this was an action planned before the attack on Ukraine to leave a wicket in case of anticipated sanctions?

Which place in the world does Russia hold in terms of cryptocurrencies?

According to one index, Russia ranks 18th in the world in terms of cryptocurrency adoption, according to Chainalysis, and Bloomberg estimated that it is home to at least $214 billion worth of cryptocurrencies, or 12% of the industry's total value.

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Is Russia using PayPal?

"Under the current circumstances, we are suspending PayPal's services in Russia," President and CEO Dan Schulman said in a statement. He added that the company "supports the international community in condemning Russia's brutal military aggression in Ukraine."

Does bitcoin have its own regulations?

The Bitcoin cryptocurrency has raised financial concerns for governments around the world. Despite its use to buy goods and services, there are still no uniform international regulations governing Bitcoin. Regulation is difficult because there is no single office, authority or country responsible for cryptocurrencies.

Which countries have decided to outlaw cryptocurrencies?

Nine countries have decided to ban and outlaw cryptocurrencies - Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia - now have a complete ban on cryptocurrencies, according to a November 2021 Congress Library report.