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Russian users have not been barred from accessing the exchanges' services. However, technology exists that could assist them in adhering to their ideals and identifying rogue actors.
To oppose Russia's invasion of Ukraine, many corporations have pulled out of the country. Major bitcoin exchanges in the United States have so far refused, claiming that they will not do so unilaterally.
This is a principled stance that aligns with the cryptocurrency community's guiding spirit. After all, these markets are meant to be an alternative to those that are dominated by government policy. Cryptocurrency is a crucial instrument for ordinary folks in Russia, as it is in Venezuela and other places where the economy is in disarray, to resist financial dictatorship.
Max Galka is the founder and CEO of Elementus, a blockchain and crypto analytics startup based in New York.
This ethical stance is likewise defendable as long as the US Treasury Department and other financial regulators do not force crypto markets to leave Russia. Of course, if a federal ban on Russian access to U.S. financial markets is enacted, there will be no room for inaction or flexibility. All cryptocurrency exchanges based in the United States will be required to comply. Ignorance would not be an acceptable defense.
A third option
Between these two views, there is a third option that cryptocurrency markets should consider - one that would protect their essential ethos while tackling one of the most significant dangers to the crypto markets at large.
In this situation, it is worth the extra effort for the crypto community to investigate such possibilities. After all, Russia isn't simply another country with cryptocurrency users. According to one estimate, around 17 million Russians – or about 12% of the population – possess cryptocurrency (which is roughly 50% greater than the ownership percentage in the United States). These estimates may underestimate the use of cryptocurrency in Russia, which has seen the value of the Russian ruble plummet. By any metric, slapping sanctions on such a market would penalize everyone in a huge economy.
However, according to our estimations, Russia is the source of more than half of all problematic and illicit crypto and blockchain transactions. Five of the eight most destructive ransomware gangs are based in Russia, according to an Elementus analysis released last month, and the other three may have ties to the country as well.
This access to crypto exchanges is critical for ransomware and other illicit activity emanating from Russia.
Because of the strong libertarian mindset that bitcoin should be fungible and blockchains should be open, decentralized, and free from political interference, crypto exchanges have avoided barring unscrupulous actors for years.
More importantly, several exchanges argued, and correctly so, that they haven't had the tools to distinguish between good and bad actors and identify the sources of unlawful activity until now.
That isn't the case now. Financial institutions now have the technology to evaluate the blockchain of any cryptocurrency and determine who owns what and when — and to do it swiftly and efficiently. Many of these dollars have already been discovered and recovered, which comes as a shock to criminals who thought they could hide their money by moving ill-gotten gains into cryptocurrency.
Of course, no technology is perfect, and crooks are always one step ahead of the authorities. If they're employing "crypto laundromats" like mixers, tumblers, and coinjoins to disguise their footprints, there are limits to what existing technology can do to follow the digital breadcrumbs. The fact that the nature of technology often makes it difficult to establish a final judgment on the entities responsible for these crimes also plays a factor.
As a result, cryptocurrency exchanges have the choice of maintaining their ethical stance of not unilaterally excluding Russian consumers while simultaneously restricting access to criminal elements – and, if required, those responsible for Russia's actions in Ukraine. They can accomplish both while remaining true to their libertarian values.
A first step in the exchange process
Exchanges should take the first step in the appropriate approach by determining their unintentional exposure to various potentially dubious companies. If exchanges are required to cut off Russian government officials or big supporters as a result of sanctions, these markets must know who to target. Many Russian clients are neither government officials or war sympathizers and should be exempt from the sanctions.
Major exchanges can readily determine how many bitcoin transactions originated in Russia according to existing technology. If such crypto activity is illegal and linked to ransomware, darknet marketplaces, or other illicit conduct, wouldn't it be in the best interests of exchanges to restrict it, regardless of sanctions?
Those who shape the cryptocurrency markets – many of which are publicly traded and hence regulated – have an opportunity to get ahead of compliance-driven action and halt unlawful behavior coming out of Russia before it becomes widespread.
The debates might then focus on a principle worth defending.
Cryptocurrency is a value repository that is unaffected by government fiat and policy intervention. However, it is not – and cannot be – a safe haven for criminals to hide their loot.
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