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How the Ukraine conflict became a turning point for cryptocurrency

The supposedly borderless form of money has collided with the reality of international sanctions spurred by a major European conflict.
Image: Ukrainian soldiers in Irpin, Ukraine
Ukrainian soldiers Thursday near the recently collapsed bridge that was the target of a Russian missile near Irpin, Ukraine. Wolfgang Schwan / Anadolu Agency via Getty Images

Many major cryptocurrency exchanges put forth defiant statements this week when Ukraine asked them to freeze any accounts belonging to Russians, with some exchanges calling upon crypto’s history of libertarian ideals to back up their decisions.

More quietly, however, many were complying with the sanctions plan aimed at devastating the Russian economy.

The gap between the words and actions of crypto’s biggest players points to the challenges that the crypto community now faces as a mainstream industry in the midst of a geopolitical and humanitarian crisis — one that now looks like a defining moment for cryptocurrencies such as bitcoin and ethereum.

On the Ukrainian side, digital coins have lived up to their reputation for easily moving money across international borders, as sympathizers with the Ukrainian cause have raised the equivalent of more than $54 million through cryptocurrency donations.

But on the Russian side, the supposedly borderless form of money has instead collided with the reality of international sanctions spurred by a major European conflict — and also the moral question of whether participants in the crypto markets could unwittingly help fuel a war of aggression or help Russian oligarchs preserve their wealth.

In between, cryptocurrency exchanges and bitcoin hard-liners — both of whom have espoused what they say is the libertarian ethos embedded in crypto — have had to wrestle with tough questions about just how much they want to embrace a technology that critics argue has little practical value aside from money laundering and investment hedging while requiring huge amounts of electricity and the burning of fossil fuels.

And they’ve also had to confront the reality that making crypto into big business means accepting things like international sanctions.

“There is a libertarian strand that runs through cryptocurrency, but I think the pushback many people in crypto have is against dragnet surveillance and extrajudicial seizures,” said Ryan Selkis, CEO of Messari, a crypto research and data firm. “We all respect the rule of law and respect the system we’re operating under.”

Crypto in recent years moved from a fringe technology to the kind of mainstream industry that pushes multiple Super Bowl ads from companies backed with hundreds of millions of dollars of investment. The underlying blockchain technology relies on distributed computing power to create public and unbreakable digital ledgers that can track who owns what without a central authority. 

One question now is how much of crypto’s anti-authority streak is still a reality, and how much is carefully chosen marketing slogans. 

At the start of the sanctions against Russia, one of the most strident statements came from Binance, the world’s largest crypto exchange. A Binance spokesperson told CNBC on Monday that limiting Russians’ access to crypto “would fly in the face of the reason why crypto exists.”

But by Friday, Binance CEO Changpeng Zhao was striking a different tone, saying in a 1,500-word blog post that the company applies the same sanctions rules as the banks and noting the company’s fundraising efforts. (Binance donated $10 million for humanitarian needs.) 

“Why won’t Binance go one step further and sanction/freeze all Russian users’ assets?” Zhao wrote. “The most important point: we don’t think we have the authority to do so.” 

Other major exchanges have also clarified that they would comply with U.S. and European sanctions, just not go further than the laws required. The U.S. Treasury Department has not accused any exchange of being out of compliance. 

Experts have said that Russian President Vladimir Putin won’t be able to use virtual currency to evade sanctions on a large scale, because even at $2 trillion the crypto market isn’t big enough and crypto exchanges have compliance departments dedicated to catching money laundering. 

“We have a number of sophisticated tool sets that allow us to understand who are sanctioned individuals, sanctioned nations, be able to track cryptocurrency and fiat deposits and withdrawals, and make sure that we block those users, as we have been doing since our inception,” Brett Harrison, the president of exchange FTX.US, told CNBC. 

The reality of virtual currency is different from how early technologists imagined it — as something so powerful that governments could never touch it. 

“Various criminal and foreign elements will be active users of CryptoNet. But this will not halt the spread of crypto anarchy,” physicist Timothy May wrote in “The Crypto Anarchist Manifesto” in 1988, two decades before the introduction of bitcoin made the idea a reality.  

A fabled outlaw image may once have benefited digital coins by adding to their allure, but that image is now a potential liability as regulators and lawmakers swarm around the community. 

Cryptocurrency-linked crime hit a record last year, with illegal addresses receiving $14 billion in digital currencies, according to research firm Chainalysis, although that represented 0.15 percent of total crypto transaction volume. 

This may be a moment for longtime crypto critics to achieve what they’ve wanted: stricter regulation of cryptocurrencies, which they see as an end run around traditional securities market regulation. 

Sen. Elizabeth Warren, D-Mass., this week joined three other Democratic senators in sending a letter to Treasury Secretary Janet Yellen seeking reassurance that Putin wouldn’t be able to use digital coins to evade sanctions. 

“Cryptocurrency can allow financial criminals, drug dealers, and tax cheats to move money around in the shadows — potentially opening the door for Putin and his cronies to evade the economic sanctions that serve as the centerpiece of the international response to Russia’s invasion of Ukraine,” Warren said in a statement to NBC News. 

“Financial regulators need to address this urgent threat to ensure that crypto doesn’t undermine our national security,” she said. 

But the criticism of cryptocurrency has also come from Republicans, adding possible bipartisan momentum to the push for regulation. 

“Cryptocurrency is rearing its ugly head here,” Sen. Lindsey Graham, R-S.C., said this week after a classified briefing on the Russia-Ukraine conflict. He said he was worried about Russians using virtual currency to evade sanctions. 

Jerome Powell, the chairman of the Federal Reserve and a Republican, has repeatedly called for new U.S. laws to govern the crypto industry, a position that he reiterated Wednesday in congressional testimony. 

In defending cryptocurrency, its advocates have emphasized the plight of everyday Russians who had no say in Putin’s decision to send troops into Ukraine. 

“If you’re a middle-class Russian right now and your entire financial system has been seized and blocked, is it legitimate for you to be able to put $100 or $1,000 of your savings into a crypto hard wallet that you could take with you if you’re leaving the country with the clothes on your back?” Selkis said. 

“That is something that should be celebrated,” he said.  

It’s not clear how many Russians are in that situation, but it’s certainly a minority. Russia ranked 18th out of 154 countries last year in a Chainalysis report on the grassroots adoption of cryptocurrency, and a more recent report showed Russians have not been flocking to crypto in recent weeks.

Worldwide, retail investors in cryptocurrency are increasingly being overshadowed by hedge funds and other institutional firms

The overall effect of the Russia-Ukraine conflict may be to separate crypto myth from reality, something that’s been happening already in the past couple years. 

U.S. authorities have partially unraveled the often-repeated crypto mantra that digital coins are “unconfiscatable,” seizing $3.6 billion in bitcoin in one confiscation last month. Agents in that case used a search warrant to obtain access to an online account where one of the alleged thieves kept the private keys required to access his digital wallet. 

People who own cryptocurrency can add layers of security to make government seizures more difficult, including storing their coins offline in a device known as a “cold wallet” or “hard wallet.” People can then take those devices around the world. 

But for Russians who might want to obtain such a device now, even that has become more difficult. 

“We are not delivering into Russia,” said Kristýna Mazánkov, a spokesperson for Satoshi Labs, which says it has sold more than 1 million of its Trezor crypto wallet. She said the company halted shipments immediately after the imposition of sanctions. 

Satoshi Labs is based in the Czech Republic, where Mazánkov said sympathy for Ukraine runs high. In 1968, the then-Soviet Union invaded the country known as Czechoslovakia. 

“Bitcoin is very apolitical,” she said. “I would like to imagine that bitcoin is a solution for different situations, and that it will stay that way.” But she said some company employees have connections to the conflict that make it personal. “We are touched by the situation in Ukraine.”