Voice of the Industry

How sanctions against Russia complicate cryptocurrency acceptance

Tuesday 24 May 2022 08:30 CET | Editor: Claudia Pincovski | Voice of the industry

As sanctions against Russia continue to impact the country, MRC explains how cryptocurrency provides an extra layer of obfuscation for those who wish to bypass traditional means of currency transfer.

The 2022 conflict triggered by the Russian invasion of Ukraine has had far-reaching humanitarian, political, and financial repercussions. As the global community discerns the best path forward in mitigating these impacts, sanctions are being used as an alternative to further escalating physical conflict.

The most recent set of sanctions imposed by the G7 (Canada, France, Germany, Italy, Japan, UK, and the US) against the Russian government, banks, and high-profile members of the Russian political apparatus are extensive.

According to a press release from the US Treasury Department, ‘Treasury is taking action against Russia’s top financial institutions, including sanctioning by far Russia’s two largest banks and almost 90 financial institution subsidiaries around the world. Treasury is also sanctioning additional Russian elites and their family members and imposing additional new prohibitions related to new debt and equity of major Russian state-owned enterprises and large privately owned financial institutions.’

In addition to the above, another significant penalty was recently imposed; the banning of several Russian banks from SWIFT, (Society for Worldwide Interbank Financial Telecommunication) to further isolate Russia financially.

The strategy appears to be working as intended, with the coordinated efforts of governments and some of the world’s most valuable companies making a significant impact. Payment card networks Visa and Mastercard for example, have suspended operations in Russia, and have modified the way they handle disputes in the region as a result of these changes.

Disguising transactions with cryptocurrency

The sanctions have had a demonstrable impact on Russian businesses, the value of the ruble, and on the Russian people. Some Russian politicians and oligarchs, however, are reportedly using cryptocurrencies to bypass the sanctions and continue to engage with the global economy by skirting the control points governments primarily rely on to trace sanction violations – the transfer of money by banks.

Traditionally, global banks abide by the Know Your Customer (KYC) rules, which help validate customer identity. Cryptocurrency exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets rarely utilise the same standard of verification, potentially allowing users to move large sums of money anonymously.

Governments have made it clear; cryptocurrency falls under the same sanctions as other forms of payment and facilitating these transactions is considered a violation.

The US Department of the Treasury recently stated, ‘U.S. persons, including virtual currency exchanges, virtual wallet hosts, and other service providers, such as those that provide nested services for foreign exchanges, are generally prohibited from engaging in or facilitating prohibited transactions, including virtual currency transactions in which blocked persons have an interest.’

Cryptocurrency adds a new wrinkle to the enforcement of sanctions by providing an extra layer of obfuscation for those who wish to bypass traditional means of currency transfer. Merchants and members of the public that use cryptocurrency for legitimate reasons need to be aware they could potentially be unknowingly facilitating sanctions violations.

Accepting cryptocurrency responsibly

Any merchant or business that accepts cryptocurrencies should consult their legal and/or financial counsel on best practices. Every merchant’s payment infrastructure will be different, and there is no ‘one size fits all’ solution. What is certain is that penalties for facilitating sanctions violations will be substantial and ensuring airtight compliance should be a high priority.

In addition to deferring to qualified counsel, what follows are recommendations businesses should consider if they are involved with cryptocurrency in any capacity.

  1. While cryptocurrency ownership is mostly anonymous, implementing KYC rules before dealing in cryptocurrency will help protect the business. Utilising KYC rules may add friction to the customer checkout process, but legitimate customers will not have an issue and the merchant gets a balance of security, liability shift, and peace of mind. Any merchant already accepting cryptocurrency should review their processes with internal or external teams trained in compliance and related regulation. More companies than ever are implementing cryptocurrency transactions, and the importance of due diligence at every level of the acceptance process cannot be overstated. The White House recently provided more insight into what the future of cryptocurrency might look like. Even before the conflict, many companies implementing cryptocurrency payments began reviewing their acceptance policies as they await future regulations in an area that is highly likely to continue to change.

  2. If a merchant is considering accepting cryptocurrency, implementation should be thoroughly vetted and reviewed by all appropriate stakeholders, including legal, compliance, customer service, treasury, and any other team that may have useful expertise or insight into potential concerns.

  3. Solutions are emerging that enable merchants to trace cryptocurrency ownership and establish a level of confidence in the payer. Other services allow merchants to utilise KYC identity verification in cryptocurrency transactions. These verification methods have proliferated, in part, due to sanctions and the increased use of cryptocurrency to mask illicit transactions.

Some of the largest payment and technology companies in the world are investing in crypto tracing tools, further highlighting their importance to the future of payments.

Using these services to determine who is purchasing products with cryptocurrency could go a long way toward mitigating the risk of unintentional sanctions violations while simultaneously reducing fraud.

The future of sanctions and cryptocurrency

It may take time for regulators to figure out how best to trace the movement of cryptocurrency funds. Though the challenge is significant, it is important to remember all financial transactions on a blockchain are public facing and traceable, and even if an illegal transaction is not immediately detectable, the transaction history is recorded in perpetuity. The concept that cryptocurrency is truly anonymous seems to be fading, and it is likely that law enforcement agencies and other blockchain experts will continue to develop technology that increases transparency.

Keeping up with the rapidly evolving financial and technology landscape is a necessary part of utilising innovative financial instruments like cryptocurrency. Developing a proactive strategy for navigating complex obstacles such as international sanctions will serve any merchant well, especially as cryptocurrency continues to evolve as an increasingly viable alternative payment method.

About Julie Fergerson
Julie Fergerson, CEO of the Merchant Risk Council, has 25+ years of experience developing, delivering, and promoting Internet-based technologies.

About Leo Parrill
Leo Parrill has extensive experience with content marketing and copywriting in the payments, technology, and gaming industries.

About the Merchant Risk Council

The MRC is a global community connecting ecommerce fraud prevention and payments professionals through educational programs, online community groups, conferences, and networking events. As a non-profit organisation, the MRC is headquartered in Seattle, Washington, but embraces members from across the globe.

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Keywords: financial sanctions, Russia Ukraine War, cryptocurrency, banks, financial institutions, SWIFT, KYC, identity verification, cryptocurrency exchange, digital assets
Categories: DeFi & Crypto & Web3
Companies: MRC
Countries: Russian Federation
This article is part of category

DeFi & Crypto & Web3


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