Regulators Looking to Tighten Sanctions - Should They Target Crypto?

As Russia's invasion of Ukraine has sustained over recent weeks, there's been much talk over the role that crypto is playing on both sides. On the one hand, crypto has provided a lifeline to the Ukrainian military and humanitarian efforts. In the first two weeks following the invasion, donors poured over $100 million into the addresses the Ukrainian government had opened, especially for the purpose of fundraising.

These funds have proven critical in the government's fight against the invading Russian forces. Fiat donations must be paid via intermediaries, which takes time and often costs extra in fees, which can be high depending on where in the world the funds are coming from. In contrast, crypto funds are immediately liquid and are already being spent on defensive equipment. Alex Bornyakov, the deputy minister from the Ukrainian Ministry of Digital Transformation, has spoken of how President Zelensky shares the vision that crypto could represent a "breakthrough from an economic standpoint."

However, Bornyakov has also requested that crypto businesses cease trading for Russian customers, citing collaborative efforts of Western governments to squeeze the country economically. His request reflects a broader concern cited by EU officials, who have been discussing ways that the bloc can "further increase the effectiveness" of the sanction to avoid individuals attempting to bypass the measures – including with crypto.

Bad Timing for Crypto Regulation

For the cryptocurrency community, this question of whether digital assets are a sanction-evading tool couldn't come at a trickier time, given that both the US and the EU are currently pondering respective versions of cryptocurrency regulation. On March 9, President Biden signed an executive order that directed the US federal government to develop a plan to regulate cryptocurrencies.

Over the pond, on March 14, the EU parliament passed a vote on its Markets in Crypto Assets (MiCA) framework that narrowly avoided outlawing proof-of-work mining in the bloc. Neither of these moves are expected to go as far as a draconian ban on trading crypto, but the backdrop of the Russian sanctions and talk of the need for regulation to stop evasion creates a worrying narrative for the largely libertarian crypto community.

However, there are good reasons to believe that these concerns are unfounded. Firstly, as Binance CEO Changpeng Zhao points out, crypto is likely too small a market to have any meaningful role in propping up the Russian economy, around 0.3% of the total net worth by his reckoning. Reinforcing CZ's view, if there had been a mass pile-in to the crypto markets by the hundreds of very wealthy Russians who are now facing sanctions, we could expect crypto prices to be skyrocketing right now, which they aren't.

Besides, the main protection that crypto has against regulation is its open and decentralized nature, which makes it virtually uncensorable. Regulators can compel centralized exchanges and cryptocurrency companies to undertake KYC checks, which serve a necessary purpose in helping to enforce the law and prevent crypto from being used as a means of laundering stolen or sanctioned money. However, over Bitcoin's lifetime, there has never been a way to stop someone from participating in an open, decentralized cryptocurrency or blockchain ecosystem.

Community-Driven Projects Gain Resilience

Over recent years, the DeFi community has been working hard to bring the vision of a crypto-based financial system to life. Creating projects like Pangolin, which are free of centralized ownership and governed by communities, has been a huge part of that.

Pangolin was created by AvaLabs and launched in early 2021 with the vision of becoming the flagship DeFi app and DEX on the Avalanche Network. From the outset, Pangolin's aim was to become community-driven. By May 2021, development had transitioned to an independent team. Today, the project has over $170 million in total value locked, with over 5,000 daily users and 30+ partnerships.

Like many DeFi projects these days, Pangolin launched with a governance token distributed according to a fair launch model as a way of reinforcing its commitment to being user-driven. No PNG tokens are allocated to the team, investors, advisors, or any sort of insiders. Therefore, Pangolin is entirely community-driven and entirely community-owned.

Pangolin is no longer the biggest exchange on Avalanche, but it remains the most trusted and well-known protocol, with the support of the broader Avalanche community – which in DeFi terms is a critical factor for success. Herein lies the challenge when it comes to regulating or censoring cryptocurrencies and DeFi protocols. They exist as immutable smart contracts on a decentralized blockchain network. They can't be deleted or stopped. And with a decentralized, distributed community of token holders and developers who are committed to future operation, it's all but impossible to introduce true censorship.

Crypto’s Vital Role in Rebuilding

During difficult economic times, people will turn to crypto and DeFi because it offers a highly liquid, borderless means to transact.

Although it's too early to say what will happen with regard to any possible end to the current conflict, it seems realistic to think that crypto can continue to play a positive role in helping to rebuild Ukraine, allowing the government and aid organizations to get funds where and when they're needed, and support the recovery effort. Meanwhile, a sensible approach to enforcing sanctions will focus on the reality of where sanctioned funds are held - in traditional banks and physical assets.