Whenever a country is sanctioned, its traditional banking institutions are the number one target. This is the same thing that happened recently with Russia when the EU, NATO, the US and many other democratic countries decided to impose tough economic sanctions for invading Ukraine. Now Washington is considering cryptocurrencies as a possible tool for sanctions against Russia.
It has been more than a week since sanctions against Russia came into effect. The official currency, the ruble, has seen a significant drop of about 40% and economic analysts and experts predict that the Russian economy is likely to fall by over 5%.
Due to the increasing panic associated with economic pressure from abroad, President Vladimir Putin has held emergency meetings with his senior economic experts after the country's official currency fell to an all-time low against other currencies and the country's central bank raised interest rates to about 20% in an effort to lower inflation. The Central Bank of the Russian Federation told the public that the stock exchange would be closed for a few days.
Due to the surge of distrust in the country's banking system, cryptocurrencies like Bitcoin and Ethereum became a tool for international money transactions for Russian citizens and formed an important part of the financial system. The U.S. now believes that an attack on Russia's access to cryptocurrencies would further weaken the country.
Ukraine's First Deputy Prime Minister Mykhailo Fedorov issued a tweet calling on all cryptocurrency exchanges worldwide to block the addresses of users from the Russian Federation and Belarus. However, some exchanges, including KrakenFX, have rejected Fedorov's request. Kraken co-founder and CEO Jesse Powell stated that the exchange cannot freeze the crypto wallets of its Russian and Belarusian users unless there is a legal requirement for it to do so.
The White House National Security Council and the Treasury Department under the Biden administration are also calling on operators of major cryptocurrency exchanges to ensure that Russian citizens, companies and organizations do not use cryptoassets to circumvent sanctions imposed by Washington, according to a report by Bloomberg.
However, freezing cryptocurrency transactions appears to be a challenge, as cryptocurrencies are private and borderless in nature, and the majority of cryptocurrencies do not fall under a financial system regulated by the central authority.
While tokens are not a substitute for the USD, which is prevalent in Russia, the Biden leadership is still wrestling with how to handle this asset class, fearing that countries could use cryptocurrencies to circumvent the regulated traditional financial system.
In addition to excluding Russian banking institutions from the SWIFT messaging network that allowed its financial institutions to connect to the universe, U.S. authorities are adamantly cracking down on any misuse of cryptocurrencies to circumvent sanctions.
So far, according to a Binance spokesperson, the exchange is considering identifying and blocking only the crypto wallets of sanctioned Russian officials and users in the U.S. and the Bahamas, where the company's headquarters are located.
Coinbase has also begun blocking crypto transactions originating from the banned wallets or addresses identified by the U.S. Treasury Department's Office of Foreign Asset Control, as well as any addresses identified by the exchange as being owned by the sanctioned Russian institutions or individuals.