Sanctioning Russia On The Blockchain: Following The Money To | Crypto Shake
Sanctioning Russia On The Blockchain: Following The Money To A Network Of OTC Providers
Sanctions can only work if those who are supposed to enforce them understand exactly what to do so that they cannot be circumvented easily. Russia's extensive network of Over-The-Counter (OTC) providers requires an extensive review by sanction committees, as they might be adopted to circumvent sanctions.
As described in the previous release, due to the limited liquidity of cryptocurrencies and Decentralized Finance space in general, it remains close to impossible for Russia to circumvent SWIFT-based systems by using crypto. However, Russians might still hold up to $200 Billion USD in crypto assets, besides running the third-largest crypto mining industry in the world. These funds can potentially be cashed out with Russian OTC providers.
The fifth EU sanction package on Russia limits the crypto asset holdings of Russian nationals, individuals, and legal entities established in Russia to €10,000 (with the same account, wallet or custody provider). The use of Russian OTC providers, which represents a network of physical providers offering cash payouts from crypto, could be adopted to circumvent these sanctions.
In oversimplified terms, OTC refers to a process in which individuals theoretically could agree on a price and meet to complete a transaction. An example of such a process could be a personal meeting in which one side brings bags with cash or any other pre-agreed means of value, and the other side could conduct a transaction on the blockchain on the spot. Transactions primarily with larger sums of money could be risky, to say the least. Contrarily to peer-to-peer exchanges (P2P) which involve independent parties, OTC exchanges act comparable to physical pawn shops. At dedicated physical locations with announced opening hours, individuals can visit and exchange their cryptocurrencies in Russia for cash or bank transfers.
Depending on the business models of virtual assets service providers (VASPs), both OTC and P2P providers have existed in various jurisdictions since the beginning of financial interactions between individuals. An example of such a platform in the EU is LocalBitcoin, registered with the Finnish Financial Supervisory Authority. Unlike Russian OTC providers which are subject to the 6th Anti Money Laundering Directive of the EU and connected to its so-called Counter-Terrorism Financing (CTF) legislation, LocalBitcoin is a unique case.
Existence of such a platform in the EU is only possible in Finland, as the rest of the EU has followed the recommendation of the Financial Action Task Force (FATF) to define and include Digital Assets in the national legislation and created an oversight program as a regulator. It can be argued that the current regulatory frameworks remain far from perfect, but there is increased interest in incorporating DeFi into traditional financial compliance programs.
Such requirements to register a P2P or OTC exchange are way different within the Russian Federation. On the one hand, Russia approved use of cryptocurrency as an investment tool or a payment method as of Q1 2021 but on the other its national bank proposed a long list of bans that should outlaw the circulation of cryptocurrencies within the country.
Due to such unclear legal circumstances, licensing and supervisory programs are close to non-existent. In the absence of platforms that have chosen 'compliance excellence' as their differentiating business strategy, for example, Coinbase or some Scandinavian VASPs, many Russian providers have to operate in the gray space to say the least.
What is surprising is the fact that even though Russians store up to one fifth of the national bank's reserves in digital assets, the public side has decided to not provide much clarity for the VASPs or any other players in Decentralized Finance (DeFi).
