Why do cryptocurrency exchanges continue to operate in Russia? Is this decision reasonable and what criticisms does it face?

The question of whether cryptocurrencies can help Russia evade economic sanctions has been the subject of much debate. Jerry Brito, Executive Director of Coin Center, summarized various discussions in the community and media over the past two weeks in an article, expressing support for the actions of current cryptocurrency exchanges. This is a translation; for any uncertainties, please refer to the original article.

Compliance of Cryptocurrency Exchanges with Sanctions

First of all, all cryptocurrency exchanges comply with sanctions obligations. What I mean is, if they don't comply, they will face existing penalties. All exchanges have also announced that they will do so, and no government official has mentioned their violations. Moreover, according to the attitude of government officials, they are not very concerned about cryptocurrencies. Here is the White House statement:

"The scale of the U.S. and partner sanctions against Russia is enormous, and cryptocurrency is nearly impossible to help them successfully evade. National Security Council cybersecurity director Carol House said in a webinar on Wednesday."

This is in line with the Treasury Department's earlier statement:

"The scale of what they have to move, and where they have to move it from, makes the use of cryptocurrency not necessarily a concern. Moving that amount of money through exchanges would create even greater volatility than what has been observed in the market recently." said Treasury Deputy Secretary's advisor Todd Conklin.

This makes me think about market trends. Although there has been a surge in cryptocurrency trading volume for the Russian ruble since the invasion of Ukraine, the amounts are only in the tens of millions of dollars. As the officials mentioned above, this is not enough to undermine the sanctions. Even if some sanctioned individuals want to convert their cryptocurrency into dollars or euros, they cannot do so under the supervision of exchanges. As I told the Washington Post on Thursday 3:

The scale of the sanctions we are seeing is quite significant, and the depth of cryptocurrency cannot reach the scale we are trying to prevent. If a Russian oligarch tries to move $10 billion, it will be obvious and noticed by industry insiders. Talking about cryptocurrency is just a red herring.

Criticism of Cryptocurrency Exchanges

Aside from some media and politicians who seem to intentionally ignore reality to draw attention or serve a specific agenda, I believe much of the confusion stems from cryptocurrency exchanges refusing to stop doing business with Russians.

You may be confused by now, as I just mentioned that exchanges comply with sanctions orders.

Indeed, exchanges do comply, but sanctions do not apply to ordinary Russian citizens. Sanctions only apply to certain banks and specific individuals. Nevertheless, many Western companies have voluntarily ceased all business with Russia. Some did so out of principle, but most did so under public pressure.

In particular, Ukraine's 31-year-old Deputy Prime Minister Mykhailo Fedorov has been urging Western companies to cut all ties with Russia on Twitter (as reported by Agence France-Presse).

"We need your help. In 2022, modern technology may be the best means to counter tanks, multiple rocket launchers, and missiles." said Mykhailo Fedorov in a letter to Tim Cook on Friday 25.

By Tuesday 2, Apple announced it was halting sales in Russia, and the use of Apple Pay was restricted.

With Apple's support, Mykhailo Fedorov has also accelerated his Twitter calls, now demanding Google, Netflix, YouTube, and Facebook to sever ties with Russia.

"There are millions of people online who want to do something for this war. So if Mykhailo Fedorov calls out certain companies and receives tens of thousands of likes and retweets, this will eventually catch the attention of the social media managers and CEOs of those companies." said Omar Wasow, assistant professor of political science at Cal Poly Pomona College.

On Sunday 27, Mykhailo Fedorov shifted his focus to cryptocurrency exchanges, demanding not only to block sanctioned officials but also to punish ordinary users. Subsequently, the Ukrainian government sent formal letters to several exchanges with the same request.

Unlike most companies, cryptocurrency exchanges have not been intimidated by public pressure. While they will comply with sanctions obligations, they will not actively sanction ordinary Russian citizens. The reason is simple: Russian citizens should not suffer for Putin's actions like Ukrainian citizens. Restricting their use of cryptocurrency is equivalent to cutting off one of their last means of safeguarding savings before the collapse of the ruble or the Russian fiat currency.

I think this is very annoying to those who do not respect the rule of law and are used to achieving their goals through threats. Former U.S. Secretary of State Hillary Clinton said last Monday 28:

I'm disappointed that some so-called cryptocurrency exchanges, not all of them, but some, are refusing to end their transactions with Russia to achieve some kind of liberal philosophy or whatever. Everyone, under the pressure of law or regulation, should now isolate Russia's economic activities as much as possible.

Hillary Clinton got some things right, but she also got some things wrong.

Are the Actions of Cryptocurrency Exchanges Correct?

She believes that libertarian ideals are not the only reason these exchanges do not sever ties with Russia, as ordinary Russian citizens may not support the Putin regime, and they could be strong allies of the Western world, targeting them with sanctions may not be a good strategy. At least that's what the Obama administration thought when they imposed the first sanctions on Russia after the invasion of Crimea. National Deputy Security Advisor Daleep Singh said in his testimony to the Senate:

Prior to 2014, the U.S. had never imposed sanctions on such a large country like Russia. It is the world's tenth-largest economy, with a GDP roughly equivalent to Italy's. More important than its size is the complexity of the Russian economy and its connections with other regions of the world. Whether in the past or present, Russia is systemically important in the global energy market, ranking second in natural gas and third in oil production. Its largest banks are as large and complex as Lehman Brothers before 2008. Given the high risks involved, our goal is clear: to design a menu of options that can reduce spillover effects on the U.S. and global economy while minimizing economic costs.

To achieve this goal, we first drafted a set of educational guidelines. Sanctions against a vast, complex, and integrated market economy like Russia should be:

1. Demonstrative of U.S. determination and our ability to impose overwhelming sanctions
2. Responsible for limiting contagion through the U.S. and global financial system
3. Targeted to avoid punishing Russian civilians, to prevent Putin from exploiting it
4. Adjusted to increase opportunities for cooperation with European and international allies
5. Phased to preserve room for escalation or de-escalation of sanctions

Imagine if it were seen as punishing civilians, they would have every reason to believe that the West is attacking them rather than the regime. Instead of Facebook actively blocking Russian users, allowing Russia to block Facebook would make citizens resent the government. The same logic applies to cryptocurrency exchanges.

By the way, the phenomenon of cutting off all ties with Russia seems to have gone a bit out of control and may have come to a moral panic level. This phenomenon is likely being manipulated by Putin. Not only are Russian cats banned from participating in international competitions, a global non-profit cancer treatment organization has also cut off contact with Russian doctors and patients. Airbnb not only limits Russian hosts but also restricts Russian users from booking as guests, and even OnlyFans has frozen the accounts of Russian and Belarusian models.

What are the consequences of this? Will the Russian people who are affected by the boycott rise up against the Putin regime together? Or will they be more influenced by Putin's propaganda?

Now, let's talk about what Hillary Clinton got right. Legal and regulatory pressure is indeed necessary to compel cryptocurrency exchanges to act in accordance with her wishes. Again, I emphasize that ordinary Russian citizens should not be subject to sanctions. If the government believes they should, it should achieve this goal through legislation or administrative action. If all Russians were added to the sanctions list, exchanges would also timely block them. This is a feature of the rule of law in a free democracy, not a flaw. Without this process, there is no accountability. The ability to resist public pressure and movements is commendable and very "American."

Asserting one's rights is the best way to prevent losing those rights.

Returning to the initial question, what is the best course of action for cryptocurrency exchanges in the current situation? The answer is simple: comply with sanctions, but do not affect ordinary Russian citizens. This is the right thing to do and strategically wise. Moreover, when most customers are idealistic liberals, this may also be good business practice.

Conclusion

Before concluding, I want to reiterate that while the threat of Russia using cryptocurrency to evade sanctions is purely speculative, there is no data or evidence to suggest otherwise. However, since the conflict began, the help of cryptocurrency in the war has been concrete and evident. Faced with currency collapse, not only Russian and Ukrainian citizens have a way to preserve their savings, but Ukraine, including the Ukrainian government itself, has raised over $55 million through cryptocurrencies to support the military. This is more than double the UN's pledge to aid Ukraine.

Of course, some people have to find a way to minimize and overlook this obvious positive development. The Washington Post reported:

Lee Reiners, former senior partner at the New York Federal Reserve Bank, expressed skepticism about the indispensable role of cryptocurrency in donations, saying in an email: Ukraine is not cut off from the global financial system, so there is nothing stopping them from getting donations through GoFundMe, the Red Cross, or any other platform or NGO. The need to convert donations into traditional currency somewhat undermines the decentralized idea of cryptocurrency. As I mentioned in my previous article on cryptocurrency crowdfunding:

I like the fact that, given the nature of cryptocurrency, anyone in the world can participate - even people from Russia, China, or Canada. By the way, last June, opponents of Putin like Alexei Navalny accepted cryptocurrency donations because the Putin government considered them extremists and took action to ban payments to them.

Indeed, Bitcoin cannot be used directly to buy missiles, but as Michael Chobanian, CEO of the Ukrainian cryptocurrency exchange Kuna.io, told the Washington Post last week: "We obviously can't buy nuclear missiles or rockets, but most non-lethal things can be purchased with cryptocurrency." According to a recent report by Bloomberg, "Ukraine has already used the $15 million in cryptocurrency donations received for military supplies, including bulletproof vests delivered on Friday. About 40% of suppliers are willing to accept cryptocurrency."

If Hillary Clinton is disappointed in exchanges that take a lawful and principled stance similar to other companies boycotting Russia, then I am equally disappointed with the reflexive opposition to cryptocurrencies that many experienced last week. Their shortsightedness and lack of imagination are incredible, and I urge them to reflect:

Note: The British government wanted to ban the use of Tor routers in 2015. The Onion Router is a free open-source communication software that can mask users' identities and private messages. It is often used to browse the dark web for criminal activities such as drug and arms trafficking, as well as cybercrime. However, the BBC announced last Friday 4 that people in Ukraine and Russia can access BBC news through the dark web.