Mar 8, 2022 7:00 AM

War Is Calling Crypto’s ‘Neutrality’ Into Question

War in Ukraine and Western sanctions against Russia have made cryptocurrency a hot potato for international politics.

Two toy soldiers stand on top of a crypto coin.

Whose side is cryptocurrency on? If you had asked Satoshi Nakamoto, the pseudonymous person (or persons) who created the Bitcoin platform in 2008, he/they likely would have rejected the question. The whole point of cryptocurrencies like bitcoin was neutrality—the fact that no government, bank, or entity could prevent you from using it, whether you were paying for a pizza, a forbidden book, or a bag of cocaine.

That, of course, started changing as soon as crypto’s value made it the perfect medium for criminal transactions, from ransomware to dark net marketplaces. Regulators around the world demanded that exchanges and other “off-ramps” blacklist cryptocurrency from accounts linked to criminal activities or individuals, despite illicit trades accounting for just 0.15 percent of global crypto movements in 2021.

But Russia’s invasion of Ukraine is a different matter. Crypto’s nature as borderless money, and the abundance of youngish, passionate people sitting on troves of crypto-millions made it a go-to method for Ukraine to raise funds from people outraged by Moscow’s actions. At the same time there were fears that government officials and Russian president Vladimir Putin’s moneyed inner circle might side-step western sanctions by moving their assets into crypto.

Cryptocurrency exchanges are reportedly blocking all transactions from accounts known to be linked to sanctioned individuals.

Crypto exchange Coinbase on Monday blocked over 25,000 Russia-linked addresses that it believes were linked to illicit activity to comply with sanctions against Russia. WIRED understands that Binance, the world’s biggest crypto exchange, has already identified and blocked at least one wallet linked to a sanctioned person, and has adopted a proactive approach, investigating and blocking accounts of people who are known to be close to individuals targeted by sanctions. Exchanges in most Western countries are required to carry out know-your-customer and anti-money-laundering checks, although some of them, including Binance, have been criticized for alleged laxity.

Yet Tigran Gambaryan, Binance’s vice president of global intelligence and investigations, thinks the concerns that crypto will help to prop up Russia are overblown. “Crypto is not a very efficient way for a government and for a nation-state to elude sanctions,” he says. “There are other ways to move billions of dollars using the financial system that already exist, rather than use cryptocurrency.”

That is because moving large sums of money in cryptocurrency would hardly be covert. As soon as the owners attempted to convert it to fiat currency outside of Russia, they would alert exchanges and investigators. Obfuscation techniques such as “tumblers”—wallets that receive cryptocurrency from various accounts and scramble them to conceal provenance—are not designed for moving large sums and tend to be slow, Gambaryan says. In addition, all cryptocurrency transactions take place on a public ledger, called the blockchain, creating a permanent record that would be undesirable for organizations eager to hide their tracks.

It is still possible that some illicit trades are happening under the radar, After all, exchanges and cryptocurrency compliance firms do not necessarily know about all the wallets controlled by proxies of an individual on a sanction list. “Historically we have seen the US Office of Foreign Assets Control (OFAC) name specific crypto wallets relating to sanctioned entities,” says Caroline Malcolm, head of international public policy and research at cryptocurrency forensics firm Chainalysis. “We haven't seen any of that yet. We are keeping an eye on whether OFAC, or other sanction entities in the EU and the UK, go on to name specific wallet addresses. It's obviously not something that can be done overnight. They might be missing a lot of them.”

What crypto compliance firms do know is that right now cryptocurrency trading is skyrocketing in popularity both in sanction-stricken Russia and war-torn Ukraine. According to figures by cryptocurrency analytics firm Kaiko, cited by Bloomberg, as of February 28, the amounts of bitcoin traded using the Russian ruble had surged to the highest point since May 2021, while trading volumes for the Ukrainian hryvnia had reached the highest point since October. Kaiko reported a similar pattern of frantic trade between the two currencies and Tether, a “stablecoin” whose value is said to be pegged to the US dollar.

The Ukrainian government is pushing for a blanket ban on cryptocurrency transactions coming from all Russian individuals, regardless of sanction status, in order to “sabotage ordinary users” and put pressure on Putin’s regime. Exchanges have so far resisted that call, and the CEOs of Binance and US-based Kraken have come out strongly against the idea, citing crypto’s libertarian underpinnings. Binance’s top executive, Changpeng “CZ” Zhao, published a blog post on Friday elaborating on that position and maintaining that crypto is an unlikely tool for Russia to circumvent sanctions.

Nevertheless, if legally required to do so by US or European authorities, exchanges would have to resort to geo-blocking techniques in order to prevent all Russians from using their services. By one index, Russia ranks 18th in the world in cryptocurrency adoption, according to Chainalysis, and Bloomberg estimated that it is home to at least $214 billion worth of crypto, or 12 per cent of the industry’s total value. Russia also ranks third among all countries at bitcoin mining—the energy-intensive process of minting new cryptocurrency units—just behind the US and Kazakhstan, a country firmly in Moscow’s orbit.

As recently as January 2022, Russia’s central bank was proposing a ban on cryptocurrency, but just days before the invasion of Ukraine the Russian government announced new regulations intended to encourage the sector’s growth. The effect of removing all Russia-outbound or Russia-mined cryptocurrency tokens from the global cryptocurrency industry— effectively closing them off behind a digital iron curtain—is hard to fathom, but such an event is guaranteed to be a defining moment, and one likely to create deep rifts in the crypto community between those in favor of ostracizing Russia and those sticking to crypto’s neutral ethos.

Of course, the opposite might also happen: Moscow might ask Russia-based exchanges to block all transactions from accounts that are linked to Western governments, or from those that have a history of donating to Ukraine. For now, this hasn’t happened.

Meanwhile, the tech-savvy Ukrainian minister for digital transformation, Mykhailo Fedorov, has been calling for cryptocurrency donations to the government’s wallets, hosted by crypto exchange KUNA. The crowdfunding campaign had raised over $51 million in various cryptocurrencies as of March 3, according to KUNA founder Michael Chobanian. In an interview with CoinDesk, Chobanian said that crypto bigwigs including Ethereum cofounders Gavin Wood and Vitalik Buterin and TRON creator Justin Sun had all donated substantial amounts to the cause.

Sergey Vasylchuk, the CEO of blockchain company EverStake, also teamed up with Kyiv to launch a decentralized autonomous organization (DAO) based on the Solana blockchain to raise donations for the Ukrainian army from individuals who feel uncomfortable donating directly. “Many [crypto owners] are scared, many of them just cannot donate directly because of compliance and bookkeeping rules,” Vasylchuk says.

“That's why Solana helped us to develop this framework.” So far, the DAO has raised over $1 million in cryptocurrency and has transferred some to Ukrainian forces already. Donors also gifted the DAO three non-fungible tokens, or NFTs (a WOOFer, a Chicky Town chick, and a photo of sunflowers). Kyiv’s initial plan to reward all crypto donors with new tokens—a mechanism called “airdrop” in crypto circles—was eventually replaced with a promise to issue exclusive NFTs.

In under two weeks—as Western internet and tech companies moved out or were shoved out of Russia—the global internet and the Russian internet have already transformed into two different realms. Crypto is one of the few threads that still stretches across that divide. But as time goes by without a solution, it will increasingly become a battleground, and its companies and actors will be asked to take a stance. In spite of Nakamoto’s vision, neutrality might soon not be an option anymore. As Vitalik Buterin himself put it after a Twitter denunciation of Putin, “Reminder: Ethereum is neutral, but I am not.”