Will Ukraine’s Pressure Tactic Of Getting Crypto Services Halted in Russia Yield Results?

Top politicians in Ukraine have urged major crypto exchanges to block the addresses of Russian users. “It’s crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users,” tweeted Mykhailo Fedorov, Vice Prime Minister and Minister of Digital Transformation, Ukraine, a few days ago.

Is This A Pressure Tactic?

Can this help put pressure on Russia, which is already under various sanctions from the US and the European Union (EU)?

With sanctions on the SWIFT mechanism and on major Russian banks, the country may depend on cryptocurrencies now. London-based Mehdi Sunderji, who has over 20 years of experience in the investment industry, told Outlook Money, “Most of these cryptocurrencies are in private hands, so steps can be taken easily as compared to other currency systems. Importantly, other traditional banking methods have been already addressed (sanctioned).”

Moreover, Ukraine may be trying to put economic pressure on Russia. Edul Patel, CEO and co-founder, Mudrex, a global algorithm-based crypto investment platform, believes that Federov may be trying to hit the Russian economy by making this appeal to crypto exchanges.

It seems this can be done to some extent, though a lot of transactions may not get affected.

“It is possible for those exchanges that follow KYC/AML (know your customer/anti-money laundering) standards. Also, exchanges can block IP addresses coming from specific locations. That being said, it is easy to get around the IP address blocking by using a VPN,” says US-based blockchain and crypto advisor Dan Kelly.

But not everyone believes it can be done so easily. Jesse Powell, co-founder and CEO of Kraken Exchange, says that his exchange cannot freeze the accounts of Russian clients without a legal requirement to do so. “Russians should be aware that such a requirement could be imminent. Bitcoin is the embodiment of libertarian values, which strongly favours individualism and human rights,” he says.

Will Crypto Play A Role In Russia?

Transactions will get impacted and crypto will have a role: Some financial experts believe that cryptocurrencies can play a role, especially in the wake of the fall in Ruble, the Russian fiat. Data from Kaiko, a Paris-based cryptocurrency research provider, shows that Ruble (RUB)-denominated Bitcoin volume surged to nearly 1.5 billion RUB on February 24, hitting its highest level since May 2021.

“Since sanctions have been issued against Russian banks from dollar transactions from its reserves, there is a chance that BTC may become powerful in Russia. If the crypto exchanges are also banned, it may affect all the transactions in the country,” says Patel.

Transactions won’t get impacted by existing sanctions: Some think that sanctions do not affect countries like Russia, which have abundant oil. “Russia holds a large amount of petroleum, any major economic sanctions will impact European countries more than Russia. As Russia has extensive oil and gas reserves (we have a good example of Iran), ban on SWIFT did not cause any deep harm to this country,” says Sandeep Kumar, Assistant Professor in Delhi University.

London-based Simon Taylor, founder of Global Digital Finance, a crypto research firm, said in a blog that over time Russia (and China) may be emboldened to build alternatives to SWIFT. “China is building an alternative to SWIFT called CIPS (Cross-border Interbank Payment System). Today CIPS is small, but China and Russia could provide a regional alternative to SWIFT,” he said.

Russian transactions may not get hampered if it moves out of SWIFT, feels Kirtan A. Shah, founder of Credence Wealth, a financial advisory firm. “SWIFT helps to make sure that communication is fast. If you are moved out of SWIFT, banks can still do international transactions, though the transaction may get delayed, or the risk on the transaction may be slightly higher,” he says. 

Further, 40 per cent of Russia’s revenue is from the oil and gas sector, which is excluded from the sanctions, Shah adds. “Moreover, they have already done a trial of CBDC (central bank digital currency), so they are looking at it as a good option.” 

Some also feel that the sanction on SWIFT can create a gap that cryptos may not be able to fill. “SWIFT is a far more established network for the execution of financial transactions and payments between global banks and businesses than any crypto asset. Most businesses globally use it, so it is easy to shut down any Russian company from payments. While it sounds like crypto can be weaponised in the same manner, being a decentralized financial tool with more fragmented exchanges, and being less established, the impact will likely be far less,” says Sunderji.