Mar 7, 2022
In the many conversations I had last week with reporters and policymakers in D.C., there was general confusion not just about whether Bitcoin could be used by Russia to evade sanctions, which I’ve already addressed, but about the crypto ecosystems reaction to the sanctions. This was summed up in this tweet from a public policy veteran:
OK, I’ll try to explain.
The first thing to say is that crypto exchanges are all complying with sanctions obligations. I mean, it’s the law. If they don’t comply, they face existential penalties. They have all announced that they will do so and I have seen no government official say that they are doing otherwise. Further, what government officials are saying about crypto is that they are not concerned about it. Here’s the White House:
“The scale that the Russian state would need to successfully circumvent all U.S. and partners’ financial sanctions would almost certainly render cryptocurrency as an ineffective primary tool for the state,” said Carol House, the director of cybersecurity for the National Security Council, during a webinar on Wednesday.
This echoes an earlier statement from the Treasury Department:
“The scale of what they have to move, and where they have to move things from, [crypto’s] not necessarily going to be that concerning,” said Todd Conklin, counselor to the deputy Treasury secretary. Any attempt to move that much money through exchanges would contribute to “a bit more of a spike in the crypto market, in my view, than has been observed lately.”
And that brings me to what we’ve been seeing in the market. While ruble trading of crypto has surged since the invasion of Ukraine began, it’s still in the tens of millions of dollars, which as the officials above noted is just not enough to make a dent on sanctions. And to the extent there are sanctioned individuals who get their hands on some crypto, they’re not going to be able to convert it into the dollars or euros they really want because the exchanges are watching. As I told The Washington Post on Thursday:
“The scale of the sanctions we’re seeing are so massive, there just isn’t the depth in crypto for the kinds of evasion we’re trying to prevent. And if an oligarch tries to move $10 billion, it will be completely obvious and spotted by people in the industry who run the on- and off-ramps,” said Jerry Brito, executive director of the crypto think tank Coin Center. “This is such a red herring.”
So what is all the fuss about?
Well, aside from some media outlets and politicians who seem to be willfully ignoring reality in order to drive attention or a particular agenda, I think a lot of the confusion stems from the fact that cryptocurrency exchanges have refused to stop doing business with Russians.
“Wait, what?” you may be thinking? “I thought the exchanges were complying with sanctions.”
They are, but there are no sanctions on ordinary Russian citizens. The sanctions apply only to certain banks and certain individuals. Nevertheless, many Western firms have voluntarily stopped doing business with Russia altogether. Some have done so out of conviction, but many others have done so under public pressure.
In particular, Ukraine’s 31-year-old Vice Prime Minister Mykhailo Fedorov has been “Twitter-shaming” (as AFP put it) Western firms into dropping all contact with Russia:
“We need your support – in 2022 modern technology is perhaps the best answer to tanks, multiple rocket launchers and missiles,” he wrote in a letter he tweeted out Friday to Apple chief Tim Cook.
By Tuesday the iPhone maker had announced sales were halted in Russia, and Apple Pay services were limited. …
Fedorov’s callouts only gathered pace after his tweet seeking Cook’s support, with subsequent ones noting Ukraine’s government had asked Google, Netflix, YouTube and Facebook to cut off Russia. …
“There are literally millions of people on the internet wanting to try and do something,” said Omar Wasow, an assistant professor of politics at Pomona College in California.
“So if he (Fedorov) does this callout of a particular company, and then thousands of people like and retweet what he’s doing that’s going to get the attention of those companies’ social media managers and ultimately CEOs,” he added.
Last Sunday Fedorov took aim at crypto exchanges, asking them to block not only sanctioned officials, “but also to sabotage ordinary users.” This was followed up by an official letter from the government of Ukraine to several exchanges requesting the same.
Unlike so many other firms, cryptocurrency exchanges have not been cowed by the public pressure to boycott all Russians. While they will certainly comply with sanctions obligations, they said, they would not be preemptively sanctioning ordinary Russians. The rationale is simple: Ordinary Russians don’t deserve to suffer because of Putin’s actions anymore than ordinary Ukrainians. To limit their access to cryptocurrency is to cut off one of the last means they have to preserve their savings before they melt away in the ruble’s collapse.
I think this has very much annoyed people who have little regard for the rule of law and who are used to getting their way with threats. Here’s Hillary Clinton last Monday:
I was disappointed to see that some of the so-called crypto exchanges, not all of them, but some of them are refusing to end transactions with Russia for some philosophy of libertarianism or whatever. Everybody—and if there has to be legal or regulatory pressure—everybody should do as much as possible to isolate Russian economic activity right now.
Well, she gets some things right and some things wrong.
She’s wrong that libertarian idealism is the only reason to eschew cutting off all transactions with Russia. Targeting ordinary citizens who could be the West’s greatest allies against a regime they did not choose is not a good strategy. At least that’s what the Obama Administration thought when they designed the first sanctions on Russia after the invasion of Crimea. Here is Deputy National Security Advisor Daleep Singh in Senate testimony (emphasis mine):
Before 2014, the United States had never imposed sanctions on a country the size of Russia. It was the tenth largest economy in world, with a GDP roughly the size of Italy. More important than its size was the complexity of Russia’s economy and its connections to the rest of the world. Russia was and is of systemic importance in global energy markets, ranking second and third in the production of natural gas and oil, respectively. Its largest banks were comparable in size and complexity to Lehman Brothers before 2008. Given the high stakes involved, our objective was clear: design a menu of options that could deliver economic costs while minimizing spillovers to the U.S. and global economy.
We pursued this objective by first writing down a set of guiding principles that remain instructive. Sanctions against a large, complex, and integrated market economy such as Russia should be: (1) powerful enough to demonstrate U.S. resolve and our capacity to impose overwhelming costs; (2) responsible to limit contagion through the U.S. and global financial system; (3) targeted to avoid the appearance of punishing the Russian civilian population and, in doing so, strengthening Putin’s domestic narrative; (4) calibrated to increase the chance of partnering with European and international allies; and (5) staged to preserve scope for escalation or de-escalation, in addition to learning from previous steps.
Imagine that. You don’t want to be seen as punishing the civilian population, giving them every reason to believe Putin’s claims that the West is attacking them rather than the regime. It should be obvious that you don’t want Facebook to ban Russians, you want Russia to ban Facebook, so it’s clear who’s hurting citizens. The same applies to crypto exchanges.
As an aside, I’ll say that the frenetic rush to sever all ties with Russia seems a bit out of control, perhaps rising to the level of a moral panic, and it could easily play right into Putin’s hands. It’s not only Russian cats that have been banned from international competition, but a global cancer treatment nonprofit has cut off Russian doctors and patients, Airbnb is restricting not just Russian hosts but also Russian users from making new reservations as guests, even OnlyFans has frozen the accounts of Russian and Belarusian models. What’s more likely? That the Russian people affected by these boycotts will blame Putin and rise up against him? Or that they will feel betrayed by the Western companies they trusted and depended on and will be more receptive to Putin’s propaganda?
Now, what Clinton gets right—even if parenthetically—is that it would indeed take “legal or regulatory pressure” to force crypto exchanges to do as she wishes. Again, ordinary Russians are not subject to the sanctions. If the government believes they should be, then there is a process to achieve that through legislation or executive action. If all Russians are added to the sanctions list, exchanges will duly block them. That is a feature and not a bug of a liberal democracy with the rule of law. Without such processes there is no accountability. And to dissent from public pressure and shame campaigns is laudable and very American. To insist on one’s rights (i.e. “come back with a warrant”) is how we don’t lose them.
So to answer the question we started with about what’s the right approach for the crypto industry in the current situation, it’s simple: Comply with sanctions, but don’t cut off ordinary Russians who are not sanctioned. It’s the right thing to do, it’s the strategically smart thing to do, and BTW, it’s probably also good business when a large portion of your clientele is idealistically libertarian.
A Lack of Imagination
Before I wrap up, I want to say once again that while the threat of Russia using crypto to evade sanctions is completely speculative and devoid of any data or even anecdotes, the good that crypto has been doing since the start of this conflict is concrete and obvious. Not only have ordinary Russians and Ukrainians had an avenue to preserve their savings in the face of currency collapse, but Ukrainian causes (including the Ukrainian government itself) have raised over $55 million through crypto. That’s more than twice what the UN has pledged in aid to Ukraine.
Lee Reiners, a former senior associate at the Federal Reserve Bank of New York, was skeptical of the argument that cryptocurrency is necessary for donations. “Ukrainians are not the ones cut off from the global financial system, so there’s nothing stopping them from receiving donations via GoFundMe, the Red Cross, or any other platform and [nongovernmental organization],” Reiners wrote in an email. The need to convert donations into traditional currency also undercuts the idea that cryptocurrency is somehow more decentralized, he said. “Last time I checked, you can’t buy Javelins [missiles] with bitcoin.”
Where to begin? As a matter of fact, Ukrainian NGOs tried to raise funds through traditional crowdfund platforms like Patreon and were summarily suspended for violating Patreon’s policy against fundraising for military activity. And even if Ukrainians had no problems receiving donations, that doesn’t mean people who want to donate will be able to. As I said about the crypto crowdfunding in my last missive, “What I love about this is that given crypto’s nature, anyone in the world can pitch in—even people in Russia and China or even Canada.” As a reminder, last June, Russian dissident Alexei Navalny’s NGO turned to crypto in order to receive donations from Russians because Putin’s government had designated the group as “extremist” and move to ban payments to it.
And yes, it’s true that you can’t buy Javelins with bitcoin. But as Michael Chobanian, CEO if the Ukrainian crypto exchange Kuna.io that is working with the government, told The Washington Post last week, “We obviously can’t buy nuclear bombs or rockets, [but] most nonlethal things you can buy with crypto.” Bloomberg reported yesterday that “Ukraine has already spent $15 million of the donations it received in cryptocurrencies on military supplies, including bulletproof vests that were delivered Friday . . . About 40% of the suppliers are willing to take crypto.”
If Hillary Clinton is disappointed in exchanges that follow the law and take what is (by their lights) a principled stance just as are the firms who are boycotting Russia, then I’m disappointed in the reflexively anti-crypto attitudes I’ve encountered over the last week. They belie incredible shortsightedness and a lack of imagination. I would ask those folks to please reflect on this:
TRM Talks: Russia Sanctions (with Treasury and White House officials). Here is a short clip you can watch without registration.
Various and Sundry
A new episode of Worker & Parasite, my book podcast with Stably, is out. In it we discuss This Is Not Propaganda by Peter Pomerantsev, which is about information war and our modern post-fact reality, so very timely. You can listen and subscribe here.
FYI tonight I’ll be speaking at the CryptoMondays event in Greenwich, CT. Details and registration here.
Finally, the Coin Center Annual Dinner will take place on Friday, June 10, during Consensus 2022. Table sponsorship opportunities are now available and they’re going fast.
 It’s funny she couldn’t help herself but be so disdainful and dismissive of a small ideological minority that nevertheless probably exists in greater numbers than the margin of votes by which she lost her presidential bid. Some people never learn.
 Hat-tip to Matthew Pines for bringing this to our attention.