Cryptocurrency exchanges must report potential sanctions violations to British authorities under new rules amid concerns that bitcoin and other crypto assets are being used to circumvent restrictions imposed in response to Russia’s invasion of Ukraine.
The official guidelines were updated on August 30 to clearly include “crypto-assets” among the assets to be frozen when individuals or companies are sanctioned. In addition to digital currencies such as Bitcoin, Ethereum, and Tether, cryptoassets may also include other digital assets with nominal value, such as non-fungible tokens.
Rules set by the Treasury Department’s Office of Financial Sanctions Enforcement, will mean that it will be a criminal offense for cryptocurrency exchanges to not report their sanctioned customers. Under the rules, cryptocurrency exchanges must act immediately if they suspect one of their clients has been sanctioned or if they suspect sanctions violations – imposing similar obligations on professionals such as real estate agents, accountants, lawyers and jewellers.
Financial sanctions against individuals and companies associated with Vladimir Putin’s regime are among Britain’s most significant responses to the invasion of Ukraine.
Sanctions targets included oligarchs and relatives with vested interests in crypto-assets. Including Vladimir Potanin, the “Nickel King”, who was previously the second richest man in Russia, who backed Atomyze, a Swiss blockchain company. Said Gutseriev, son of oligarch Mikhail, held a stake in a Belarus-based cryptocurrency exchange until August 2021, before being sanctioned on the same day as Potanin in June. Metal billionaire Oleg Deripaska previously urged the Central Bank of Russia to allow Bitcoin as a payment method. There is no indication that they used crypto-assets to circumvent sanctions.
Binance, the world’s largest cryptocurrency exchange by trading volume, said in April it had blocked the accounts of relatives of Russian politicians, including Polina Kovaleva, the stepdaughter of the foreign minister, Sergei Lavrov, and Elizaveta Peskova, the daughter of Putin’s spokesperson, Dmitry Peskov. The exchange has previously dismissed concerns that cryptocurrencies are being used to evade sanctions. Using cryptocurrencies to evade sanctions and move money around the world is already illegal in the UK under laws covering all “financial resources”. However, the change underscores authorities’ concerns about the relatively new asset, which can help circumvent sanctions because users do not rely on regulated entities for transactions.
Anna Bradshaw, a partner at London-based law firm Peters & Peters, said the UK’s move “is in line with the broader expansion of the financial services cryptocurrency industry and anti-financial crime regulation”.
Cryptocurrencies and virtual assets are treated no differently than any other type of asset when it comes to asset freezes, she said. This means that reliance on cryptocurrencies or virtual currencies can make it difficult to detect the involvement of sanctioned parties or, if it involves sanctioned trading or other sanctioned activities, at least to prevent it in a timely manner.
Regulators have taken notice. In February, representatives of the White House and the US Treasury demanded to stop the operation of cryptocurrency exchanges in Russia. In March, UK financial regulators issued a joint statement confirming that crypto-assets are subject to sanctions regulations. In April, the EU also banned large cryptocurrency transactions with Russia.
A Treasury spokesman said: It is vital to address the risk of cryptocurrency assets being used to breach or circumvent financial sanctions. These new requirements will apply to companies that have records of holding or allowing the transfer of cryptocurrency assets and are therefore likely to will have relevant information.
