In the modern world, sanctions have already become usual for many sectors of the economy. By imposing restrictions, regulators fight fraud, money laundering and other illegal activities. The cryptocurrency sphere is relatively new, but due to its rapid development, it has already attracted the attention of regulators and law enforcement agencies. The first case of the application of sanctions against cryptocurrency exchanges was on September 21, 2021, when The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury blocked the work of the over-the-counter crypto broker SUEX.
It was suspected of receiving more than 160 million US dollars from illegal sources (darknet, fraudulent schemes, blocked exchanges).
The blockchain analytical company Chainalysis, which participated in the investigation of the case, reported that SUEX converted cryptocurrency into fiat cash and vice versa in branches in Moscow and St. Petersburg, while the company was registered in the Czech Republic. This case has become a kind of precedent for the following blocking of cryptocurrency companies around the world.
Expert Maxim Kurbangaleev told us more about the current sanctions policy in blockchain operations.
Digital currency vs fiat currency –– Maxim Kurbangaleev
Almost every country has its own national currency, in which all payments in the local market take place. For international transactions, people have to change one currency to another. In this case money becomes a commodity. This means that money in one currency acquires a certain value in another currency. There comes an exchange rate that is set by the Central Bank of the country.
This is how fiat money (i.e. money issued by the government of the country) is exchanged. In fact, these are buying and selling operations in the financial market, which are available to users both offline (in bank branches or exchange offices) and online (in personal accounts).
The exchange of cryptocurrencies takes place, in general, in a similar way. You can exchange one type of cryptocurrency for another, or sell / buy it for fiat money.
Such operations are carried out mostly online (exchanges, electronic wallets, Telegram bots). But they can also be conducted offline through specialized ATMs.
Unlike fiat money, the price of cryptocurrency does not depend on the state and its currency policy. The main influence is the supply and demand in the crypto network: the more users (demand) a cryptocurrency has, the greater the number of operations with its participation, which means that its value is higher. And the fewer users it has, the lower the price.
Maxim Kurbangaleev points out another significant difference between the exchange of fiat money and the exchange of cryptocurrency:
“When exchanging one fiat currency for another, there is a strictly defined set of criteria by which Central Banks determine the exchange rate. In addition, all procedures and requirements for operations are coordinated and legally fixed. With cryptocurrency, everything is a little different. Even if it is legalized in some countries, there are no general rules for interacting with it in the industry. Anything can affect the cost of a certain type of crypto — from a businessman’s tweet on a social network to the adoption of laws in related areas. Market participants cannot control it. Officially, there are no clear criteria whether a cryptocurrency operation is safe or not, how to conduct verification and build a business in general. Therefore, there is a rather tense situation in the market right now,” Maxim Kurbangaleev comments.
Maxim Kurbangaleev: Is market regulation really necessary?
In 2022, not all jurisdictions have a legal framework for cryptocurrency companies, and only some of them license this activity.
It would seem that obtaining a special permit can complicate the procedure for opening a company, but Maxim Kurbangaleev believes otherwise: “Licensing of the market means that a certain set of requirements is legally fixed in a particular country. If a company fulfills these requirements, it is allowed to conduct business. Accordingly, knowing the requirements of the regulator, cryptocurrency companies will be able to build a good system of internal control in the field of AML (Anti-Money Laundering). Fulfilling the requirements of the regulator from year to year, the company will confirm the license and will have some guarantee that the business will not be affected by sanctions. There will be fewer blocked companies, which means there will be a chance of further development of the industry and additional investments.”
The current sanctions are imposed not on crypto trading, but on individual companies like SUEX – Maxim Kurbangaleev
According to the expert, the lack of regulation is not the only problem in the cryptocurrency market today. “The user cannot cancel the transaction and quickly check the received money. Although there are special programs for analyzing the blockchain, if they show that 20 blocks ago someone spent funds through a prohibited exchange, your wallet will be marked with a special label. Even if that exchange was recognized as prohibited after the operation. Why? The answer is the same: there is no regulation of the sphere, there are no strictly fixed rules for the use of inspection tools, there are no requirements for the frequency of inspections. The regulators and law enforcement agencies are acting chaotically, and this, of course, will not benefit anyone. With this approach, sooner or later sanctions will spread like a virus, and the entire cryptocurrency will be “infected” with these tags,” Maxim Kurbangaleev warns.
“The current sanctions are imposed not on crypto trading, but on individual companies that, according to the regulator, violated the requirements of the legislation. Here we are talking mostly about banking regulations and laws that are secretly applied to the cryptocurrency sphere. I do not have a guaranteed right solution, but it seems that it would be logical in today’s conditions to conduct a thorough KYC (Know Your Customer) check, as in the banking sector. This will help crypto trading and protect crypto exchanges from funds involved in any illegal scheme. But this is a temporary solution. In the long run, government agencies, together with the leaders of the crypto market, need to develop a legislative framework, otherwise the cryptocurrency will not work,” Maxim Kurbangaleev notes.