Sanctions could hurt Russia’s multi-billion dollar crypto industry

Illuminated mining rigs work in racks at CryptoUniverse cryptocurrency mining farm in Nadvoitsy, Russia.

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The sanctions imposed on Russia over the country’s unprovoked invasion of Ukraine could hamper the growth of its multi-billion dollar crypto sector, according to experts.

This week, US officials targeted Russian bitcoin mining company BitRiver in its latest round of sanctions aimed at hurting the Russian economy. The Treasury Department’s Office of Foreign Assets Control says it is concerned that Russia may monetize its vast oil reserves and other natural resources for power-intensive crypto mining to raise funds and evade Western sanctions.

“This is a strong signal from OFAC that it will use every tool in its arsenal to prevent Russia from using crypto to circumvent sanctions,” said David Carlisle, vice president of policy and regulatory affairs at crypto compliance firm Elliptic , in an emailed note.

The sanctions will cripple BitRiver and its various subsidiaries, preventing them from accessing US crypto exchanges or mining equipment. Crypto mining – the process of validating new digital currency transactions – requires specialized computers that use a lot of energy.

The move shows US officials are “deeply concerned that Russia may use its natural resources to mine crypto to circumvent sanctions,” something Iran and North Korea are known to have engaged in in the past have said Carlisle.

The potential exploitation of Bitcoin production to circumvent Russian sanctions remains a top concern for global regulators, including the International Monetary Fund.

“While far from a substitute for the assets frozen by Russian sanctions, crypto mining avoids and circumvents the fiat-to-crypto “on-ramps” and crypto-to-fiat “off-ramps” on centralized virtual currency exchanges so the sanctions review,” said Anand Sithian, an attorney at Crowell & Moring and a former trial attorney in the Criminal Division of the Department of Justice’s Asset Forfeiture and Money Laundering Division.

Russia’s crypto market

Separately, Binance, the world’s largest crypto exchange, said it is restricting its service to Russian users in response to the fifth wave of EU sanctions against Moscow.

Russian Binance accounts with over €10,000 in digital currency will be blocked from making deposits or making trades and will only be able to withdraw funds, the company said.

“While these measures are potentially restrictive for ordinary Russian citizens, Binance must continue to lead the industry in implementing these sanctions,” Binance said in an update on its website. “We believe that all other major exchanges will soon have to follow the same rules.”

Russia is home to a huge cryptocurrency market. The Kremlin estimates that Russians own around 10 trillion rubles ($124 billion) worth of digital assets.

It’s not clear where this data came from, but there is mounting evidence that Russians are turning to crypto as an alternative to the ruble as the currency plummets in response to the country’s economic isolation.

According to data from CryptoCompare, the ruble-denominated crypto trading volume reached 111.4 billion rubles ($1.4 billion) in March, much more than in previous months. Activity fell in April, with the total volume for the month reaching just 19.2 billion rubles. Binance was the most popular exchange for ruble crypto volume in March, accounting for 77% of trades.

In the six months ended March 2022, the ruble crypto trading volume exceeded 420 billion rubles, or more than $5 billion, according to CryptoCompare.

Third largest bitcoin mining hub

Meanwhile, figures from Cambridge University show that the country is a crypto mining powerhouse.

As of August 2021, according to the Cambridge Center for Alternative Finance, Russia accounted for about 11% of the world’s processing power used to mint new bitcoin units, making it the third largest mining center behind Kazakhstan.

Given that political unrest in Kazakhstan resulted in internet shutdowns that threw bitcoin miners offline, there’s a chance that Russia’s share of the sector is now even higher.

However, there could be an exodus of miners from Russia to the “Stans” — Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — where they could “use stranded gas for their operations,” CryptoCompare CEO Charles Hayter told CNBC .

The Russian government has a “love-hate relationship” with digital assets, Hayter said. While Russia’s central bank is pushing for a ban on the use and mining of cryptocurrencies, President Vladimir Putin wants to regulate them instead.

According to Hayter, the Russian regime and its oligarchs “may see digital assets as a way to fund activities outside of Russia.” Sanctions could hurt Russia’s multi-billion dollar crypto industry

Chrissy Callahan

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