The EU is scrambling to put together legislation to regulate cryptocurrency in an effort to prevent Russia from evading the recent sanctions levelled against the country in response to its attack on Ukraine.
“There is a broad consensus among Member States that we cannot allow cryptocurrencies to be used to circumvent the financial sanctions against Russia”, said French finance minister Bruno Le Marie during a press conference following an online meeting of the EU’s finance ministers last Wednesday. The details as to how the lawmakers will enforce the measures cannot yet be shared, Le Marie said.
Stephan Berger, the European Parliament’s lead rapporteur on the highly anticipated Markets in Crypto-assets (MiCA) regulation, told Parliament Magazine in an email: “Clarity on the movement of crypto-assets is needed for sanctions to succeed. The European Central Bank (ECB), European Banking Authority and the European Securities and Markets Authority should therefore start building a unified supervisory structure now.”
MiCA had been scheduled to go through a parliamentary vote on 28 February. However, this was postponed due to a misinterpretation of some of the legislation’s clauses; an amendment regarding the environmental impact of “cryptocurrency mining” read as a de facto bitcoin ban, which was not the intended effect. To regain the support of the majority of the Parliament’s groups, the legislation was sent back to the drawing board, according to Berger’s office.
The ECB has added pressure onto MiCA in the wake of the EU’s sanctions on Russia following the war in Ukraine. “There are always criminal ways to try to circumvent a prohibition, which is why it’s so critically important that MiCA is pushed through as quickly as possible, so we have a regulatory framework”, the ECB’s president Christine Lagarde said during a press briefing on 25 February when asked if Russia could use cryptocurrency to avoid EU sanctions.
“It cannot be excluded that Russian oligarchs and individuals see bitcoin and other crypto-assets as a way out [of suffering the blow of sanctions]” Stefan Berger (DE, Christian Democrats)
However, Parliament rapporteur Berger highlighted that the legislation, as it stands, fails to address a key question, namely: “[T]he current question of how financial sanctions are enforced despite crypto-assets is not at the core of the MiCA regulation. Therefore, separate action by the European Commission and its member states, independent of MiCA, is now needed”, he argued.
The Russian economy is facing great financial disruption following the EU’s penalising actions over aggression in Ukraine. The value of the Russian rouble against the US dollar fell by over 40 per cent in the last week of February, to a record low of 119 roubles per US dollar. During the press conference on 2 March, French finance minister Le Marie said that lawmakers were able to localise and freeze a significant amount of the assets of Russia’s central bank.
The conference of finance ministers evaluated the sanctions’ effectiveness, and the focus is moved to additional measures to avoid any Russian circumvention. Now, cryptocurrencies are under the spotlight.
According to crypto data firm Kaiko, daily trading volume across tracked cryptocurrency exchanges saw a spike after the Russian invasion into Ukraine. This observed increase has raised suspicions among the finance ministers. “It cannot be excluded that Russian oligarchs and individuals see bitcoin and other crypto-assets as a way out [of suffering the blow of sanctions]”, wrote Berger.
“In the short term, however, many companies in the country lack the necessary expertise and infrastructure to switch completely to crypto-assets,” Berger added.
“The Bank of Russia would need vast amounts of cryptocurrency – around $400bn – to counteract the sanctions that target its foreign reserves" JP Schnapper-Casteras, Senior Fellow at the Atlantic Council’s GeoEconomics Center
In a blog post published on 2 March on the Atlantic Council website, Senior Fellow at the Atlantic Council’s GeoEconomics Center JP Schnapper-Casteras concurred, writing that “the Bank of Russia would need vast amounts of cryptocurrency – around $400bn – to counteract the sanctions that target its foreign reserves. That’s larger than the total market cap of all but two cryptocurrencies and, in case of bitcoin, would require massive purchases which would likely lead to price spikes (making evasion more and more expensive).”
Yet while the EU continues its efforts to work out how to regulate crypto-assets amid the sanctions on Russia, cryptocurrency remains a double-edged sword in the Ukraine war. On the one hand, it is seen as a tool for Russia to evade the harsh economic sanctions it is under. On the other hand, it allows for Ukrainian resistance and international support to come in.
“We observe that bitcoin can also be a support tool for Ukrainian resistance”, Berger wrote in his email to Parliament Magazine. “An NGO from Kyiv recently took in donations of $4m in bitcoin for the purchase of equipment for the Ukrainian military.”
Meanwhile, according blockchain analytics firm Elliptic, just over €50m has been raised in cryptocurrency for the Ukrainian government and NGOs.
"We are in a war that is also being fought through the financial institutions”, explains Berger. “Decisive action by all governmental bodies is needed now.”