Amid War in Ukraine, Should Ordinary Russians Be Banned From Trading Crypto?

Blocking all cryptocurrency operations in Russia would increase the impact of Western sanctions. But experts are divided on whether it would do more harm than good.

As Russia's war on Ukraine intensifies, the US and its allies have continued to increase their economic pressure on the Russian government, to isolate the country further from the global financial system and debilitate its military capacity. 

Western allies have frozen Russian assets abroad, removed Russian banks from international banking networks and even banned all gas and oil imports, among other unprecedented penalties. 

But there's still growing concern that Russian President Vladimir Putin and his supporters might turn to cryptocurrencies to avoid economic sanctions.

With their ability to operate as alternatives to the traditional financial system, cryptocurrency exchanges -- digital marketplaces where you can buy and trade digital currencies -- have become an effective option both for Ukraine supporters to raise funds for relief efforts and for ordinary Russians to seek financial shelter from the economic sanctions imposed on their country.

That's why both the Ukrainian government and advocates for even further economic penalties against Russia have become increasingly vocal about the role crypto exchanges can play in the conflict.

Hundreds of Western businesses, such as oil companies Shell and BP and tech players Netflix and Microsoft, have scaled back or halted their dealings in Russia since the beginning of the war. 

And some people argue that similarly stopping crypto operations in the country could significantly weaken Putin's hold on Russia's economy and its citizens.

"I'm asking all major crypto exchanges to block addresses of Russian users," Ukraine's vice prime minister and minister of digital transformation, Mykhailo Fedorov, tweeted Feb. 28. 

"It's crucial to freeze not only the addresses linked to Russian and Belarusian politicians but also to sabotage ordinary users." 

Fedorov also sent letters to eight cryptocurrency exchanges, including two of the largest by volume, Coinbase and Binance, asking them to stop offering service to Russian users out of concern digital currencies are being used to evade sanctions.

"We are not preemptively banning all Russians from using Coinbase," CEO Brian Armstrong tweeted March 3. "We believe everyone deserves access to basic financial services unless the law says otherwise." 

And hours after getting Fedorov's letter, a Binance spokesperson told CNBC, "We are not going to unilaterally freeze millions of innocent users' accounts. Crypto is meant to provide greater financial freedom for people across the globe. To unilaterally decide to ban people's access to their crypto would fly in the face of the reason why crypto exists."

But the CEOs of several exchanges, including some that got Fedorov's letter, said that though they'll continue to offer access to ordinary Russians, they're complying with US law in regard to sanctions. 

On March 7, Coinbase reportedly said that to facilitate sanctions enforcement, it had blocked more than 25,000 wallet addresses related to Russian individuals or entities thought to have engaged in illicit activity and had reported them to the US government.

Ukraine's request for an all-out ban on Russian users, and the unequivocal rejection from most regulated crypto exchanges, has sparked a debate about the responsibilities digital currency platforms have in an international conflict. 

As a growing number of Western companies decide to stop conducting business in Russia, should crypto exchanges follow suit and go beyond what they're required to do by law? 

And even if they did, would banning all Russian users from crypto exchanges make a difference in slowing down Russia's invasion of Ukraine?

Some crypto specialists interviewed by CNET, including executives from crypto companies and public officials working to prevent Russia from using digital assets to sidestep economic sanctions, said a full Russian ban from crypto platforms could do more harm than good in regard to ordinary Russians. 

And some said the volume of the whole crypto market is still too small to really help Putin's government counter the impact of Western economic penalties, even if it tried.

But other experts on the role the private sector can play in global conflicts said bringing the Russian economy to a standstill is the one nonmilitary way to thwart Putin's advance on Ukraine, and that crypto exchanges can contribute to that only if they stop operating in Russia altogether. 

Cryptocurrencies are digital assets that are recorded on a blockchain, a distributed digital ledger that can't be altered. They usually aren't backed by an underlying asset, such as fiat currency. That's why they could be an ideal safe haven amid a wave of economic sanctions. 

In refusing to kick ordinary Russians off their platforms, cryptocurrency exchanges argue that the move would further hurt Russian citizens who are suffering from the economic impact of the war and who might consider buying cryptocurrencies as a way to protect their financial standing.

"We all saw those photos of runs on ATMs from Russian citizens -- lines around the block in Moscow," said Todd Conklin, counselor to the deputy secretary of the US Treasury Department. "One would suspect ordinary citizens may have been looking for an alternative to the ruble." 

Conklin made the remarks during a March 4 webinar hosted by blockchain analytics company TRM Labs about the possibility Russia could use cryptocurrencies to avoid economic sanctions. 

The ruble, Russia's national currency, has lost nearly 50% of its value against the US dollar since the start of the year, according to Reuters. 

Other parts of Russia's financial system have also been impacted by the West's pressure on the country to stop its aggression on Ukraine. 

Digital payment services such as Apple Pay, Google Pay and Samsung Pay aren't available in Russia any longer. Visa, Mastercard and PayPal also halted operations in the country. 

Ordinary Russian citizens, worried that economic sanctions will devastate the Russian economy even further, have flocked to ATMs and banks, seeking to withdraw as much cash as possible before it might be too late. 

"Some ordinary Russians are using crypto as a lifeline now that their currency has collapsed," Armstrong, the Coinbase CEO, tweeted. "Many of them likely oppose what their country is doing, and a ban would hurt them, too."

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