‘Crack Down’ on Crypto? Maybe, but You Can’t Ban Math

On-ramps like crypto exchanges are already regulated, and rightly so, thwarting would-be sanctions evaders. Outlawing code would be unconstitutional and ultimately futile.

By Daniel KuhnLayer 2
AccessTimeIconMar 3, 2022 at 9:12 p.m. UTC
By Daniel KuhnLayer 2
AccessTimeIconMar 3, 2022 at 9:12 p.m. UTC

Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

In recent days, following the invasion of Ukraine and the West’s disabling economic sanction of Russia – an unprecedented retaliatory move – there has been increased chatter that governments and international bodies may step up efforts to “crack down” on cryptocurrency.

Like most everything involving cryptocurrency, this conversation is speculative. The argument is that non-state, blockchain-based monetary networks might help the Russian government and oligarchs evade sanctions; and so, if the West’s economic blockade is to be effective, it needs to tighten access to crypto.

This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

This fear is partially grounded in fact. Sen. Elizabeth Warren, for instance, tweeted last week, “Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain. … U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets.” The Massachusetts Democrat renewed her call to action today.

Likewise, Federal Reserve Chair Jerome Powell said Wednesday that the ongoing war “underscores” the need for cryptocurrency regulation. European power brokers have voiced similar concerns. French Economy and Finance Minister Bruno Le Maire said: “We are taking measures, in particular on cryptocurrencies or crypto assets, which should not be used to circumvent the financial sanctions decided upon by the 27 EU countries.”

Still, the fear that crypto could be banned is mostly rooted in uncertainty and doubt. It’s worth noting that calls to “crack down” on the industry, a common phrase, are imprecise. What would a “crackdown” look like over and above the rules to increase surveillance and compliance already being discussed or enforced today?

It’s true too that Powell, Warren and their ilk are also being fairly cryptic in their calls for increased “scrutiny” of and “measures” over crypto. That could mean anything – hence the fear, uncertainty and doubt. But it cannot seriously mean a blanket ban of blockchains.

You can’t ban math

Around the time of the fall of the Soviet Union, the U.S. was leading a battle to kill consumer encryption. For most of history, encryption – the ciphers used to send secret messages – was primarily developed and guarded by governments. Various militaries are credited with creating the first paper codices and first digital cryptographies to protect war correspondence. At the height of the Cold War, the U.S. placed strict controls over the export of commercial and military encryption.

This changed with the advent of the internet. Early cypherpunks saw that computer networks could easily be surveilled and worked to design codes to foster privacy. That was the environment in which, in 1991, computer scientist Phil Zimmermann released the public-key program humbly named Pretty Good Privacy (PGP) and kickstarted the “Crypto Wars.”

The United States Customs Service alleged that Zimmermann had violated the Arms Export Control Act that forbade the export of “strong” cryptography and opened a criminal investigation. Around the same time, the Clinton administration tried to legally force companies to write in backdoors into commercial encryption technologies, called “clipper chips.”

Due to a confluence of factors, including PGP’s wide adoption and MIT publishing its code as “open source,” regulators were essentially forced to drop the case. More importantly, privacy advocates made the case that code was math, and that math was speech. Suppressing encryption would be unconstitutional – the cat was out of the bag.

“We won in the courts, Congress and public opinion,” the Electronic Frontier Foundation, one of the leading organizations advocating for strong encryption, later wrote.

That hasn’t necessarily stopped governments from trying to quash a host of industries based on encryption and supercharged by the internet. These include attempts to “crack down” on facial recognition, artificial intelligence and private communication through end-to-end encryption – although strict regulation or bans of those industries might be desirable (considering their dystopian prospects).

Encryption likewise serves as the basis for cryptocurrencies (that’s the “crypto” part; I think we’re still figuring out what “currency” means). It sounds “just so,” but that’s essentially the reason that an outright ban of bitcoin (BTC) or ethereum (ETH) is unlikely.

Not only is there legal and constitutional precedent, but knowledge has flooded the plain. (Imagine trying to ban a recipe for cookies.) PGP wasn’t nearly as widespread as Bitcoin software is today.

Regulated channels

Still, even if cryptocurrencies are open source, open access and protected by speech laws at the command-line level, most consumers access crypto through intermediaries. These on-ramps can and ought to be regulated – and should be part of sanctions packages against Russia.

Indeed, they are. As part of the “Russian Harmful Foreign Activities Sanctions Regulations,” the U.S. Treasury’s Office of Foreign Assets Control (OFAC) is set to issue new rules to prevent people from interacting with prohibited Russian entities. This means that crypto exchanges and service providers will blacklist any assets believed to be owned by a targeted group of Russians.

Salman Banaei, Chainalysis' head of public policy for North America, said on CoinDesk TV’s “First Mover” that there are about 100 wallet addresses identified in OFAC’s sanctions package.

Although there are calls, including from the Ukrainian government, to issue a blanket ban to prevent all or most Russians from accessing crypto networks, such rules have yet to be written.

Further, major exchanges including Binance, Kraken and Coinbase say that denying access across all of Russia is a line they will not cross, though they will comply with targeted sanctions.

“[Kraken] cannot freeze the accounts of our Russian clients without a legal requirement to do so,” Kraken CEO Jesse Powell said over Twitter.

“Our mission at [Kraken] is to bridge individual humans out of the legacy financial system and bring them into the world of crypto, where arbitrary lines on maps no longer matter, where they don't have to worry about being caught in broad, indiscriminate wealth confiscation.”

Is a ‘crackdown’ necessary?

Although many people are speculating that crypto could be a powerful tool for people to breach economic sanctions, so far in the conflict, that has yet to bear out.

Banaei didn’t have detailed information related to suspected and sanctioned addresses belonging to Russian oligarchs, but said, “Our data does show that the ability of those sanctioned wallet addresses to seek liquidity has been seriously hampered as a function of sanctions.”

There are a few reasons why crypto is less than ideal for evading sanctions – try as criminals might. First, all transactions are publicly viewable, irreversible and leave a trail of evidence for investigators to snoop out a purported crime. This was the argument Bloomberg’s Joe Weisenthal made a few weeks ago when calling for Bitcoin to be made “better for money-laundering.”

A few days ago, ex-bitcoiner Nassim Taleb similarly said he “hopes Sanction Evaders use bitcoin,” because it's so easy to track – barring some types of transactions like CoinJoins, which are not widely adopted and may be compromised. Unlike gold, which can be melted down to anonymize who bought or sold the asset, Bitcoin is a public ledger with a clear view on “entry and exit points.”

The worst Russian actors are skilled in plundering their country’s wealth and hiding the proceeds. Their wealth is in gems, gold and yachts. Less and less it’s in dollars, but that’s not to say there isn’t fraud committed with greenbacks. “Russians are very familiar with the traditional tools available to money launderers and the traditional banking system,” Banaei said.

Politico reported last week that “Treasury officials say they aren’t overly worried about crypto undermining the effort to choke off the Kremlin’s access to capital.” That’s in part because there are already strong tools to track where money flows on blockchains – even if obscured through mixers or complicated swaps, Banaei said.

But there’s also growing evidence to suggest that current crypto networks are incapable of handling the amount of money that Russians would need to wash to evade sanctions without giving up the game, Banaei said, “given some of the structural features of cryptocurrency.”

“The order of magnitude of liquidity that would be flowing into the cryptocurrency markets would be detectable,” he said.

Credibly neutral

All of this unfolds as Ukraine’s government raises millions of dollars’ worth of dog tokens, bitcoin and other cryptocurrencies to fund its resistance efforts and support civilians affected by the war.

Just a border crossing away, many Russians stand opposed to their government’s unjust actions. Those people, suffering at the hand of Putin’s war, who may have lost their savings with the ruble’s collapse, whose businesses may have been hurt by sanctions, could turn to crypto as a “safe haven.”

In the months leading up to the Ukrainian invasion, Russia’s central bank pushed to “ban” cryptocurrency in the country – perhaps as part of the government’s war planning. Legislatures pushed back on those plans, preferring to monitor the industry through regulated on-ramps. Putin has since enforced strict capital flight controls, which include rules for digital assets.

Circling back to “cracking down” on crypto in the U.S., crypto lawyer Jason Gottleib responded to Elizabeth Warren’s ambiguous criticism of this industry by noting how an “indiscriminate ban” would affect more than just the worst humanity has to offer.

“Fundamentally, crypto frees people from corrupt, evil, or incompetent intermediaries who can cancel their money at any time. It puts financial power back into the hands of individuals, and out of the hands of the elites and banks,” he wrote.

It’s a simple calculus – let’s hope they don’t try to ban calculus, either.

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Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

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