How Russia’s Invasion of Ukraine Is a Litmus Test for Cryptocurrency Exchanges

The exchanges have resisted blocking Russian users from using their services. But technology exists that might help them to maintain their principles and identify bad actors.

AccessTimeIconJun 3, 2022 at 11:04 p.m. UTC
Updated May 11, 2023 at 4:48 p.m. UTC
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Many companies have withdrawn from Russia to protest Russia’s invasion of Ukraine. So far, major cryptocurrency exchanges in the U.S. have resisted, saying they won’t do it unilaterally.

This is a principled stand, and it is consistent with the guiding ethos of the cryptocurrency community. After all, these markets serve as an alternative to those dominated by governmental policy interference. And in Russia, as in Venezuela and in other zones of economic chaos, cryptocurrency is an important tool for ordinary citizens to resist financial totalitarianism.

Max Galka is the founder and CEO of Elementus, a New York-based blockchain and crypto analytics firm.

So long as the U.S. Treasury Department and other financial regulators do not force the crypto markets to pull out of Russia, this principled stand is also defensible. Of course, if a federal ban on Russian access to U.S. financial markets is put into place, there isn’t flexibility or tolerance for inaction. All U.S.-based cryptocurrency exchanges will have to comply. And ignorance would not be a defense.

A third path

There is yet a third path that cryptocurrency markets should consider between these two positions – one that would preserve their core ethos while addressing one of the most central threats to the crypto markets, writ large.

It is worth the extra effort for the crypto community to explore such options in this case. Russia, after all, is not just another nation with crypto users. By one estimate, roughly 17 million Russians – about 12% of the country – own crypto (that’s about 50% higher than the ownership rate among Americans). Those figures may understate crypto’s usage in Russia amid a collapse in the value of the Russian ruble. Blanketing such a market with sanctions would punish everyone in a large economy, by any measure.

But Russia is also the source of more than half of questionable and illegal crypto and blockchain transactions, by our own estimates. An Elementus report published last month found that five of the eight most lethal ransomware groups operate from Russia and that the other three may also have ties to the country.

Ransomware and other criminal activities that emanate from Russia depend on this access to crypto markets.

For years, crypto exchanges steered clear of blocking bad actors because of the strong libertarian mindset that bitcoin should be fungible and that blockchains should be open, decentralized and free from governmental interference.

More critically, many exchanges argued, and rightly so, that until now, they haven’t had the means to systematically differentiate between good and bad actors and identify the sources of illicit activity.

That is no longer true. Technology now exists to allow financial institutions to review the blockchain of any given cryptocurrency and discover who owned what and when – and do it relatively quickly and efficiently. In a shock to criminals who thought they could hide their money by transferring ill-gotten gains into cryptocurrencies, many of these dollars have already been identified and recovered.

Of course, no technology is perfect, and criminals are always adept at staying one step ahead of the law. In this case, if they’re using mixers, tumblers and coinjoins as “crypto laundromats’’ to obfuscate their trails, there are limits to what the current technology can do to follow the digital breadcrumbs. Human judgment also plays a role in that the nature of the technology sometimes makes it hard to make a definitive judgment on the entities behind these crimes.

So cryptocurrency exchanges have the option to maintain the principled stand that they will not unilaterally cut off Russian customers, while also reducing access to criminal elements – and, if necessary, those responsible for Russia’s aggression in Ukraine. And they can do both without violating their libertarian ethos.

A first step for exchanges

The first step in the right direction is for exchanges to determine their unwitting exposure to various potentially suspect entities. If sanctions require exchanges to cut off Russian government officials – or major supporters – these markets must know whom to target. Many Russian customers are not government officials or supporters of the war and should be spared the impact of such sanctions.

Existing technology allows major exchanges to quickly identify how many bitcoin transactions came from Russia. If such crypto activity is illegal and tied to ransomware and darknet markets or other illegal activity, wouldn’t exchanges be operating in their own best interest – regardless of sanctions – to block it?

Those who are shaping the cryptocurrency markets – many of which are publicly traded and are, therefore, regulated companies – have an opportunity to move ahead of compliance-driven action and preemptively block illegal activity coming out of Russia.

The exchanges can then maintain a principle that is worth defending.

Crypto is a storehouse of value independent of government fiat and policy intrusion. But it is not – nor can we let it be – a place for criminals to store their ill-gotten gains.


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Max Galka

Max Galka is the CEO and co-founder of Elementus.

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