Russia’s invasion of Ukraine highlights the dark side of crypto as the industry lobby ramps up efforts in DC to shield them from regulation.
Why it matters: The crisis has prompted a sharp and almost uniform global response from the very institutions – governments and banks – that want to marginalize cryptocurrencies. It also reinforces the perception that crypto helps bad actors avoid punishment or detection.
What’s happening: Sanctions, swiftly imposed by governments and traditional banking systems after Russia’s invasion of Ukraine, helped weaken Russia’s economy.
- Concerns immediately arose that both the Russian government and affected individuals could circumvent sanctions by funneling funds into decentralized, unregulated cryptocurrencies.
- A group of four senators, including Sen. Elizabeth Warren (D-Mass.), wrote to the Treasury Department on Wednesday, asking if “criminals, rogue states and other actors could use digital assets and alternative payment platforms as new means to conceal cross- Border trades for nefarious purposes.”
- Additionally, the Biden administration called on leading crypto exchanges to monitor accounts that may be linked to sanctions targets.
- Crypto platforms have rejected calls to ban Russian addresses from using their services.
The Intrigue: The crisis was just unfolding as crypto lobbyists in DC launched a campaign to dissuade lawmakers from enacting new restrictions.
- “Congress slammed the industry with tax provisions in the Infrastructure Act last summer, and advocacy has grown exponentially and instantly,” Niki Christoff, a Beltway consultant who advises companies on crypto payments, told Axios.
Using the numbers: A study by cryptohead.io published last month showed that industry lobbying spending increased by 116% to $4,925,000 in 2021.
- A report by the Tech Transparency Project released late last year revealed that at least “235 officials from Congress, the White House, federal agencies, the Federal Reserve, and national political campaigns” “were coming to or from dozens of crypto companies, exchanges, or trade associations…”
- Membership in the Blockchain Association lobby group has grown to 80 members in recent months, including Crypto.com and Foundry Digital.
The big picture: Cryptocurrencies and blockchain-based technologies aim to create alternatives to existing financial systems that can transcend national borders and operate beyond the reach of government.
- This vision is increasingly at odds with real institutions and laws.
- The dramatic rise in ransomware attacks, often coupled with demands for payment in crypto, has heightened regulators’ fears.
- “In reality, the crypto industry has the worst of both worlds: reliance on institutions with no protection whatsoever.” crypto critics Rebecca Ackermann and Poppy Alexander wrote in an LA Times op-ed Monday. “No wonder terrorists are increasingly relying on crypto for funding, criminals are trying to use it to hide their funds, and scammers are preying on the gullible, with crypto ‘love scams’ particularly on the rise.”
Yes but: The Russian invasion has also added weight to some arguments in support of crypto.
- Crypto has proven to be a fast and effective way to send funds to the war zone. The Washington Post reported Thursday that the Ukrainian government has already raised over $42 million in crypto.
within the industry, Many, like Christoff, say concerns that crypto could help Russia evade sanctions are a “red herring.”
- “People can’t spend crypto without going into fiat banking,” Christoff said.
- and some have pointed this out that the scale of the sanctions, coupled with the transparency of public blockchain revenue, would make it more difficult for Russia to use crypto as a financial backdoor.
Between the lines: Dave Grimaldi, executive vice president and head of government relations at the Blockchain Association, understands how quickly the tide can turn against a new, technologically complex industry.
- “You’re always one crisis away from goodwill eroding in minutes,” he said. “Look at the examples of data breaches, auto emissions disclosures, healthcare obfuscation, and so on.”
- “Crypto’s unfamiliarity, relative ‘novelty’ and complexity have made elected officials, particularly Democrats, skeptical and suspicious,” he adds.