By Michael B. Cohen
Vice President of Global Operations
Demand for cryptocurrencies and stablecoins linked to Western currencies has risen sharply in Russia following the collapse of the ruble, which is now worth less than a single U.S. cent. The devaluation of the ruble was predictable in the wake of the unprecedented economic sanctions slapped on Russia by Western countries in the wake of its invasion of Ukraine. So was the rush by ordinary Russian citizens to acquire or increase digital assets as a hedge against rampant inflation that resulted.
By February 28, just four days after the first Russian troops crossed the border into Ukrainian territory, CryptoCompare, an independent provider of real-time cryptocurrency market and pricing data, found that crypto acquisition in Russia had already tripled within a week. After all, why hang on to savings in a near-worthless currency when there is an alternative?
But is there?
The Russian Rush to Acquire Crypto Is Bound to Slow Down to a Trickle
As long as sanctions remain intact, the ruble will not strengthen any time soon either. Its depressed value, the run on banks to withdraw them and the evaporation of hard Western currencies will make it almost impossible for Russians to obtain new digital currencies. In addition, since the Russian central bank prohibits cryptocurrency to be used to purchase goods and services domestically, Russians who do hold crypto generally store it outside the country, where it can be used.
Meanwhile, Visa and Mastercard, which together account for 74% of all payment transactions in the country, have blocked major Russian financial institutions from their networks. PayPal (and its money transfer tool Xoom), Wise and Remitly have all cut off access from Russia. Apple Pay has limited its service as well. And old fashioned bank wires cannot be sent abroad without access to SWIFT. Russians, therefore, are finding it increasingly impossible to acquire crypto on exchanges abroad or cash out digital assets held in foreign exchanges for hard currency.
Crypto Exchanges Are Taking a New Look at Sanctions
But all of that may soon become academic anyway, since crypto exchanges outside of Russia, which were initially skeptical about such sanctions, now appear to be reconsidering. Coinbase, which has announced that it is committed to sanctions, blocked over 25,000 Russian wallets that it says are linked to “illicit activity.” South Korea’s four largest exchanges (which also happen to be the only ones in the country authorized to conduct cash-to-crypto trades) are now blocking Russian IP addresses. Japan may be next. There are reports that its financial regulator, together with its domestic crypto industry, are exploring how to prevent Russian financial institutions from using cryptocurrency to evade sanctions.
All that has further constricted Russia’s domestic cryptocurrency liquidity. After all, Russians who have crypto stored in Russian exchanges as a hedge against inflation are not going to sell it to other Russians anxious to pay for it in near-worthless rubles. So while demand may not subside as long as international sanctions remain, access to the supply is drying up.
And that may not be the end of it either.
Sanctions Could Be a Catalyst for Crypto Regulation ― and Recovery
In Brussels, London and Washington, regulators and politicians alike are intent upon preventing both the Russian government and Russian citizens from using cryptocurrency to evade sanctions, even if they somehow do have it at their disposal. Incidentally, what that may mean is that formal government regulation of cryptocurrencies may have to come sooner than anyone thinks. On March 2, Jerome Powell, chairman of the U.S. Federal Reserve, in testimony before a House of Representatives committee, stated that the need to prevent cryptocurrency from being used to skirt sanctions requires “congressional action on digital finance, including cryptocurrencies” because “there isn’t in place the kind of regulation framework that needs to be there.”
So what alternative is left to Russians who want to increase their crypto holdings? Statistics provided by MyChargeBack strongly suggest that they are exploring the possibility of recovering disputed crypto that was until now presumed lost in the blockchain.
MyChargeBack, which traces disputed cryptocurrency through the blockchain for clients around the world, reports a 157% increase in web traffic from Russia in the first week following the invasion of Ukraine. The most logical explanation for this trend is that Russians are in a rush to reclaim cryptocurrency they might have lost to frauds, disputes or hacking. To recover lost crypto, however, they first have to know where it wound up and who received it, a hurdle that requires the type of sophisticated cointracing software principally employed by national law enforcement agencies, taxation authorities and central banks, as well as select financial services firms like MyChargeBack. For the record, MyChargeBack has never marketed this service in Russia, which is why we believe that the uptick in interest cannot be due to factors unrelated to the constriction of the Russian cryptocurrency market itself.
Time will tell.