KYC: Combatting Russia’s crypto influence

The rule change comes amid concerns that cryptocurrencies are being used to circumvent sanctions in response to Russia’s invasion of Ukraine. While the Treasury has provided no further detail on the underlying allegations, there is plenty of circumstantial evidence in the public domain to demonstrate Russia’s advanced relationship with cryptoassets, and the challenges the West faces in rooting out illicit activity.Russia’s historical relationship with digital assetsThe difficulty in pulling the trigger one way or the other may lie in strategic imperatives to use crypto as a weapon to skirt sanctions. At present, there is little evidence that this is the case. Or it may be because Russia’s relationship with crypto-assets is not only longstanding, but also multi-faceted and geographically widespread.Research also suggests that at the time of the Russian invasion, there were more than 400 VASPs accepting roubles. They are tied to hundreds of thousands of crypto-addresses, spanning several assets. Many are likely to be unregulated entities, with minimal or no KYC requirements or AML checks. These entities have facilitated the trade of hundreds of millions of dollars in crypto, across several jurisdictions and subsidiaries. Crypto-related sanctions on the increase These include Estonia-based Garantex Europe - which was accused of processing over $100 million of illicit funds and formally sanctioned in April 2022 - and Czech-incorporated SUEX OTC, an arm of Moscow-based exchange SUEX. SUEX OTC was designated by OFAC in September 2021 for allegedly facilitating financial transactions for ransomware actors.On 20 April 2022, for the first time ever, OFAC designated companies operating in Russia’s virtual currency mining industry. Swiss-registered Bitriver AG, the holding company of virtual currency mining company Bitriver, as well as 10 of its Russia-based subsidiaries, were also added the SDN list.Russia’s influence over (or involvement in) the digital asset sector is seemingly sprawling. The fear is that this leaves the wider industry potentially exposed to Russia using the asset as a sanctions busting measure. Using compliance to push back on bad actors**Notably, these activities tie in with the drivers behind the UK Treasury’s updated guidance. VASPs are being asked to review their KYC documentation and take action accordingly, often in tandem with (or led by) blockchain analytics - scrutinising wallet activity for signs of illicit or suspicious behaviour and blacklisting those users and addresses.Efforts to enact restrictions on Russian use of crypto is where the travel rule will have its first big test. It has a critical role in safeguarding crypto’s (slowly improving) standing. Its implementation is still nascent, but Russia will prove a useful testing ground in demonstrating that crypto has effective and decisive compliance tools. No pressure then.