The article discusses the upcoming US and EU cryptocurrency regulations, Travel Rule, Bitcoin, Monero and Waves. Additionally, the scenario of sanctioning cryptocurrencies in Russia is discussed.
Both the United Stated and the EU are weighing the possibility of sanctioning Russia from the use of cryptocurrencies. Reports indicate that US President Biden will sign an executive order this week, paving the way for the enforcement of such sanctions.
The EU Parliament is scheduled to vote on the European Union’s Markets in Crypto Assets (MiCA) regulations on 14 March 2022. In addition, it will include some measures on stablecoins.
EU Crypto Sanctions
Moreover, the EU clarified today that crypto assets are included in the sanctions imposed on Russia:
“Crypto assets fall under the scope of ‘transferable securities’ and further expand the existing financial restrictions by mirroring the measures already in place regarding Russia sanctions.”
source: EU
Crypto exchanges have already taken some measures to prepare for the direct cryptocurrency sanctions on Russia and to meet future cryptocurrency regulations.
In February, the large cryptocurrency exchange has teamed up to launch the Travel Rule Universal Solution Technology (TRUST).
The goal of TRUST is to assure full compliance with the Financial Action Task Force (FATF). One of the key components of FATF is to lower crypto usage for money laundering and financing terrorism.
18 crypto exchanges have joined TRUST. Some of these known companies are Coinbase, Robinhood, Gemini, Kraken and BlockFi.
FATF Cryptocurrency Rules
The FATF requires records of transaction from above $1,000 / €1,000. Regarding ATMs, some jurisdictions may view such a transaction to be occasional while others may not.
When assessing which countries are at greater risk, FATF suggests the following using credits to determine the risk:
“Countries or geographic areas identified by credible sources as providing funding or support for terrorist activities or that have designated terrorist organizations operating within them.
“Countries identified by credible sources as having significant levels of organized crime, corruption or other criminal activity, including source or transit countries for illegal drugs, human trafficking, smuggling and illegal gambling.
“Countries that are subject to sanctions, embargoes or similar measures issued by international organizations such as the United Nations.
“Countries identified by credible sources as having weak governance, law enforcement and regulatory regimes, including countries identified by the FATF statements as having weak AML/CFT regimes, especially for VASPs, and for which VASPs and other obliged entities should give special attention to business relationships and transactions.
"In identifying the addresses, the FATF suggests the following measures:
“Corroborating the identity information received from the customer, such as a national identity number, with information in third-party databases or other reliable sources.
“Potentially tracing the customer’s IP address.
“The use of analysis products, such as blockchain analytics
“Searching the Internet for corroborating activity information consistent with the customer’s transaction profile, provided that the data collection is in line with national privacy legislation.”
The FATF recommends keeping records for at least 5 years.
Source: FATF
FinCen Crypto Rules
The Financial Crimes Enforcement Network (FinCen) requires the following information available if requested from exchanges:
The name of the transmitter,
The account number of the transmitter, if used,
The address of the transmitter,
The identity of the transmitter’s financial institution,
The amount of the transmittal order,
The execution date of the transmittal order, and
The identity of the recipient’s financial institution;
and, if received:
The name of the recipient,
The address of the recipient,
The account number of the recipient, and
Any other specific identifier of the recipient.
Source: FinCen
According to FinCen, records all the transactions must be kept for 5 years. The Travel rule only applies to transactions that exceed $3,000 (or foreign equivalent). The interesting part is that transactions that made via ATMs or point of sale are exempted from the rule.
In February, Assita Kanko and Ernest Urtasun submitted a draft to mandate all cryptocurrency exchange to record all transactions. This includes transactions as little as $5.
Recently, FinCen issued an alert to US institutions on possible attempts Russia may exercise to evade the sanctions.
source: FinCen
Preparing for Cryptocurrency Sanctions
Tracking users’ IP addresses is a common practice. IP screening is required to ensure sanctions jurisdictions are unable to make transactions at the exchange.
BitGo was fined by the Office of Foreign Assets Control (OFAC) in 2020 for allowing users in sanctioned regions to make transactions at the exchange.
A total of 183 transactions were made from users in Sudan, Syria, Cuba, Iran and Crimea using BitGo’s hot wallets.
source: the department of the treasury
There are services that offer screening in real-time with the updated sanctions list. If measures are taken against cryptocurrencies in Russia, VPNs may be required to be blocked as well.
Know Your Customer (KYC) is already adopted by the leading exchanges. It is a known Anti Money Laundering (AML) process. It requires identification verification and ongoing monitoring of client’s transactions in search for irregular patterns.
Elliptic for example offers blockchain analytics to financial firms.
If sanctions violation is noted by the exchange, it must be reported to the regulatory bodies.
Evading Sanctions, the 'Loopholes'
MetaMask, a popular wallet for cryptocurrencies blocked Venezuela users by error. MetaMask is using Ethereum node infura, which is owned by a US company (ConenSys).
To meet the US sanctions list infura blocked Venezuela by error. When the United States sanctions cryptocurrencies in Russia, Infura is likely to block Russian users. Russian users will, therefore, be unable to use their MetaMask crypto wallets.
There may be a rush towards hardware wallets such as Trezor.
One method of evading sanctions is turning to Bitcoin mining. The system is unable to block miners from receiving BTC rewards based on geographic location. Turning to real estate in the metaverse may also be a possibility to safeguard one's capital.
While the value of the virtual real estate depends on the market, despite the reduced interest in real estate NFTs, the market is expected to blossom within the next few years.
Moreover, taking a loan against NFTs may be possible as the direct focus is on crypto exchanges and not NFTs 'pawn shops.' Further, renting NFTs may be possible if a wrapped version of the digital asset is created.
For the Russian government/banks to bypass the sanctions is challenging. In 2018, reports circulated that Russian officials and businessmen are involved with Venezuela's official cryptocurrency, Petro.
It is possible Russia will follow suit and introduce its own coin and blockchain to fight the sanctions.
The Monetary Authority of Singapore (MAS) recently announced it is forbidding all cryptocurrencies and NFTs transactions that are made by sanctioned Russian banks and individuals. More countries may adopt stricter policies against crypto trading in Russia.
Monero is Hammered by the Market
Some cryptocurrencies are privacy-focused. Monero (XMR) is among these popular coins. As opposed to traditional cryptos such as ether and Bitcoin , Monero obfuscates any information about the users’ identity and past transactions.
The IRS hired Chainalysis and Integra to develop tracing tools for Monero. To date, no tracing tools for Monero have been reported.
Aside from Monero, other privacy-focused cryptocurrencies are available such as Zcash. Monero uses stealth addresses, random addresses that are burned after a single transaction (a burner address) and a security ring for greater privacy.
Monero’s official Twitter account responded to the upcoming US executive order:
As Monero is not compliant with the proposed regulations (and it will never be), Monero may be delisted from various exchanges. Many are suggesting to immediately withdraw XMR from crypto exchanges and store them in XMR wallets.
Privacy coins may be at the center of attention in US regulations. Ransomware attackers often ask for Monero. Due to the upcoming regulations, privacy coins spiked higher. XMR popularity may increase as many users wish to maintain their anonymity in the crypto landscape.
Monero initially broke higher when the US executive order was signed. However, it is currently facing a large selloff. Monero trading volumes are estimated to be down by approximately -40%.
It is early to determine whether the selling of XMR is related to profit realization or investors abandoning the cryptocurrency due to upcoming regulations.
Zcash, another privacy-focused token, is holding onto its gains as opposed to XMR. It may offer a greater case for investors pulling out of Monero rather than a swift profit realization.
Bitcoin Reaction to Upcoming Regulations
Initially, Bitcoin traded higher following the executive order. Once the dust settled; corrective weakness was followed. Bitcoin investors realized their profits following the rally, which is seen in the market as BTCUSD is back under $40,000.
source: coinglass
Aside from Bitcoin, ETH gas fees have dropped significantly. The standard (26) swapping gas fees have dropped below $10. Liquidity gas for ether is also relatively low.
ETH Gas is Falling
Since the OpenSea phishing hack trading volumes in the NFT marketplace have dropped significantly, OpenSea began blocking users that are based in Iran from its platform. The move started as regulating digital assets is picking up pace in both the United States and Europe.
It is possible that due to the decline in ETH marketplaces, there was some impact on the reduction of gas fees.
swapping fee, source: crypto.com
liquidity fee, source: crypto.com
Bitcoin, Waves and Stellar
As long as the war between Russia and Ukraine continues, Bitcoin may struggle to find stability. A monthly close below $37,000 may technically suggest further weakness is due.
Regulatory measures that may be introduced by the US, EU and most recently Dubai may not necessarily have a positive impact on cryptocurrencies over the medium term.
‘Harsh’ regulations may be met by resistance and greater volatility in crypto-related products.
Stellar and Waves cryptocurrencies have their own blockchain. Despite the heavy selling in Bitcoin, Ethereum and BNB they are both demonstrating greater resilience.
source: WAVE/USD, tradingview
I will cautiously say that using alternative blockchains to BSC and ETH and the protocols differentials may have their benefits based on the market reaction to BTC long liquidations.
Waves did gain some attraction on its shift to Practical Proof-of-Stake Sharding (PPOSS) and support Ethereum Virtual Machine (EVM). While some suggest that the bullish 'wave' is because the founder is Ukrainian (Sasha Ivanov)
Analyzing the various blockchain technologies may provide a better understanding of which blockchain technology is best adopted and more resilient to market volatility.
