1/ Russia can't & won't use crypto to evade sanctions.
Concerns about crypto's use for sanctions evasion are totally unfounded. They fundamentally misunderstand:
- how sanctions work
- how crypto markets work
- how Putin is actually trying to mitigate sanctions
I'll explain 🧵
2/ To begin, I want to express my strong & unequivocal support for the people of Ukraine fighting a totalitarian invader to defend their homes & their basic rights to liberty & self-sovereignty. Glory to Ukraine 🇺🇦
The free world must assist Ukraine & fight back against Putin.
3/ One way for the free world to fight back is by imposing severe economic sanctions on Russia.
Sanctions are a foreign policy tool used to influence the behavior & diminish the capabilities of foreign actors. They seek to deter & punish bad acts through economic consequences.
4/ Here's how US sanctions work:
First, sanctions must be authorized by the President in an executive order or by Congress in legislation.
Second, the Office of Foreign Assets Control (OFAC) designates specific targets for sanctions: individuals, companies, governments, etc.
5/ OFAC adds targets to the Specially Designated Nationals And Blocked Persons (SDN) List, available here: sanctionssearch.ofac.treas.gov
*It is illegal for any US person to transact with any person on the SDN List.*
This is the crux of sanctions: cutting SDNs off from the US economy.
6/ This is crucial to understanding sanctions policy:
The main goal of US sanctions is to deprive SDNs of access to the US economy by making it illegal for US persons to transact with them.
SDNs can't buy US goods or services, sell products to US markets, own US property, etc.
7/ To be most effective, US sanctions laws are extremely broad:
- "US person" means every US individual, company, etc. all over the world
- the law prohibits direct & indirect transactions, plus "facilitation"
- violations are strict liability offenses; zero tolerance for errors
8/ This brings us to Russia.
The US & our allies have imposed severe sanctions on Russia as punishment for invading Ukraine & to deter further aggression.
These sanctions aren't comprehensive. They're targeted at Putin, his oligarchs, the government, & other state entities.
9/ In addition to these sanctions, we've also:
- frozen assets of Russian oligarchs & central bank
- limited Russian banks' access to SWIFT
- banned Russian flights in EU airspace
This list isn't complete & more sanctions are being discussed every day, but you get the idea.
10/ These sanctions have been devastating for Russia so far & will likely be even more effective over time.
But some people are suggesting that crypto could give Russia a way to "evade" or mitigate these sanctions. Is that plausible?
Not at all. I'll give you three reasons why.
11/ FIRST: Russia's access to a global payment network has nothing to do with the goal of primary sanctions, cutting Russia off from the US economy.
It's illegal for US persons to transact with SDNs, period. It doesn't matter if they use dollars, gold, sea shells, or bitcoin.
12/ US persons around the world are cutting ties with Russian SDNs right now, regardless of what payment systems they were using previously.
There's zero reason to think crypto's existence will convince any of them to willfully violate sanctions laws, risking fines & jail time.
13/ What about SWIFT, you ask?
SWIFT is a messaging service that facilitates interbank transactions. Kicking Russian banks off SWIFT will make it harder for them to conduct business.
But it's not the same as "banning Russia from the global financial system," as some have said.
14/ Rather, as with primary sanctions, the goal is to deprive Russia of services offered by the free world.
SWIFT is a service. Russia doesn't get to use it anymore. That's the sanction.
Some Russian banks can still do cross-border transfers, they just can't use SWIFT for that.
15/ Crypto works the same way.
US crypto companies offer a variety of services. Russia doesn't get to use them anymore. That's the sanction, just as with all US goods & services.
Russia's ability to use the underlying technology doesn't let them "evade" the sanction in any way.
16/ Can crypto mitigate sanctions by offering an alternative to SWIFT? Not really.
If Russia wants an alternative, they're far more likely to use China's CIPS than a public network they can't control.
Regardless, there's nobody in the free world to do business with them anyway!
17/ SECOND: crypto markets are too small, costly, & transparent to be useful for the Russian economy.
Crypto markets are thin to start with, & ruble trading pairs are rare. With Russia cut off from the world's crypto industry, they can't source nearly enough liquidity to matter.
18/ Russia also can't hide its tracks with crypto.
Setting aside valid privacy concerns, the transparency of public ledgers + the analytics capabilities of US forensics firms = crypto is useless for sanctions evasion.
19/ THIRD: the reality is Putin's spent years trying to sanctions-proof Russia & crypto isn't part of his plan.
His strategy included diversifying Russia's reserves into yuan & gold (not crypto), shifting trade to Asia (not onto blockchains), bringing manufacturing onshore, etc.
20/ Putin could have built crypto infrastructure if he wanted. He didn't. There's no reason to think he will (or could) now.
Here's @nytimes, which stoked fears about crypto & sanctions evasion last week, on Putin's real strategy. Zero mentions of crypto: nytimes.com/2022/02/03/wor…
21/ There are other reasons why crypto doesn't create sanctions evasion risk, & more to say about how crypto is being used to support Ukraine & the many innocents caught in the crossfire, but this thread is getting long, so I'll wrap it here. More to come soon.
🇺🇦
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1/ There's a ton of action in Congress on stablecoin regulation right now & @RepJoshG just proposed a draft bill with the best language we've seen yet.
1/ A small silver lining of a crypto bear market is that it may relieve some regulatory pressure.
For good reason, regulators with limited resources focus attention on issues with widespread impact & systemic importance.
To a degree, shrinking markets = lower risk = less focus.
2/ Regulators looking at the crypto market over the last 12-18 months see a high-risk speculative mania inflated by unrealistic or even false promises.
They assume it will end badly for most participants just like it did after the 2017 ICO bubble & they want to limit the damage.
3/ They're particularly concerned because of how much retail participation they see in the 2022 edition.
With a few exceptions (like Katy Perry's crypto claws), the 2017 bubble didn't really breach the mainstream before it blew up.
President Biden signed the bill into law on Monday. The crypto tax provisions are officially set to take effect on January 1, 2024 (for FY2023 reporting).
Several members of Congress have already proposed new bills to fix this 👇
2/ As a reminder, the infrastructure bill imposed tax reporting requirements on an unknown but possibly massive number of actors in crypto, even where compliance is impossible.
This could include miners, validators, software developers, wallet providers, NFT creators, & more.
3/ The bill has three main flaws:
- the broker definition, which could force nearly everyone in crypto to do tax reporting
- the digital asset definition, which could apply to anything on a blockchain
- the cash transaction report expansion, which is the infamous 6050I provision
I really can't wait to explain @ConstitutionDAO to folks here in DC.
This is Web3 at its best: thousands of passionate people coming together to fund the preservation of a historic document & make it available to the American public after decades in private hands. Truly amazing.
The Constitution isn't just a set of laws or a historic artifact. It's a symbol of the freedom & opportunity at the heart of our democratic experiment.
Before Web3, who would've imagined that anyone, regardless of background, could participate in the American dream in this way?
I admit I've been a little emotional about it the past few days. Many of the notes from people who've joined are deeply moving.
I feel this on a personal level too, as a grandchild of immigrants who came to America fleeing persecution across the sea. 🇺🇸