The Swiss government wants to freeze Russian crypto assets to enforce economic sanctions. That might be crucial to avoid regulators to crack down on the entire crypto space.

Since the Russian onslaught in Ukraine began, the west is trying to increase pressure on Russia by imposing economic sanctions. A large part of that involves financial sanctions, such as excluding Russian bank from the SWIFT system and freezing financial assets of Russian oligarchs.

One concern for western lawmakers and regulators were cryptocurrencies, which Russian’s could use to circumvent financial sanctions. And indeed that is a concern, as regulations in the crypto ecosystem are much less tight than in financial systems. That said, the notion that crypto is a lawless space is not correct. As Switzerland now demonstrates.

Freezing crypto assets

According to the Financial Times, the Swiss federal government plans to freeze crypto assets owned by Russian businesses and citizens within Switzerland. Guy Parmelin, the Swiss Finance Minister, said more than 200 Russians including president Putin had their bank accounts and physical assets frozen since the war started. Freezing crypto assets would be one more step, so a senior official with the finance ministry.

Other countries have taken similar measures, for example France. “We are taking measures, in particular on cryptocurrencies or crypto assets which should not be used to circumvent the financial sanctions decided upon by the 27 EU countries,” said the French Finance Minister Bruno Le Maire.

The way this could work is to ban Russian citizens from using centralized exchanges like Binance or Coinbase and to force the exchange providers to freeze the respective assets. That said, there are limitations to that approach. Crypto assets that are kept in cold storage or wallets outside of exchange infrastructures would be difficult to confiscate. Also any assets that run through decentralized finance (DeFi) platforms where users don’t need to undergo any KYC procedures would effectively not be subject to these bans.

“If someone holds their crypto key themselves then, wherever they are, it’s going to be virtually impossible to identify them,” said the official to the financial times. “But if they are using crypto services—funds, exchanges, and so on—these service points we can target.”

Integrity of the crypto ecosystem

Involving crypto in the sanctions is not only about trying to stop the Russian invasion in Ukraine. It’s also about the integrity of the crypto industry. After all, if crypto where used as a means to bypass sanctions – even if just in theory – that would compel lawmakers to crack down on the industry in a harsh way.

Considering that Switzerland and Liechtenstein are home to a vivid blockchain industry with around 1,128 blockchain companies – according to a report by Crypto Valley Venture Capital – that’s a major concern of both countries. To avoid this from happening, it’s necessary to ensure that crypto is not being used for sanctions evasion.

Crypto proponents have jumped to crypto’s defence, pointing to the over $50 million in donations that have so far reached Ukraine through crypto channels.

But still: If crypto were to be used on a major scale to avoid government regulations – such as sanctions – that would be a major threat to the existence of the whole space. Investors and users thus have an interest to ensure the technology is not used for illicit purposes.  

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