Crypto industry faces ‘fork in the road’ over sanctions

Bow to policy-makers’ concerns about sanctions evasion or face reputational damage, says LSEG’s Schwimmer

Crypto-exchanges-face-existential-choice

Cryptocurrency exchanges face a “watershed moment” where they can either comply with regulations or face the reputational consequences of failing to prevent sanctions evasion, London Stock Exchange Group chief executive David Schwimmer told an audience at the FIA Boca conference this week.

To win favour from regulators and increase wholesale market participation, there is growing pressure on crypto exchanges and trading firms to demonstrate compliance with existing anti-money laundering and know-your-customer rules.

This has become increasingly important as concerns rise among policy-makers that cryptocurrencies could be used as a loophole to avoid Russian sanctions, making it harder for regulators to track movements of illicit money. Yet one of the underlying principles of cryptocurrencies is that of a peer-to-peer, decentralized payment network that is free from control of government or financial entities.

Schwimmer said the crypto industry has reached a “fork in the road” where it must choose either to follow the “underlying philosophy” of decentralised finance or “align with the global financial system and the need for more regulation”.

“If that industry is seen as a bad actor, from a regulator perspective, from a government perspective… in the context of the implementation or avoidance of sanctions in terms of what is going on with Russia, then I think that will have a long-term impact on how that industry is perceived,” he said, speaking on a panel at the event on March 16.

The comments come amid the debate about the role of cryptocurrency exchanges in enforcing global sanctions. Earlier this week, Japanese authorities ordered the country’s 31 crypto exchanges to not process any transactions subject to asset-freeze sanctions involving Russian or Belarusian entities.

The UK’s Financial Conduct Authority has also called on the entire financial service industry, including the crypto sector, to support global efforts on sanctioning the Russian and Belarusian economies, while the US Treasury has published guidance that requires cryptocurrency firms to not engage with any sanctioned targets.

On March 17, US lawmaker Elizabeth Warren revealed at a hearing of the Senate Committee on Banking, Housing and Urban Affairs that she plans to introduce a bill that would impose rules on crypto platforms that do business with already sanctioned entities. At the hearing, Jonathan Levin, co-founder and chief strategy officer at digital asset analytics firm Chainalysis, said he has seen no evidence of Russia using cryptocurrencies to evade sanctions.

US regulators are aiming to introduce rules that will shape the digital asset market to conform with current financial services practices. Last week, President Joe Biden issued an executive order aimed at fostering innovation in the $3 trillion crypto market while protecting consumers and financial stability.

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