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Ukraine, Russia, Sanctions and Crypto

2022-03-04

A hot topic now, but there is much misunderstanding. Very few people have a deep understanding of all 4 topics. I don’t claim to be one of them. Here, I will share what I think I understand.

First, I want to say how deeply sad, angry and hurt I am watching the news from Ukraine.  It is a terrible humanitarian crisis - and one that I never thought I would see in the modern era. The team at Binance is working hard to help people in and around Ukraine. We have already donated to help the kids, refugees, and people in need.

Next, let’s clear a few common misconceptions.

“Binance is not applying sanctions.” This cannot be further from the truth. Binance follows international sanction rules strictly. At Binance, we have assembled a dedicated global compliance task force, including world-renowned sanctions and law enforcement experts, such as Tigran Gambaryan, Matt Price, Nils Andersen-Röed, and more recently Chagri Poyraz. They work tirelessly to enforce sanction rules. More on this later.

“Banks apply sanctions, but Binance doesn’t.” Again, nothing can be further from the truth, Binance applies the same sanctions rules as the banks, according to international standards.

Now, some of the common (misleading) questions.

Why won’t Binance go one step further and sanction/freeze all Russian users' assets?

The most important point: we don’t think we have the authority to do so. Sanction decisions are made at the most senior levels of governments, with the support of legal legislature, law enforcement and even military powers. We don’t think it is right for businesses or platforms to unilaterally decide to freeze populations of users’ assets. There are normal Russian citizens in London, New York. Should a bank CEO in London have the power to unilaterally decide to freeze those people’s assets? On what grounds? Just because they don’t agree with the President of their country? What happens if they also do not agree with another head of state in another country? Should they have the power to freeze all assets of citizens of that other country too? Where does this stop? For this reason, it is our understanding that we must follow international sanction lists, and not make up our own.

Second. Is crypto really the center of this issue? Currently, the media and politicians are spending a lot of effort and focus on crypto & sanctions. The truth is, crypto is too small for Russia. If we look at the crypto adoption today, there is probably about 3% of the global population with some kind of crypto exposure (ie, owning some crypto). Of those, most only have a small percentage of their net worth in crypto. Less than 10% on average. So, there is probably only less than 0.3% of the global net worth in crypto today. This percentage applies equally to Russia. Now, instead of focusing on banks, which hold 99.7% of the money, the media and politicians are focusing on 0.3% of the money. Even if you block all of that, does it even move the needle? No. Instead of focusing on bitcoin, it may be far more effective to focus on banks, oil/gas, or other means.

Does Russia want to use crypto? No, it devalues the ruble. Russians converting from ruble to crypto weakens the ruble, which weakens Russia’s powers. It’s rumored that the Russian Central Bank is actively trying to block access to crypto, not promoting the use of it. Russia may effectively “sanction” themselves from crypto, i.e., “ban crypto”. Some western politicians also commented that the west should encourage Russian citizens to move to crypto.

Another reason Russia would not want to use crypto is that it is too traceable. And governments around the world are already very adept at tracking it, look at the Bitfinex hack for example.

Would they use privacy coins? No, they are even smaller. The biggest privacy coin, Monero, has a market cap of $3 billion. Russia’s GDP is $1.5 trillion.

Assuming after all that, Russia still wants to use crypto. Does sanctioning a few international crypto exchanges have any impact? No. There are tens of thousands of small exchanges all around the world, many are located in Russia. Most users ‘multi-home’ (use more than one platform). Switching costs between exchanges are low. Is their low liquidity an issue? No, if users are forced to go there, liquidity providers and arbitrage traders will provide the liquidity immediately. Limiting a few large international exchanges does practically nothing.

Lastly, many who have never used crypto don’t understand that: to use crypto, one does not need an exchange. People can use crypto simply by downloading a wallet (open-source software). Then they can begin to accept crypto for their goods and services. And they can pay others in crypto for the goods and services they need. They don’t need an exchange at all. They just need a wallet.

I hope that puts in perspective some of the misconceptions or misunderstanding floating around.

Circling back to Binance, we take sanctions very seriously. Our compliance team has more than 500 people globally and close to half of them are directly involved in sanctions control work such as anti-money laundering, name screening, Know Your Customer onboarding and on-chain monitoring. 

We have very clear Standard Operating Procedures for when we identify risky transactions related to sanctions. This includes account restrictions, filing of STRs/SARs and transference of assets to law enforcement. 

There is not a crypto-team in the world with this level of expertise.

The team and the processes that are outlined above are working 24 hours a day - literally - on the imposition of new sanctions on Russian individuals and entities. One surprising stat, we reviewed all the sanction list closely, and have off boarded one so far. Wait - just one? Yes, one. Here’s why.

The reason why this number is so low is that we utilize banking grade tools such as Refinitiv Worldcheck, which is the gold standard in anti-money laundering, name screening and sanctions control.

Politically Exposed Persons (PEP) are stopped at Binance BEFORE they onboard. Most of the newly sanctioned individuals would have been flagged as PEPs and therefore denied access to our platform long before they could ever trade in the first place.  This includes principals, their lawyers, family members and mules - people that people try and use to open fraudulent accounts. 

During the onboarding process and during periodic screening, Binance ensures all its users are properly screened to minimize sanctions risk. Binance remains one of the few exchanges in the industry that implements mandatory KYC as part of its onboarding process. 

We believe that only through a strong Customer Identification Programme can sanctions and risk relating to Specially Designated Nationals (SDNs) be mitigated. 

What this all leads to is that - contrary to popular belief - crypto is not an effective tool for illicit activities.

In short, crypto can be fully tracked on the blockchain through on-chain analytics. By virtue of the number of regtech partnerships Binance has in the industry, Binance remains one of the top proponents of Anti-Money Laundering and Counter-Terrorist Financing in the crypto industry.

In total, over the past three years, we have off-boarded approximately 20,000 accounts that we identified as having high-risk typologies with regard to PEP exposure or international sanction directives.

On top of that, we use sophisticated tracking systems to track their money, because - as I said - blockchain and crypto is not good for money laundering. We use on-chain monitoring tools such as Elliptic, Ciphertrace, Chainalysis & TRM to ensure illicit funds with possible sanctions backgrounds are identified and restricted accordingly. 

Crypto is not good for laundering money for a few reasons. 

One, the KYC is tough. Two, you simply cannot move millions of dollars into crypto without people noticing, and three, it is trackable. 

Look at the Bitfinex hack. You can - in theory - steal $3.6bn worth of Bitcoin, but you then can’t use them without getting caught.  

The fact remains that the traditional financial system is far more susceptible to money laundering and sanctions-busting than crypto will ever be.

So, I’ve been clear. We are meeting sanction requirements, and crypto is not useful to avoid sanctions.

So, should Binance block crypto to all Russians unilaterally? Let me ask this another way. Should a coffee shop in Paris refuse to serve a Russian customer? Or take their wallet while they’re at it?

The answer to that is no. We are not going to unilaterally freeze millions of innocent users' accounts. 

Of course, if governments introduce new sanctions that include off-boarding users then we will apply those aggressively as well. We also have formal and informal joint task force teams with multiple governments and regulatory agencies around the world, providing consulting on the best practices going forward. We are always happy to work with any government who wishes to work with us.

CZ

CEO @Binance