UK Obliges Crypto Exchanges to Report Suspected Russian Sanction Breaches

Under new rules brought in amid concerns that bitcoin and other crypto assets are being used to dodge restrictions imposed in response to Russia’s invasion of Ukraine, crypto exchanges must now report suspected sanction breaches to UK authorities.

Official guidance was updated on 30 August to explicitly include “crypto assets” among those that must be frozen if sanctions are imposed on a person or company. Just like digital currencies, such as bitcoin, ether and tether, crypto assets could include other notionally valuable digital assets like NFTs.

The rules, set by the Treasury’s Office of Financial Sanctions Implementation, will mean crypto exchanges are committing a criminal offence if they fail to report clients designated for sanctions. Under the rules, crypto exchanges must immediately act if they suspect that one of their customers is under sanctions, or if they suspect a breach of sanctions – giving them similar obligations to professionals such as estate agents, accountants, lawyers and jewelers.

Financial sanctions on people and companies linked to the regime of Vladimir Putin have been among the UK’s most prominent responses to the invasion of Ukraine.

Targets for sanctions have included oligarchs and relatives with direct interests in crypto assets, including Vladimir Potanin, the “nickel king” who was previously Russia’s second richest man, and who backed Atomyze, a Swiss blockchain business.

Said Gutseriev, son of the oligarch Mikhail, owned a stake in a Belarus-based cryptocurrency exchange until August 2021, before he was hit with sanctions on the same day as Potanin in June. The metals billionaire Oleg Deripaska has previously urged Russia’s central bank to allow bitcoin to be used as a means of payment. There is no suggestion that they have used crypto assets to evade sanctions.

Binance, the world’s largest cryptocurrency exchange by trading volume, in April said it had blocked the accounts of relatives of Russian politicians, including Polina Kovaleva, the stepdaughter of the foreign minister, Sergei Lavrov, and Elizaveta Peskova, the daughter of Putin’s spokesperson, Dmitry Peskov. The exchange had previously dismissed fears of crypto being used for sanctions evasion.

Using cryptocurrencies to evade sanctions and move money around the world was already illegal in the UK under laws that cover all “economic resources”. However, the change underlines authorities’ concern about the relatively new assets, which could be useful for evading sanctions because users do not rely on regulated entities to make transactions.

Anna Bradshaw, a partner at Peters & Peters, a London law firm, said the UK’s move was “in line with the more general expansion of financial services and anti-financial crime regulation to the crypto sector”, according to The Guardian.

“Crypto and virtual assets are treated no differently to any other type of assets for the purposes of an asset freeze. Having said that, reliance on crypto or virtual currencies could potentially make it more difficult to detect that a sanctioned party is involved, or that it relates to sanctioned trade or other sanctioned activity – at least in time for steps to be taken to prevent it", she said.

Regulators have taken note. In February, representatives from the White House and the US Treasury asked crypto exchanges to stop operating in Russia. In March, UK financial regulators issued a joint statement confirming that crypto assets fall under sanctions rules. The EU in April also banned large crypto transactions with Russia.

A Treasury spokesperson said: “It is vital to address the risk of crypto assets being used to breach or circumvent financial sanctions. These new requirements will cover firms that either record holdings of, or enable the transfer of crypto assets and are therefore most likely to hold relevant information.”