A new interpretation of a recent Ukrainian law aims to crack down on crypto companies, according to the deputy head of Ukraine’s Security Service. This could intensify regulatory pressure on other countries with similar laws.
The “The Ukraine Way Might Intensify Regulatory Pressure On Crypto Companies” is a piece that discusses how the Ukraine might intensify regulatory pressure on cryptocurrency companies. This will likely have an impact on other countries with similar laws. Read more in detail here: is cryptocurrency legal.
People may witness ‘live’ why the sanctions on Russia are important on a daily basis. Everyone now seems to be reconsidering the value of compliance and cryptocurrencies. Which side do you support? It seems that the Ukraine-Russia relationship is compelling individuals to respond to this issue.
For some members of the crypto community, this may be unsettling since standing with the West against Russia also means adhering to sanctions. It may be difficult to reconcile crypto/ostensibly blockchain’s autonomous structure with its claims of being borderless, dispersed, and censorship-free.
Take OpenSea, for example; the NFT marketplace is not a decentralized initiative, yet it is often referred to be one. The following is according to CoinMarketCap:
“OpenSea is a decentralized peer-to-peer marketplace for the purchase, sale, and exchange of rare digital items.”
However, some NFT collectors were outraged when OpenSea recently blocked Iranian consumers from accessing their nonfungible token trading platform, claiming that it was only following United States sanctions legislation. Khashayar Sharifaee, a documentary photographer, tweeted in response:
I saw #OpenSea and #Metamask blacklisting and shutting off sanctioned users. This was not the decentralized system! (countries like Iran, Cuba, Syria, and others) This was not going to work!
March 3, 2022 — Khashayar Sharifaee (@sharifaee)
This begs the question: did OpenSea have a choice in barring Iranian users, which enraged the majority of its community? Is there a greater focus on crypto regulation among the general public and government authorities, especially since the commencement of the Russia-Ukraine conflict?
Furthermore, although large crypto-related enterprises situated in the United States, such as OpenSea, FTX, Consensys, and Coinbase, must follow US legislation and penalties, what about decentralized initiatives with no clearly defined headquarters, country connections, or leaders? Will they be able to comply as well, or will they be given a pass?
A long-term issue is whether we will ever have a fully operating decentralized marketplace. Isn’t it inevitable that the whole cryptoverse will have to make some kind of compromise with centralized organizations like sovereign governments?
Regulatory Focus Increased
When questioned about current happenings in the globe, Cory Klippsten, CEO of Swan.com, said:
“Recently, government authorities have shown a greater interest in crypto-regulation. For many years, serious regulatory debates have been occurring. Nonetheless, the Russia-Ukraine conflict has brought crypto into the forefront, which is why we’re witnessing an increase in public interest in these crypto-regulatory developments.”
Carlos Domingo, the founder and CEO of Securitize, agreed:
“For a variety of reasons, everyone is beginning to reconsider the value of compliance and cryptography. Right now, we’re seeing firsthand the relevance and efficacy of sanctions in the context of the conflict.”
US authorities are putting more pressure on the crypto industry’s biggest participants to follow laws and regulations. Markus Hammer, an attorney and owner of the consultancy firm Hammer Execution, said:
“And now, partially decentralized crypto platforms,” says the author.
That might be why, despite the fact that Iranian sanctions were re-imposed in 2021, OpenSea took a strong line against Iranian customers in the last week. Klippsten had this to say about it:
“As laws look to be in the horizon, organizations like OpenSea are attempting to protect themselves by ensuring that they are comply with any future legislation.” That is why they are banning Iranians.”
Will we start to see more initiatives like FTX or Binance, which were previously ambiguous about where they were located, becoming more specific about where they are now based? Will others declare, like OpenSea did last week?
“We’re a US-based corporation, therefore we have to follow US sanctions law?”
We’re truly sorry to the artists & creators that are impacted, but OpenSea is subject to strict policies around sanctions law. We’re a US-based company and comply with US sanctions law, meaning we’re required to block people in places on the US sanctions lists from using OpenSea
— March 3, 2022, OpenSea (@opensea)
Domingo responded:
“I’m not convinced OpenSea attempted to conceal their whereabouts. The CEO and other workers were based in New York, as most people understood. To be clear, I do not consider OpenSea to be a decentralized initiative. I believe it is centralized in the same way as Coinbase, Binance, and FTX are.”
He added:
“Rather, what we’re seeing today is that regulators are becoming more concerned about fraud and criminal actions perpetrated against their people and enterprises, and they’re becoming more prepared to take enforcement action anywhere in the globe, as in the instance of BitMEX.”
Many in the bitcoin world, however, perceive OpenSea’s activities as a betrayal, since blockchain-based initiatives are intended to be censorship-free. Is it acceptable to deny a platform to sell digital art to an Iranian artist who has nothing to do with the government’s actions?
Klippsten elaborated:
“Like any other centralized US-based firm, OpenSea is subject to US sanctions regulations and legislation. A decentralized initiative, such as Bitcoin, on the other hand, has no leader and is really permissionless. When no one can govern the project unilaterally, it’s difficult to restrict users or enforce punishments.”
The fact that there are numerous sanctions regimes complicates things. These sanctions, for example, were imposed by the United States on Russia. Ordinary Russians are exempt from them. Instead, they go after Russia’s banking industry and elites, including billionaires. The US sanctions on Iran, on the other hand, harm all Iranian users.
Parties are also free to interpret these punishments in their own ways. For example, OpenSea “de-platformed” Iranian artist Arefeh Norouzii, despite the fact that she is an Iranian citizen who “is not even resident in Iran,” according to Hammer.
“In that situation, I would claim that OpenSea’s decision to deplatform Arefeh on their conditions is in violation of the appropriate penalties.”
Domingo believes:
“By processing transactions from Iranians, OpenSea would be committing a felony, and it’s as simple as that.” I understand that individuals in sanctioned nations should not be affected in this manner since they are not accountable for their governments’ conduct, but the US government has determined that this is the best method to defend its citizens and interests.”
Given previous developments, it is reasonable to conclude that certain crypto and NFT businesses are not as decentralized as they claim to be. Fabian Schär, a professor at the University of Basel’s business and economics department, insisted:
“At first appearance, certain infrastructure services seem to be more centralized than they are.”
Even if projects are not totally decentralized, these users have other alternatives. They may simply run their own node and utilize different user interfaces. Hammer argues that until recently, some of these decentralized systems did not take into account current financial sector laws.
“They saw themselves in the ostensibly secure ‘decentralized’ area and never considered that, over time, they would get entangled in regular financial market regulation.” It’s finally catching up with them, especially crypto exchanges with fiat ramps.”
Will DEXs Be Able to Comply?
What about the decentralized initiatives, one could wonder? Are they impenetrable in terms of compliance and regulation? Isn’t it feasible for DEXs and many other decentralized projects to comply completely if they want to, considering that there is some amazing compliance tools to detect all the “bad actors” on decentralized digital ledgers today?
Hammer had this to say:
“The tools are in place, and they are becoming more powerful and effective.”
Chainalysis’ forensic capabilities were recently used to discover the malefactor behind the notorious 2016 attack of The DAO, which is a perfect example. Domingo went on to say:
“Companies can easily comply with legislation if they wish to.” There are no shortages of tools or technology, and some ‘decentralized’ initiatives seem to be doing so already.”
Schär elaborated:
“Software solutions exist, and anybody who bridges the gap between conventional banking and decentralized finance must comply with anti-money laundering regulations and sanction lists.”
Schär does not expect they will jeopardize access to existing payment methods since the whole business model is based on it. Decentralized exchanges, on the other hand, are just smart contracts that provide impartial infrastructure.
“These checks cannot be performed by a smart contract.” However, we must keep in mind that these decentralized exchanges lack conventional financial resources. You have no choice except to transfer tokens.”
As a consequence, the risks associated with DEXs are far lower than those associated with centralized exchanges. As long as they can, some of the organizations will engage in regulatory arbitrage. However, this is a misguided policy since, although technology advances faster than legislation, regulation will ultimately catch up.
However, the major issue is whether we will ever have a completely decentralized marketplace.
According to Schär:
“Some markets are really decentralized. One example is a market maker with a non-upgradable constant function. There are no special privileges, no external ties, and no one in authority capable of making these judgments.”
Because these initiatives can never be directly monitored, they often operate indefinitely. According to Schär, politicians and regulators should concentrate on the on- and off-ramps and use indirect control.
While decentralization is possible if a company adheres to two principles: it uses open-source software and is administered primarily by a decentralized autonomous organization (DAO).
However, even among decentralized organizations, there may always be certain constraints on conduct, and most initiatives will unavoidably have to make some kind of compromise with centralized institutions, including sovereign governments.
Domingo ended by saying:
“That’s exactly how I see it.” Finance will continue to decentralize, but there will be measures in place to protect investors from frauds and unscrupulous actors. We’ll get to a point where we can agree on something.”
