Cryptocurrency evangelists are on the defensive amid warnings from U.S. and European lawmakers that digital asset companies are not up to the task of complying with Western sanctions imposed on Russia following the country’s invasion of Ukraine.
The criticism has seen the crypto industry scrambling to regain control of the narrative, with many executives frustrated that the compliance regimes in place at leading exchanges, such as Coinbase and Binance, are being called into question.
At the same time, the increased scrutiny could be a pivotal moment for the sector to prove that it is not the "Wild West" of finance that regulators have painted it to be.
"It's an opportunity for the industry to show that it is mature and that it knows how to properly manage risk," said Matt Homer, an executive in residence at venture capital firm Nyca Partners.
The crypto community was largely caught flat-footed as the United States and its allies moved to impose sweeping sanctions against Russia's banks, elites and other state firms.
Unlike other payment companies, crypto exchanges have rejected calls to cut off all Russian users, saying that goes against the industry's libertarian values, sparking concerns among European officials and U.S. lawmakers that digital assets could be used to circumvent the sanctions.
U.S. Senator Elizabeth Warren has alleged that many crypto exchanges and wallets have lax compliance controls and are not collecting data on customers' identities.
But executives at exchanges including Kraken, FTX, Coinbase and Gemini, as well as industry trade groups, say that's not the case.
"This rhetoric is inaccurate," said Elena Hughes, chief compliance officer at Gemini, adding that the company screens clients like any other financial firm. "We've dedicated a lot of resources to ensure that we have the right controls (and) that we've gotten things right."
On Monday, Coinbase issued a lengthy blog detailing its controls, noting that it had blocked more than 25,000 addresses connected with Russian individuals or entities believed to be engaging in illegal activity.
FTX US, a Chicago-based crypto exchange, said it operates multiple regulated licenses and continues to "rigorously implement and comply" with all sanctions.
"For the most part, most of these companies have very robust systems in place already, and it's very easy for them to comply with sanctions, just like any other financial institution," said Kristin Smith, executive director of the Blockchain Association.
From its inception, the cryptocurrency community touted digital assets as vehicles for anonymous transactions, and a slew of federal enforcement actions for fraud, money laundering and unregistered coin offerings has only reinforced the perception that crypto companies are prone to flouting the law.
But as the value of all cryptocurrencies surged past $3 trillion last year and more Americans invest in the asset class, the industry has been trying to shed its unsavory image by burnishing its overall compliance credentials.
While lawmakers worry about crypto sanctions evasion, Biden administration officials have said they do not believe digital assets could be used to circumvent all the curbs.
The U.S. Treasury Department has reached out to several crypto exchanges and trade groups to explain its expectations for sanctions compliance and to create a line of communication in case of questions, a person familiar with the matter said.
This person, who spoke on condition of anonymity, added that officials were impressed by the majority of firms' compliance controls.
For many exchanges, the risk of not being in compliance with the rules as they stand is "existential," said Charles Delingpole, chief executive officer at ComplyAdvantage, an anti-money laundering technology company that works with several prominent crypto firms, including Binance and Gemini.
"Not only in terms of being fined (and) having dollar clearing access removed," he said. "If you're laundering money, which is the flip side of this, there's been huge backlash from the public for companies seen to be facilitating illegal flows of money."
(Reporting by Hannah Lang in Washington; Editing by Michelle Price and Paul Simao)