What the geopolitical crisis tells us about current challenges in banking

Rubel-denominated bitcoin trading volumes have surged, and crypto is set to get a big boost from the ruble's collapse and the growing market share of stablecoins.

It is hard to prove that cryptocurrencies have helped Russia slip past the blockade on a large, systemic scale but the possibility exists that individually blacklisted oligarchs are using them to move funds.

With years of massive investments in AML and the continuous development of robust processes, banks should not be caught off-guard, but have the capabilities to step up to the current risk environment.

A lot of the current attention is focused on dealing with sanctions and identifying Russian interests in relation to various types of assets. It puts the ability of financial institutes to identify unique beneficiary owners behind layers of legal persons to the test.

The immediate and acute activities may be discussed as indications of some broader challenges. Are existing KYC processes including risk classification procedures able to meet current needs?

In light of the reported movements on a large scale of Russian money into virtual assets, a further question is how banks are able to address risks linked to virtual asset service providers (VASPs)?

De-risking is an easy way out. Virtual assets are still and perhaps unjustifiably associated with less serious market players. However regardless of de-risking involves VASPs or gambling companies, it may be discussed if a bank from a business perspective can afford de-risking.

Positive developments have been made with regards to dealing with risks, especially among Fintech startups, with regards to e.g. the ability to monitor transactions in real-time and notifying stakeholders, blocking transactions and blacklisting addresses, and contributing to criminal investigations and law enforcement by virtue of utilizing these tools. It is also noted that the Ukraine government has successfully turned to crypto to crowdfund millions of dollars to support them in the war against Russia.

Meanwhile, cryptocurrency trading platforms remain vulnerable, and tracing of trading in suspiciously obtained bitcoins or other cryptocurrencies through the blockchain is a challenge, given that it is factually possible to obscure the origin and traceability of cryptocurrencies. Bitcoins, along with online payment services are used by organized crime, from low-value large volume crimes such as trading with stolen credit cards, to ransomware as noted.

While the crypto assets market is not properly regulated, we have seen a growth in global transaction volumes between 2020 and 2021 at 600 percent, largely driven by gambling and speculations. Two unwanted outputs can be observed.

Virtual assets is the preferred means to transfer illicit gains. 50 percent of worldwide ransom ware profits in 2020 moved through three crypto exchanges, and illicit cryptocurrency addresses that received the equivalent of USD 14 billion in 2021. This is an 80 percent increase from the previous year. Although it is still <1 percent of all crypto transactions. Observers now discuss if illicit assets stay under the radar on decentralized finance (DeFi) platforms indefinitely.

A further perspective of the above challenges is the discussion if and how law enforcement can seize or recover virtual assets without the cooperation of the owner.

A discussion has also emerged around the possibility to include cryptocurrencies in sanctions. The US Senate recently revealed a Digital Asset Sanctions Compliance Enhancement Act, which would e.g. require the Treasury Department to blacklist foreign cryptocurrency firms that enable sanctions evasion by Russian nationals, a proposal that has already met with criticism.

In light of the recent developments, we can draw a few tentative conclusions and recommendations:

Taking a holistic and risk-based approach

It may sound like an obvious and well-worn recommendation, but it is worth repeating for equally obvious reasons. Because it is difficult. Implementing PEP and sanctions screening tools is just one part of what needs to be in place and work effectively. One aspect is how robust implemented screening tools are, another is how that specific process including outputs are established within the overall management system.

Addressing how organizations can manage risks associated with crypto assets

Cryptocurrency is both a threat and is doing good. Leading ‘futurists’ claim that 25% of national currencies worldwide will be replaced with cryptocurrencies by 2030. This may of course be challenged, but we can rest assured that cryptocurrencies, despite some historical crashes, are here to stay.

This means that financial institutes will unlikely be able to afford to de-risk. Rather, they need to revisit their strategies, conduct renewed risks assessments and to evaluate if they indeed can afford to de-risk on crypto. And in revisiting strategies, follows the the issue of risk classification and risk appetite, so that they can build on existing KYC and monitoring processes. This may include better business intelligence to understand the environment that they operate in and the customers to begin with.

Evaluating crypto in relation to environmental impact

The trade of one single bitcoin alone, requires more electricity than the average US household consumes in 74 days. The same single trade generates a carbon footprint equivalent of 2,670,906 VISA transactions.

The extreme carbon footprint and energy consumption involved in cryptocurrency mining and trading must be treated in the ESG context. What is the environmental impact of any given virtual asset exchange? If a bank proceeds to include crypto in its service portfolio, how will that impact the annual sustainability performance. At this point, we can forget about saving air miles to stay green. This is on a totally different level.

Not only do banks need to manage heightened financial crime risks associated with a still largely unregulated crypto market. Banks also need to understand and evaluate the environmental impact of data mining and trading in crypto currencies.

Banks need to adapt measures to ensure that crypto is effectively included in their sustainability strategy and evaluation process with regards to the greenness of their portfolios, including a perspective of what we may be facing with a continued rapid growth of crypto currencies in future.


Bitcoin Energy Consumption Index – Digiconomist; https://www.bloomberg.com/news/articles/2022-03-07/cryptocurrencies-appear-to-remain-a-small-window-for-russians

Louise Brown


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