Due to their technical basis (decentralization and cryptography), blockchain-based cryptocurrencies are generally suitable for circumventing the sanctions imposed by the European Union in connection with the Russian attack on Ukraine. Although the relevant processes are covered by the sanctions regulations, in practice they are currently difficult to detect and attribute to specific defendants. It is possible that the threat posed by cryptocurrencies will be countered by measures against crypto service providers and crypto networks.
According to the European Commission's FAQs, no different rules apply to transactions in cryptocurrencies than to transactions by other means (see C.6.1 of the Commission Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014, as at 14.05.2024). The European Commission refers to the fact that the non-exhaustive definition of “funds” in Regulation (EU) No 269/2014 includes crypto-assets, including cryptocurrencies, and that the definition of “economic resources” also extends to certain crypto-assets. For its part, Council Regulation (EU) No 833/2014 clarifies that “transferable securities” also includes crypto-assets, but adds: “with the exception of payment instruments”.
The European Commission's FAQs are not binding for the courts. Nor do they reflect the “will of the legislator” - contrary to the opinion of the Frankfurt am Main District Court (judgment of 31.01.2023 - 943 Ds 7140 Js 235012/22) and Frankfurt am Main Regional Court (decision of 10.01.2023 - 5-28 Qs 14/22, n.v.). The Commission is the executive and governing body of the Union (Martenczuk in: Grabitz/Hilf/Nettesheim, Das Recht der Europäischen Union, 80th ed., Art. 17 TEU para. 1). To interpret its FAQs as the “will of the legislator” does it too much credit.
Irrespective of this, the FAQs should be endorsed with regard to cryptocurrencies. The prohibition on making funds available and the freezing requirement pursuant to Art. 2 of the Financial Sanctions Regulation (EU) No. 269/2014 refer, among other things, to “funds”. These are defined broadly in Art. 1 lit. g of this Regulation as “financial assets and benefits of every kind”, which is illustrated by the list of means of payment under Art. 1 lit. g point i) (“cash, cheques, claims to money, bills of exchange, money orders and other means of payment”). Since cryptocurrencies can be used as a means of payment and have a financial value, they are “funds” within the meaning of this Regulation.
This understanding is also not contradicted by the wording of Art. 1 lit. f of the Sectoral Sanctions Regulation Regulation (EU) No. 833/2014, according to which “transferable securities” include certain types of “securities, including crypto-assets, which can be traded on the capital market, with the exception of payment instruments”. This can be reconciled with the aforementioned understanding if crypto assets are understood as the general category and cryptocurrencies as “funds”.
Art. 1 lit. f of the Sectoral Sanctions Regulation Regulation (EU) No. 833/2014, which was introduced with the fourth sanctions package, includes crypto assets in the term “transferable securities”. This clarifies that the capital market-related sanctions of Art. 5, 5a, 5e, 5f of Regulation (EU) No. 833/2014 also apply to crypto assets. For example, the purchase of crypto assets and the provision of services in relation to crypto assets issued by the Russian central bank are prohibited (Art. 5a para. 1 lit. b) of Regulation (EU) No. 833/2014), i.e. purchases and services relating to the digital rouble.
A regulation specifically aimed at the risk of circumvention by cryptocurrencies was introduced by the fifth sanctions package with Art. 5b para. 2 of Regulation (EU) No. 833/2014. It prohibits the provision of “services related to crypto-wallets, crypto-accounts or crypto-custody” to Russians and natural or legal persons resident or established in Russia.
The provision was further tightened by the eighth sanctions package by removing the original limitation of the ban to services relating to crypto assets with a total value of more than EUR 10,000. The regulation means that corresponding accounts or wallets of Russian holders must be closed; however, this is not accompanied by a freezing order.
These material regulations are flanked by reporting obligations. On the one hand, this concerns Art. 5a para. 4a of Regulation (EU) No. 833/2014, which was introduced with the tenth sanctions package and obliges financial companies and insurance companies to submit quarterly reports on their participation in transactions with reserves and assets of the Russian central bank. Art. 5a para. 4a lit. c explicitly extends these reporting obligations to crypto assets.
Even more relevant to the issue of circumvention of sanctions using cryptocurrencies, however, is Art. 6 para. 1 lit. d of Regulation (EU) No. 833/2014, which contains a reporting obligation for the Member States and the Commission if they identify violations, circumvention or attempts to do so. Since the eleventh sanctions package, which focused on combating the circumvention of sanctions, the regulation has explicitly included circumvention through crypto assets.
In view of the possibility of transactions being concealed by cryptocurrencies, the European Union has introduced the obligation for providers of crypto services to collect and transmit information on the parties involved in crypto asset transactions through Regulation (EU) 2023/1113 of the European Parliament and of the Council of 31 May 2023 on information accompanying transfers of funds and transfers of certain crypto assets and amending Directive (EU) 2015/849. At national level, this area is covered by the Ordinance on Enhanced Due Diligence Obligations for the Transfer of Crypto Assets (Crypto Asset Transfer Ordinance - KryptoWTransferV) issued in accordance with Section 15 (10) sentence 1 no. 1 of the German Money Laundering Act.
However, laws and regulations are only effective if compliance with them can be monitored and violations can be identified and sanctioned accordingly. Complete traceability and government monitoring of all processes are unlikely to be feasible. In addition, this would require crypto service providers to be willing to cooperate and to have the technical means to collect and process the necessary information.
In addition, it is sometimes the business model of such service providers to technically exclude the possibilities of traceability and monitoring or, if they exist, not to use them. Examples include mixers or tumblers that mix potentially identifiable crypto money with other money. This is intended to improve the anonymity of transactions by making it more difficult to trace the crypto assets. Such service providers in particular could potentially become the target of sanctions themselves. On 08.08.2022, the Office of Foreign Assets Control of the US Department of the Treasury “blacklisted” the tumbler Tornado Cash. This meant that citizens, residents and companies in the United States were prohibited from receiving or sending money via this service. However, the enforcement of such sanctions is unlikely to be easy due to decentralization.
In summary, it can be stated that cryptocurrencies are technically suitable for circumventing sanctions, but that such circumvention is prohibited in particular by the European Union's sanctions regulations against Russia and is also punishable under Section 18 (1) of the Foreign Trade and Payments Act (AWG). In practice, no large-scale or systematic violations of sanctions through transactions in cryptocurrencies have (yet) been observed. It remains to be seen whether such violations will occur or be uncovered and to what extent the investigating authorities have the technical and personnel resources to investigate the perpetrators - within the statute of limitations under criminal law - and ultimately bring them to justice.