In this first August edition of crypto regulatory affairs, we will cover:
- EU adopts new Russia sanctions
- CLARITY Act continues to face challenges
- UK FCA offers insights from Stablecoin Sprint
- South Africa consults on cryptoasset manual
EU adopts new Russia sanctions with focus on third country cryptoasset evasion
The European Union has agreed to new sanctions targeting Russia, including further measures aimed at disrupting Russian sanctions evasion via cryptoasset platforms hosted in third countries.
On July 23, the Council of Europe agreed to adopt its 21st package of sanctions against Russia, part of its ongoing response to Russia’s invasion and continued military hostility in Ukraine. The package, which will take effect from August 23 and passed after intense and difficult negotiations among EU member states, contains a number of important actions that impact the cryptoasset industry and that build upon previous EU actions directed at disrupting Russian sanctions evasion through cryptoassets.
The sanctions impacting the cryptoasset space contain a combination of familiar actions and new authorities. The EU’s latest sanctions target 14 cryptoasset service platforms located in Georgia, Panama, the UAE, the Marshall Islands, Kyrgyzstan, Belarus, and in Africa. The designated entities are:
- A7 Nigeria
- A7 Africa
- Afory Pro
- ABCeX
- Bitpapa
- Encode
- EXMO Ltd.
- HTX
- Monease Ltd.
- NoOnecrypto INC.
- Pilot Finance Ltd.
- Rapira
- Tradex
- WhiteBird
EU VASPs and financial institutions will be prohibited from engaging in activity with these cryptoasset platforms from August 23, when the designations take effect. A number of these firms, including HTX, Bitpapa, and EXMO, were previously sanctioned by the United Kingdom in June. The EU’s addition of these entities to their own sanctions list creates greater alignment with the UK’s lists. Firms that are registered across both jurisdictions will need to ensure that they comply with any applicable designations that appear on those lists.
The designations of A7 Nigeria and A7 Africa build upon the EU’s previous sanctions that have targeted the Kyrgyzstan-based A7 financial network that Russia uses for sanctions evasion, including the A7A5 ruble stablecoin. As Elliptic highlighted in recent research, sanctions that the EU, US and UK have imposed on A7A5 and the exchanges that have facilitated Russian activity using the stablecoin have had a drastic impact. A7A5 trading volumes have plummeted over the past year, demonstrating that sanctions targeting on-chain infrastructure can disrupt sanctions evasion where capabilities such as blockchain analytics enable compliance with restrictions.
In addition to the targeted sanctions directed at the 14 named cryptoasset platforms, the EU’s 21st sanctions package includes a more novel and sweeping measure. The new package provides the EU with the authority to enact complete bans on dealings with any cryptoasset service platform located in a named third country. Specifically, it gives the EU the ability to designate a third country as having “systematically and persistently failed to prevent the provision of crypto-asset services that frustrate" EU sanctions efforts on Russia, and to prohibit dealings with all cryptoasset services located in the designated jurisdiction.
The current sanctions package only provides the basis for the new authority without designating any countries, and the EU has indicated that it hopes the new authority will serve as a deterrent to countries (such as Kyrgyzstan) continuing to host cryptoasset services that Russia abuses for sanctions evasion. Though it does not create any immediate obligation on EU-based firms at this stage, VASPs and financial institutions in the EU should prepare for the possibility of future country-wide cryptoasset prohibitions and should begin taking steps to understand their own potential exposure to sanctions-related risks.
For example, compliance teams in the EU should undertake a review of their customers and transactions to identify the scale and nature of their exposure to third countries such as those where the 14 sanctioned entities are located (e.g. Georgia, Panama, the UAE, the Marshall Islands, Kyrgyzstan, Belarus and Nigeria). Compliance teams can use this insight to identify relationships that may sit outside their risk tolerance and may require reassessment, and also to reassess the sufficiency of their existing monitoring and screening arrangements.
Using Elliptic’s configurable risk engine, customers who use our screening solutions can tailor their monitoring arrangements to identify activity that aligns with their risk appetite, including by flagging direct and indirect exposure to higher risk jurisdictions.
Similarly, using Elliptic Discovery, our comprehensive dataset of information on VASPs, compliance teams can identify whether any of their counterparty VASPs have underlying exposure to EU-sanctioned entities that presents elevated risks.
To learn more about sanctions compliance using blockchain analytics, download our comprehensive report on the topic here.
CLARITY Act continues to face challenges ahead of August recess
The future of cryptoasset market structure legislation in the United States remains up in the air as Congress prepares to go on its August recess.
With Congress set to go on a month-long recess from Friday, August 7, the Digital Asset Market Clarity Act (CLARITY Act) is still waiting to reach the Senate floor. The CLARITY Act, which passed the Senate Banking Committee in May after numerous delays, would provide a broad and comprehensive regulatory framework for the US cryptoasset industry by defining key activities requiring oversight and better defining the jurisdictional authorities of key agencies, particularly the US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
However, the Act has remained in Senate limbo since passing the Banking Committee, with many observers suggesting that its failure to reach the Senate floor ahead of the August recess could doom its chances of ever becoming law with the November mid-term elections ahead.
Several policy debates have continued to stymie the CLARITY Act’s progress. First and most significantly has been a debate over ethics provisions, which Democrats in Congress, including pro-crypto members, have insisted must be sufficiently robust to address President Donald Trump’s personal and family financial interests in the cryptoasset sector. While the White House offered its own ethics language in hopes of helping the bill move forward, Senate Democrats, along with Republican Senator Thom Tillis, rejected the White House ethics proposal and have proposed alternative language - though it remains to be seen whether a compromise can be reached.
The bill also continues to face significant debate around the topic of stablecoin yield. Though the Senate Banking Committee brokered an ostensible compromise on stablecoin yield that allowed the bill to pass the Committee, a number of Senators, including Republicans in the Senate majority, have expressed concern that the existing language is problematic for community banks, which continue to lobby aggressively against the current compromise provisions.
Finally, some Democratic members of the Senate have continued to express concern that certain provisions of the Act must be strengthened to ensure that law enforcement agencies have sufficient ability to investigate illicit activity involving cryptoassets, particularly with regard to activity involving decentralized finance (DeFi) applications.
In order to become law, the CLARITY Act must first pass a cloture vote in the Senate with the approval of 60 members, after which it can move to a full vote on the Senate floor, which requires a simple majority of 50 votes in favor. It would then need to be sent back to the House of Representatives, which passed its own version of the bill last year, but which would need to approve the new version, which has undergone changes in the interim.
A number of important questions are lingering about the timeline facing the CLARITY Act. While a full and final Senate vote on the bill ahead of the August recess has been ruled out, Republican Senate leadership has floated the possibility of putting the bill up for a cloture vote ahead of the recess - though key Democrats who have supported the bill to date have indicated they are unlikely to vote in favor of cloture without further changes to the bill. As of Monday, August 3, a cloture vote for the CLARITY Act was not on the Senate's planned schedule, giving it only 72 hours to make the cut before the August recess begins.
Failure to even hold a cloture vote ahead of the recess would make passage from September onward increasingly difficult, though certainly not impossible, with the approaching mid-term elections ahead. Some Republican Senators have called on Senate Majority Leader John Thune to suspend the August recess to try and force the chamber to reach agreement on key priority pieces of legislation, which could give the CLARITY Act improved hopes.
But for now, the saga over the CLARITY Act’s future persists. You can learn more about the recent history of the CLARITY Act by reading our previous analysis here.
UK FCA offers insights from Stablecoin Sprint
Cross-border payments are the most promising area of payments innovation for stablecoins, according to the UK’s Financial Conduct Authority (FCA), the UK's primary financial services regulator.
On July 28, the FCA published findings based on observations from its Stablecoin Sprint, a policy initiative the FCA ran in March of this year as part of its efforts to develop the UK’s forthcoming stablecoin regulatory regime and to enable responsible innovation in the sector.
The sprint, which included participation from approximately 75 firms and organizations, including banks, payments firms, e-money firms and others, explored the challenges and opportunities of stablecoins in domestic and international payments, as well as in trade finance.
According to the FCA, the sprint identified that cross-border payments offer “clearest near-term payments opportunity, particularly compared to correspondent banking.” In particular, it found that stablecoins have the ability to create significant efficiencies and opportunity in transactions to and from emerging markets, while noting that stablecoins may have less utility in facilitating transactions through existing trade corridors among highly developed countries where financial infrastructure is already relatively fast and inexpensive.
The spring also identified that when it comes to domestic payments, stablecoins offer potential advantages to merchants, who can leverage stablecoins in place of card schemes, benefiting from more efficient settlement and ready liquidity that stablecoins offer over card arrangements. Cross-border e-commerce and agentic merchant payments were identified as particularly promising use cases for stablecoins.
The sprint also resulted in broad consensus that stablecoins should be treated as money or monetary instruments for regulatory purposes, and that existing payment services regulations may require adaptation and new guidance to address specific risks and features of stablecoins.
To learn more about the UK’s recent efforts on developing stablecoin regulation, see our previous analysis here.
South Africa consults on crypto manual
The government of South Africa is consulting on new guidelines for the use of cryptoassets in cross-border transactions.
On August 3, the National Treasury and the South African Reserve Bank (SARB) published a Draft Crypto Assets Manual for Cross Border Activities, which is open to public comment and consultation through September 30. The manual is designed to support separate draft regulations that South Africa released for public comment in April of this year aimed at addressing risks - including risks of capital flight and illicit activity - associated with cross-border cryptoasset transfers. The manual serves as practical implementing guidance for the private sector when complying with the regulations.
The regulations apply to any cryptoasset activity involving a cryptoasset service provider (CASP) registered in South Africa, and one registered abroad, or to an unhosted wallet. The manual describes obligations of CASPs in South Africa when it comes to reporting cross-border transactions, including processes CASPs must take to report cross-border activity via South Africa’s FinSurv Reporting System, which South Africa uses to monitor foreign transactions and compile statistics on the country’s balance-of-payments and foreign debt statistics.
