Sanctions

Russia to begin work on CBDC settlement system as sanctions endure

The country’s central bank will begin studying two possible cross-border CBDC settlement models this quarter.

Russia’s central bank is reportedly set to begin developing a cross-border settlement system using a central bank digital currency (CBDC) amid ongoing sanctions in response to its invasion of Ukraine.

The plans to move forward with Russia’s digital ruble are expected to come in the first quarter of 2023 and will see Russia’s central bank study two possible cross-border settlement models, according to a Jan. 9 report by local media outlet Kommersant.

The first proposed model sees various countries entering into separate bilateral agreements with Russia to integrate their CBDC systems.

Each agreement would be made to ensure the conversion and transfer of assets between the countries are in accordance with the rules of the agreements.

The second, more complicated model proposes a single hub-like platform for Russia to interact with other countries, sharing common protocols and standards to facilitate payments between the connected countries.

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Roman Prokhorov, the head of the board of the Financial Innovations Association (AFI) opined that the first model was more simple to implement but less promising for bilateral interactions between countries.

The other option was more “advanced” and he considered an initial two-way system may be implemented, with China as the most likely partner given its “technological and political readiness.”

Reports in September claimed that Russia was planning to use its digital ruble for settlements with China by sometime in 2023.

Still, others believe Russia’s CBDC play won’t be hamstrung by technology, but rather by politics.

The vice president of the Association of Banks of Russia, Alexey Voylukov, said that introducing a digital ruble won’t change or improve Russia’s global political situation, and trials for the CBDC platform can only be undertaken with countries that are friendly withthe Russian government and technologically ready.

Related: Crypto regulation world: How laws for digital assets changed in 2022

Previously, the Bank of Russia said it was looking to roll out its digital ruble by 2024, with all banks and credit institutions connected to the CBDC’s platform.

Russia has faced mounting financial and trade sanctions since its escalation of the Russo-Ukrainian war when it launched a full-scale invasion of Ukraine in late February 2022.

It’s since tried and pondered ways to skirt the sanctions, such as the central bank considering the use of cryptocurrencies in the country “only to support foreign trade.”

The Bank of Russia and the Ministry of Finance came to an agreement in September on a rule allowing Russians to send cross-border payments using crypto.

Binance joins association to address compliance with global sanctions

The crypto exchange has come under scrutiny from policymakers amid multilateral sanctions on Russia and U.S. sanctions on Iran.

Binance has become one of the first crypto firms to join the Association of Certified Sanctions Specialists, orACSS, in an effort to stay in compliance with global sanctions.

In a Jan. 6 announcement, Binance said its team of sanctions compliance personnel would be undergoing training as part of the certification process at ACSS. According to the association’s website, the group offered an examination addressing “knowledge and skills common to all sanctions professionals in varied employment settings.”

“The blockchain industry is still in its early years, and it’s our priority to continue upholding the highest level of compliance amid a fast-evolving space,” said Binance’s global head of sanctions, Chagri Poyraz. “At the end of the day, we want to continue setting the industry standard for security and compliance alongside other industry players.”

Poyraz told Cointelegraph in October that the exchange was in compliance with multilateral sanctions on Russia following the country’s invasion of Ukraine but saw “room for improvement when it comes to clarity” in European Union guidelines on crypto. Reports have also suggested Binance may have allowed Iran-based users access to certain services in violation of United States sanctions, prompting scrutiny from officials.

According to Binance, the ACSS training will educate the exchange’s team on guidelines from the U.S. Treasury’s Office of Foreign Assets Control and inform them of potential risks of violations. The exchange is one of the largest in the crypto space and, according to its website, is available in more than 100 countries with different regulatory and licensing requirements.

Related: The world has synchronized on Russian crypto sanctions

Binance also joined the crypto lobbying group Chamber of Digital Commerce in December as part of efforts to advocate for regulatory clarity in the United States. However, some global policymakers have reportedly targeted the exchange for potential violations of Anti-Money Laundering laws and sanctions.

Crypto OTC trading to get traction due to FTX fiasco, exec says

The FTX crash could trigger a bigger demand for crypto OTC services as investors are looking for alternative crypto exchange methods amid weak trust in CEXs.

Before the rise of centralized exchanges (CEXs), over-the-counter (OTC) trading was the go-to method to buy or sell cryptocurrency for many crypto investors. The FTX collapse could trigger a bigger demand for crypto OTC services as investors are looking for alternative methods to convert from and to fiat due to weaker trust in CEXs.

Cointelegraph spoke with BestChange, a Russian OTC crypto exchange aggregator, to learn more about the current state of OTC markets.

“The role of OTC is sometimes underestimated amid the all-encompassing marketing of centralized exchanges,” BestChange chief analyst Nikita Zuborev said. According to the exec, OTCs often act as an entry point to crypto for most users.

BestChange users often resort to the services of OTC exchangers — portals that act as fiat onramps to crypto — in order to replenish the balance on a crypto exchange or sell their crypto, Zuborev told Cointelegraph.

“If for the Central European countries and the countries of North America there are quite convenient ways of direct replenishment from a bank card, then for the countries of Eastern Europe and Central Asia there are no such options, and exchangers remain the only convenient way to work with cryptocurrency,” Zuborev stated.

The exec also pointed out that the latest industry events could have a positive effect on the crypto OTC segment, stating:

“Thanks to the fiasco of the FTX executives, our segment could see a significant influx of users even outside of our traditional market. We expect that 2023 could be the year of decentralization and accelerated development of decentralized apps.”

Founded in 2007, BestChange enables crypto-to-fiat transactions through Visa and Mastercard cards as well as services like PayPal, Payoneer, Skrill and others. Currently operating under the jurisdiction of the Russian Federation, BestChange plans to move its headquarters to Dubai gradually.

The executive stressed that the relocation has nothing to do with the ongoing geopolitical problems or other issues in Russia, as BestChange has been planning to expand beyond the country for a while.

Additionally, BestChange doesn’t expect any pressure from the global community in terms of sanctions, according to Zuborev. “The UAE continues to remain neutral in geopolitical matters, and secondly, the format of our business does not involve the handling of money,” he said. BestChange-listed OTC crypto exchangers are located in the Baltic countries or central Europe and should comply with local regulations, he noted.

Related: Russia intends to launch a ‘national crypto exchange’

BestChange serves several countries, including post-Soviet states like Ukraine, Kazakhstan, Georgia and Belarus. According to data from SimilarWeb, users from Russia and Ukraine make the biggest amount of visits on BestChange, with 48% and 15% of traffic coming from these countries, respectively.

“Most centralized exchanges are under pressure from European and North American regulators, and our segment is mostly represented by small local services that obey the laws of the country of location so they can serve Russians, Ukrainians, Europeans, Africans, residents of Asia, Oceania independently of each other,” he stated.

According to Zuborev, global sanctions against Russia have not had a negative impact on BestChange’s OTC market services but even have driven more adoption instead.

ETH staking on top exchanges contributes to Ethereum censorship: Data

One of the biggest factors harming Ethereum’s credible neutrality is the use of censoring MEV relays by crypto ecosystems and exchanges.

For most crypto ecosystems, being compliant with federal sanctions have a negative impact on its global reach. However, when it comes to Ethereum, investors have significant power to decide the degree of compliance the ecosystem obeys.

Nearly 60% of all post-Merge Ethereum blocks comply with the United States sanctions put forth by the Office of Foreign Assets Control (OFAC). While the crypto community stands against this transformation, many fail to realize their own contribution to helping Ethereum attain total OFAC compliance.

One of the biggest factors harming Ethereum’s credible neutrality is the use of censoring Miner extractable value (MEV) relays by crypto ecosystems and exchanges. MEV relays work as a mediator between block producers and block builders, which are being used by prominent crypto players, such as Binance, Celsius Network, Coinbase, Kraken and Cream Finance, to name a few.

Top Ethereum censorship offenders leaderboard. Source: MEV Watch

Users staking Ether (ETH) on platforms (as shown above) that run censoring MEV relays on their validators are directly contributing to the censorship of Ethereum. Crypto platforms can help remediate the situation by adopting a non-censoring MEV-boost relay.

For validators and relay operators, some of the popular MEV-boost relays that don’t promote censorship include Ultra Sound Money, Agnostic Boost, Aestus, BloXroute Max Profit, BloxRoute Ethical, Manifold and Relayooor.

OFAC compliance data for last 100 Ethereum blocks. Source: MEV Watch

At the time of writing, 67 of the last 100 Ethereum blocks were found enforcing OFAC compliance.

As investors, it is important to understand that protocol-level censorship is deterrent to crypto’s goal of unleashing open and inclusive finance. Hence, it becomes important for both investors and service providers to opt for non-censoring MEV-boost relays.

Related: BNB Chain now has more unique addresses than Ethereum, developer says

The Ethereum ecosystem recently witnessed two dormant addresses wake up after four years to transfer 22,982 ETH.

The ETH transfers in question can be traced back to trading platforms Genesis and Poloniex where the unknown whales transferred 13,103.99 ETH and 9,878 ETH, respectively.

Opposition press links Russian lawmaker to local crypto OTC

Russia’s crypto OTC platform Bankoff has reportedly not only helped officials avoid sanctions but also generated some gains.

A Russian legislator who was one of the authors of the bill to legalize cryptocurrency mining in the country has been tied to local over-the-counter (OTC) exchange Bankoff.

Russian opposition activist Mikhail Khodorkovsky linked Bankoff to lawmaker Andrei Lugovoi in an article by the London-based investigative project Dossier Center on Dec. 19.

The 6,000-word article was accompanied by a video titled “Crypto-Kremlin: How the authorities launder Bitcoin,” released the Khodorkovksy Live YouTube channel.

According to Dossier, Bankoff is the most active peer-to-peer trader using Russian rubles on global crypto exchange Binance. As previously reported, Binance continued to serve non-sanctioned Russians despite the European Union banning all crypto transactions for Russia in October. The Bankoff OTC platform accepts only cash from customers and has almost no Anti-Money Laundering or Know Your Customer controls.

The trader’s office is reportedly on the 65th floor of a building in the Moscow City skyscraper district. The premises belong to the Bratsk Electricity Network, a company that distributes electricity around the east-central Russian city of Bratsk, which is a center of cryptocurrency mining.

According to Dossier, Bankoff could make up to $20,000 daily on up to 4% in commissions on users’ crypto transactions. Lugovoi’s wife, Ksenia Lugovaya, has reportedly also owned a share in Bratsk Electricity Network since 2018. A declaration filed by her husband and purportedly shown in the Dossier video indicates that Lugovaya had an income of 29.6 million rubles (a little more than $400,000) in 2021 with no sources of income other than the Bratsk electric company.

The Dossier article and video also describe how a representative of Dossier was allegedly able to convert 100,000 rubles ($1,400) in Tether (USDT) using the sanctioned Russian crypto exchange Garantex. The representative was reportedly able to send USDT from Garantex to Binance and then successfully transfer to an account in the United Kingdom-based fintech firm Wise, thus enabling the distribution of that money despite sanctions from the United States.

Such a scheme not only allows the Russian government officials to avoid sanctions but also generates money for them, the speaker in the video argues, stating:

“That doesn’t impede Russian officials and members of the security forces from using cryptocurrency not only to take millions out of the country but also to make money from doing it. People who are under the close attention of law enforcement agencies worldwide have long been tied to this.”

While apparently benefitting from crypto themselves, Russian lawmakers have been actively opposing the idea of crypto investment by regular people. The Russian government has not legalized any local cryptocurrency exchange, and the central bank has taken a firm stance against crypto investment.

Related: Putin calls for blockchain-based international payment system

Apart from backing one of the biggest crypto OTC platforms in Russia, Lugovoi is known for developing local cryptocurrency laws. He is one of the authors of the cryptocurrency mining bill introduced into Russia’s lower house of parliament on Nov. 17. Lugovoi began his political career after he was implicated in the poisoning of former Russian security service officer Alexander Litvinenko in the U.K. in 2006.

Additional reporting by Helen Partz.

Into the storm: The murky world of cryptocurrency mixers

A handful of obfuscation protocols are competing for the user base of OFAC-sanctioned Tornado Cash.

Cryptocurrency mixing services are a divisive subject in the industry. Some advocate for the privacy-enabling features of these protocols while others maintain that they are mainly used for illicit means.

For platforms like Tornado Cash, the mainstream verdict is “guilty as charged.” The infamous decentralized mixing protocol was sanctioned by the United States Office of Foreign Assets Control (OFAC) in August 2022, essentially making it illegal for anyone to make use of the service.

Tornado Cash continues to be a contentious topic and one of its developers, Alexey Pertsev, controversially remains in detention in the Netherlands while investigators look to build a case against the Russian developer and his alleged role in the mixer’s operation.

In a proverbial sense, one man’s loss is another man’s gain and that seems to be the case for cryptocurrency mixers according to a report from blockchain analytics firm Elliptic.

A blow to money-laundering operations

As highlighted in its analysis, Elliptic reveals that over $7 billion worth of cryptocurrencies were processed by Tornado Cash. An estimated $1.54 billion of illicit cryptocurrency was laundered through the platform, with a user base that included the likes of North Korean Lazarus Group state hackers.

In the wake of OFAC’s sanctions, Tornado Cash liquidity pools saw their holdings drop by 60% which is said to have drastically reduced the anonymizing potential of the platform for large-scale money laundering operations.

With Tornado Cash ostensibly shut down, a number of alternative mixing services have been identified as potential threats to cryptocurrency service providers and criminal investigators. Elliptic highlights six different protocols that have been used as mixers in the wake of Tornado Cash’s prohibition.

Not all mixers are being used for illicit means

Elliptic’s report unpacks how these mixer protocols operate in different ways and provide a variety of outcomes for potential users. A top-down view shows that these obfuscation protocols have mixed over $41 million of cryptocurrency, which pales in comparison to the total amount that was processed by Tornado Cash.

Ether (ETH), BNB (BNB), Wrapped Ether (wETH) and Tether (USDT) are the most commonly mixed tokens, given their usability within decentralized finance (DeFi). Elliptic’s figures notably exclude Polygon-based tokens.

Two particular protocols account for the highest mixing capacity of the tools analyzed and as a result, make up three-quarters of the cryptocurrency mixed.

The first is Railgun, a decentralized protocol that, according to Elliptic, caters to professional traders and DeFi users looking to conceal investment strategies. Railgun Privacy System removes wallet addresses from transactions on public blockchains using zero-knowledge-proof technology. It claims to be ERC-20 token compatible and has no mixing limit.

Cyclone Protocol is the second protocol, a Tornado Cash fork that touts a number of enhancements said to include yield farming to contributors of anonymity pools. Elliptic reports that Cyclone is able to mix 100 ETH/100,000 USDT in one instance and is available on IoTEX, Ethereum, BNB Smart Chain and Polygon.

Aside from Cyclone, which Elliptic highlights as the highest risk protocol among the six in its report, funds being mixed by these services “largely reflect legitimate DeFi trading activity.”

Just $40,000 of mixed funds were traced back to DeFi thefts which suggests that current activity reflects a lack of adoption of these alternative mixing protocols by nefarious actors and criminal elements.

Keeping tabs

Despite the fact that a relatively small amount of cryptocurrency has been mixed by nefarious actors, Elliptic still provides a cautionary note aimed at a couple of the services it highlighted.

Cyclone Protocol is identified as the highest-risk service in the wake of Tornado Cash sanctions. The service’s high transaction limit, large liquidity available in its mixing pools, and its ability to process Tornado Cash’s eponymous governance token (TORN) are cause for concern according to Elliptic:

“It’s confirmed use to launder at least some proceeds of DeFi exploits, the large amount of funds it has since processed and the apparent absence of its developer team to address concerns only strengthen these risks.”

Buccaneer V3 (BV3) was scored as a “medium-high” risk tool. The Ethereum-based token (BUCC) allows users to “bury” funds for an indefinite period of time without having to mix, pool or cycle transactions. A decoy mode displays fictitious BUCC balances on user interfaces as an obfuscation technique.

The service could be attractive for illicit use cases as it makes use of a Gas Station Network in order to pay transaction fees by claiming a small proportion of transferred BUCC. This could allow users to avoid using regulation-compliant cryptocurrency exchanges and services:

“BV3 therefore claims that it solves the ‘funding problem’ — the issue that addresses typically need to source ETH to pay transaction fees, typically from a centralized KYC exchange.”

A caveat provided by Elliptic is that BV3 uses technology that is still being tested, with its features and capabilities still to be fully realized. The remaining four protocols all have factors that Elliptic believes will inhibit large-scale illicit use.

Proactive sanctions can help spare the ecosystem: Chainalysis exec

Andrew Fierman highlighted the nuances of sanctions depending on who is involved, what is at stake and where they’re coming from.

As many countries, entities and even individuals face international sanctions, the crypto industry seeks to find its place among increasing regulations. 

Digital currencies have often been mentioned as an avenue for those subject to sanctions to divert them, such as in the recent case of Russia. In such instances, exchanges and other industry players need to understand where they stand compliance-wise. 

Research out of Harvard even suggested that central banks can use Bitcoin (BTC) to fight off sanctions.

Speaking to Cointelegraph’s managing editor Alex Cohen at the Israel Crypto Conference, Chainalysis head of sanctions Andrew Fierman said sanctions are nuanced depending on the many factors which surround the situation.

“When you’re looking at countries like Iran and North Korea, from a US perspective, crypto has in fact been comprehensively sanctioned.”

He said Russia is a bit of a “different story,” as there are entity-based sanctions like companies and individuals that have been sanctioned by the United States. Along with industry-based sanctions (energy, military, etc.), all of which create a cloudy nuance around the situation.

“That’s been one of the big challenges within the industry at large. Not only in crypto but traditional finance as well.”

However, Fierman said there are methods in which major industry players could spare the ecosystem from major headaches. 

“Proactively sanctioning entities and actors that are operating in a damaging way to the ecosystem is an effective way to help stop them from interacting with the ecosystem at all.”

Fierman continued to say that there are a lot of opportunities to stop illicit activity in the industry if actors are working on the blockchain.

Related: Binance still serving non-sanctioned Russians while seeking clarity on EU crypto regulations

Fierman highlighted a few recent cases of compliance enforcement from governmental entities such as the Office of Foreign Assets Control (OFAC). One of which involved the centralized exchange Kraken which was fined hundreds of thousands from OFAC, along with Bitfinex which received an even heftier fine. 

“In both instances, these really show a path for entities in space to take the right approach.”

According to the head of sanctions, one of the big trends in the industry has been IP blocking and having ongoing monitoring of IP activity. This doesn’t just account for the point of “know your customer” procedures to verify user identity, but also where users login from to search for inconsistencies. 

Forecasts predict crypto-related, cross-chain money laundering to reach $10 billion by 2025. 

Kraken settles with US Treasury’s OFAC for violating US sanctions

The U.S.-based crypto exchange agreed to pay more than $362,000 as part of a deal “to settle its potential civil liability” related to violating sanctions against Iran.

The United States Treasury Department’s Office of Foreign Assets Control, or OFAC, has announced a settlement with crypto exchange Kraken for “apparent violations of sanctions against Iran.”

In a Nov. 28 announcement, OFAC said Kraken had agreed to pay more than $362,000 as part of a deal “to settle its potential civil liability” related to violating the United States’ sanctions against Iran. The U.S.-based crypto exchange will also be investing $100,000 into sanctions compliance controls as part of the agreement with Treasury.

“Due to Kraken’s failure to timely implement appropriate geolocation tools, including an automated internet protocol (IP) address blocking system, Kraken exported services to users who appeared to be in Iran when they engaged in virtual currency transactions on Kraken’s platform,” said OFAC.

In a statement to Cointelegraph, Kraken chief legal officer Marco Santori said the exchange had “voluntarily self-reported and swiftly corrected” its actions to OFAC:

“Even before entering into this resolution, Kraken had taken a series of steps to bolster our compliance measures. This includes further strengthening control systems, expanding our compliance team and enhancing training and accountability.”

The United States has imposed sanctions on Iran that prohibit the export of goods or services to businesses and individuals in the country since 1979. However, Kraken had allegedly been violating these controls since 2019 by allowing a reported more than 1,500 individuals with residences in Iran to have accounts at Kraken — giving them the means to buy and sell crypto. 

According to a July report from The New York Times, then CEO Jesse Powell — who in September announced he would step down — suggested he would consider breaking the law, through not specifically mentioning sanctions, if the benefits to Kraken outweighed any potential financial or legal penalties. The crypto exchange also reportedly allowed access to crypto for individuals in Syria and Cuba, countries sanctioned by the United States.

Related: Crypto exchange Kraken freezes accounts related to FTX and Alameda

In September 2021, the U.S. Commodity Futures Trading Commission ordered Kraken to pay more than $1 million in civil monetary penalties for allegedly violating the Commodity Exchange Act by offering “margined retail commodity transactions in digital assets” to ineligible U.S. customers from June 2020 to July 2021. Kraken’s incoming CEO, Dave Ripley, said in September he did not see a reason to register with the Securities and Exchange Commission as “there are not any tokens out there that are securities that we’re interested in listing.”

US Treasury redesignates Tornado Cash sanctions, citing North Korea nuclear weapons program

The redesignation of the crypto mixer essentially replaces the U.S. Treasury’s actions from August, establishing sanctions for its role in “enabling malicious cyber activities.”

The United States Treasury Department’s Office of Foreign Asset Control, or OFAC, has amended the sanctions on cryptocurrency mixer Tornado Cash in addition to including two individuals involved in “transportation and procurement activities” for North Korea in its list of specially designated nationals.

In a Nov. 8 announcement, the Department of the Treasury said it had “delisted and simultaneously redesignated” Tornado Cash in addition to taking into account activities conducted by North Korean nationals Ri Sok and Yan Zhiyong in its basis for sanctions. The government department reiterated its claims that the crypto mixer was involved in laundering $455 million in crypto stolen by the North Korea-affiliated Lazarus Group.

The redesignation of Tornado Cash essentially replaces Treasury’s actions against the crypto mixer in August, establishing sanctions for its role in “enabling malicious cyber activities, which ultimately support the DPRK’s [weapons of mass destruction] program.“ The original sanctions included the Lazarus Group but did not show connections with North Korea’s nuclear program.

“Today’s sanctions action targets two key nodes of the DPRK’s weapons programs: its increasing reliance on illicit activities, including cybercrime, to generate revenue, and its ability to procure and transport goods in support of weapons of mass destruction and ballistic missile programs,” said Brian Nelson, Under Secretary of the Treasury for terrorism and financial intelligence.

Related: Deribit hackers move stolen Ether to Tornado Cash crypto mixer

Many in the crypto space have been involved in lawsuits against the U.S. Treasury following the sanctions against the mixer. A group of investors backed by U.S.-base crypto exchange Coinbase took legal action in September, claiming that Treasury’s sanctions of 44 USD Coin (USDC) and Ether (ETH) addresses connected to Tornado Cash were “not in accordance with law.” Crypto advocacy group Coin Center also filed a lawsuit against the government department in October, saying the mixer was a “privacy tool beyond the control of anyone.”

North Korea fired several missiles over northern Japan in the last month, though none impacted the island nation or directly caused any casualties. The United States has seven bases for different military branches on Japan’s mainland.

EU crypto sanctions against Russia have an unexpected enforcer

The Monetary Authority of Singapore says crypto exchanges in the country must comply with financial sanctions against Russia.

The Monetary Exchange of Singapore (MAS), ​​the country’s central bank and financial regulator, reminded all authorized cryptocurrency exchanges in the country to comply with financial sanctions in place against Russia. 

The statement came after research that revealed millions in crypto donations raised by pro-Russia groups in support of the ongoing conflict in Ukraine and increased sanctions on Russia from financial authorities around the world.

Singapore’s decision puts it in line with European Union’s sanctions against Russia, which were first imposed earlier this year. Initially, the sanctions limited Russia-EU crypto payments to around $10,000.

However, the most recent restrictions in early October further tightened measures and banned “all crypto-asset wallet, account, or custody services, irrespective of the amount of the wallet.”

Around the time of the EU’s first set of sanctions, MAS created measures aimed at Russian banks and other entities based in the country, along with the prohibition of any fundraising for any activities which could benefit the Russian government.

Related: What new EU sanctions mean for crypto exchanges and their Russian clients

Crypto exchanges and related platforms have been falling in line with sanctions toward Russia since the start of the conflict.

The popular crypto exchange Kraken closed its doors to Russian users this past month and restricted all accounts associated with the country. Similarly, Dapper Labs suspended all accounts of Russian users. The move prohibited Russian-linked accounts from selling, buying or gifting nonfungible tokens (NFTs), along with stopping funds withdrawal.

Most recently, Binance’s global head of sanctions, Chagri Poyraz, told Cointelegraph in an interview that the company is working hard to comply with EU measures while still best serving their users.

Meanwhile, many Russian users are flocking to neighboring countries, such as Kazakhstan, to continue utilizing services previously available to them.