Whether or not Russia is able to use cryptocurrency to bypass sanctions is the hottest question in the virtual assets industry.
With the SWIFT messaging system now closed to many major Russian banks and sanctioned companies and oligarchs, the traditional banking system is choking off President Vladimir Putin’s economy and strongest allies.
Could bitcoin come to their rescue?
One answer is yes, of course. In many ways, that was the basic purpose of bitcoin and most of the other cryptocurrencies that followed it. To be, according to the first sentence of the bitcoin white paper: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Both Iran and North Korea have used cryptocurrencies for some time to evade sanctions, and there are plenty of tools designed to obscure crypto transaction more than they already are by default: decentralized finance (DeFi) exchanges for one. Their transaction volume is growing rapidly, they do not require — or even have — anti-money-laundering (AML) tools to identify customers and have, in theory at least, no employees or owners for law enforcement to chase.
Read also: PYMNTS DeFi Series: What Is DeFi?
Then there are crypto mixing services and privacy coins like Monero, all of which are specifically designed to defeat the increasingly sophisticated blockchain tracking tools deployed by firms like Chainalysis, Elliptic, and a growing number of others. These blockchain intelligence services rely on the fact that the transactions on the Bitcoin blockchain — and most others — are public. They are pseudonymous in that the identity of the owners are obscured.
Learn more: PYMNTS Crypto Crime Series: When Privacy Counts, Crypto Users Turn to Mixing Services
Blockchain intelligence firms rely on tracking these transactions either to wallets used in the past that are identifiable — something unlikely to happen with state-level sanctions evaders — or simply by following them to the off-ramp needed to turn crypto into usable fiat currency and actually buy things.
And then there are simply private transactions: direct, peer-to-peer trades that do not go through an exchange at all.
And there is plenty of liquidity in the bitcoin market alone to cover Russia’s needs: bitcoin’s transaction volume surpassed $3 trillion last year, according to New York Digital Investment Group.
Moving the Ruble
“Russia has had a lot of time to think about this specific consequence,” Michael Parker, a former federal prosecutor and head of the AML and sanctions practice at Washington law firm Ferrari & Associates, told The New York Times last week. “It would be naïve to think that they haven’t gamed out exactly this scenario.”
As a result, Chainalysis said Friday on Twitter that “Russian elites and financial authorities have likely been preparing for sanctions, and would have carried out those transactions slowly over the past few months.”
And in fact, it has seen an 860% jump in ruble-to-crypto transactions in the week leading up to Feb. 24. Still, that could represent average users as much as financial institutions or elites, as Russia — and Ukraine — are both among the top crypto using nations.
That said, Chainalysis added, “we’re optimistic that the cryptocurrency industry can counter attempts by Russian actors to evade sanctions with crypto. Compliance pros have already proven effective in this regard.”
But then, they haven’t been facing a state with the technological and financial resources of Russia before.
Besides, while U.S. exchanges like Coinbase, FTX, and Binance US will have to abide very closely to sanctions under the U.S. Treasury’s OFAC regime, internationally-based centralized exchanges will have more or less latitude depending on where they are based — and many are in small, offshore jurisdictions with strong banking secrecy.
Binance’s main, international exchange, the largest in the world, said it would strictly follow sanctions against individuals and blacklisted accounts known to belong to them, but would not cut off individuals from sanctioned countries while sanctions do not cover them.
“We have assembled a dedicated global compliance task force, including world-renowned sanctions experts, and are taking action steps required to fully comply with any sanctions while minimizing impact to our user base,” the exchange told Bloomberg on Feb. 25.
That’s particularly important to the owners of exchanges, as OFAC sanction violations come with a jail term of up to 30 years.
Spending Crypto
There’s another answer to that basic question, however, even beyond Chainalysis’ claim that companies like it and increasingly sophisticated capabilities of U.S. law enforcement organizations like the FBI and IRS — and, it’s reasonable to assume, the CIA and NSA.
That is that it’s one thing to move financial resources around the world, but it’s another thing to spend them on anything but other financial resources. Taiwan, for instance, has shut off Russia’s access to its markets, which include the majority of all computer chip manufacturing.
Even moved through DeFi exchanges, mixers and privacy coins, spending on the level Russia needs to maintain its economy is a lot harder to cover than that of Iran — which is suffering major hardships due to sanctions — and North Korea, which is using crypto theft and ransomware gains largely to support its nuclear program and luxuries for the elites.
On the other hand, the West has largely refrained from sanctioning Russia’s largest income source, energy, as Europe is heavily dependent on those oil and natural gas supplies — to say nothing of the fact that choking off the Russian supply would send gasoline and energy prices skyrocketing at a time when inflation is already a big economic concern.
Regulating Crypto
Another big question is the impact sanctions, and the extent Russia is able to use crypto to evade sanctions, will have on the cryptocurrency regulations that much of the world is deep in the middle of writing.
Russia, which was poised to crack down on the use of crypto, particularly for payments may reconsider that position.
But India, where the government has already been determined to stamp out crypto payments and until recently was looking seriously at an outright crypto ban, may reconsider if it is shown that crypto can evade a blockade as strong as international sanctions.
On Friday, European Central Bank President Christine Lagarde said Russian sanctions give new urgency to the need to implement cryptocurrency regulations being drawn up under its forthcoming Markets in Crypto Assets (MiCA) regulatory regime.
“There are always criminal ways to try to circumvent a prohibition, which is why it’s so critically important that MiCA is pushed through as quickly as possible so we have a regulatory framework,” Lagarde said, according to Bloomberg.
The U.S. is also in the midst of regulating crypto, with the core fight being whether to emphasize enforcement and consumer protection or to avoid hindering innovation. Serious use of crypto to evade sanctions would no doubt have a serious impact on that philosophical debate.
Finally, there’s the question of DeFi exchanges and privacy coins. The IRS has said it is not impossible to target DeFi exchanges’ despite their claim of having no centralized control — all have developers working on them either formally or informally.
And making it illegal to use DeFi or privacy coins could have a huge impact on their use by the broader public. It’s one thing for a retail users to risk a tax audit. Criminal charges are a whole other consideration.
Ultimately, the impact of Russia’s invasion of Ukraine could have a huge and long-lasting impact on the way crypto is regulated, and even legalized, in the United States, Europe, and further afield.
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