Cryptocurrency Markets Too ‘Illiquid’ To Support Mass Russian Sanctions Evasion, Says Study

April 19, 2022
A new report by Chainalysis, a crypto analytics firm, has cast doubt on the idea that Russian oligarchs could use cryptocurrency to evade sanctions and move wealth overseas en masse.

A new report by Chainalysis, a crypto analytics firm, has cast doubt on the idea that Russian oligarchs could use cryptocurrency to evade sanctions and move wealth overseas en masse.

Drawing on a mixture of in-house and external data, Chainalysis found that even the largest cryptocurrency markets are too illiquid to facilitate such large-scale transactions without crashing the price of the asset being sold.

For Russian oligarchs who want to move money quickly, Chainalysis believes that crypto “almost certainly” could not support mass liquidations of wealth from a price standpoint.

In one of the key findings of the study, Chainalysis calculated that if $1.46bn of Bitcoin was sold at the same time, it would immediately drop the asset’s price by 10 percent, making it an unattractive conduit for preserving or transferring sanctioned wealth.

Moreover, such large-scale sales, deposits or withdrawals could not take place without drawing the attention of law enforcement and compliance teams at crypto service providers.

“This reinforces our belief that any Russian sanctions evasion using cryptocurrency will most likely resemble typical money laundering, in which small amounts of cryptocurrency are moved to cashout services over time, rather than systematic, mass conversions between cryptocurrency and cash,” the report notes.

Liquidity is key

In finance, liquidity refers to the ease with which an asset or security can be sold into cash without affecting its market price.

Before calculating how much liquidity cryptocurrency markets can offer, Chainalysis first used external data to estimate how much wealth Russian oligarchs already hold and how much they may be tempted to hide.

This is a challenging feat, given that Russian oligarchs are known to hold their wealth across a range of assets and in different jurisdictions.

A typical holding could include liquid assets, such as equities and cash deposits, and illiquid physical assets, such as yachts, real estate and sports franchises.

Arriving at a precise number for just one oligarch’s net worth is therefore extremely difficult, and even more so for multiple oligarchs combined, but there are studies that offer some clues.

The Bloomberg Billionaires Index, for example, provides an up-to-date ranking and profiling system for the world’s 500 richest people.

As of April 14, the index contained 23 Russian nationals with a combined net worth of over $300bn, as estimated by Bloomberg.

Similarly, a 2017 study from the National Bureau of Economic Research in the US estimated that Russian oligarchs collectively hold about $800bn in offshore funds.

Although this $800bn does not include assets held within Russia — which are harder to monitor from outside the country — it is the benchmark used by Chainalysis in its study.

Chainalysis said it chose the $800bn figure because it is one of the largest reliable estimates available, and thus decreases the risk of under-counting.

Free float liquidity

With that $800bn in mind, Chainalysis then used the concept of “free float” to calculate the level of liquidity in the world’s three largest cryptocurrency markets.

Free float is the total value of a given crypto-asset held by “liquid entities''. Using the Chainalysis definition, these entities can be either private or exchange-hosted wallets, and must meet two criteria:

  1. They send (i.e. sell) at least 25 percent of the crypto-assets they receive in a year.
  2. They have held all of their assets for a year or less on average.

Though the three biggest cryptocurrencies — Bitcoin, Ethereum and Tether — have a combined market cap of $1.25trn, Chainalysis found that only $296bn of that total would qualify as free float liquidity.

To calculate implied volatility based on free float liquidity, Chainalysis analysed price movement data from 19 cryptocurrency exchanges.

With a free float liquidity only half the size of Bitcoin’s, Ethereum would be the least attractive option to any would-be sanctions buster, given that only a fraction of the free float would need to be sold at one time to cause double-digit price crashes.

As for Tether, a US dollar stablecoin, its price cannot drop in the same way that Bitcoin’s or Ethereum’s can.

In times of high volatility — i.e. heavy, systemic selling across the crypto markets — Tether can briefly lose its peg to the dollar, as traders rush out of assets like Bitcoin and Ethereum and into the safety of a stablecoin.

On April 18 last year, for example, when Bitcoin dropped from $61k to $54k in a matter of hours, the price of Tether spiked to $1.004.

Such spikes would likely be of little consequence to a sanctions-busting oligarch, but the difficulty would be in finding a sufficient amount of Tether tokens available at one time to get out of other crypto-assets on a large scale.

KYC and suspiciously large transactions

In addition to price and liquidity limitations, Chainalysis points out that know-your-customer (KYC) requirements have effectively made it impossible for Russian oligarchs to cash out using crypto.

While an oligarch could theoretically trade billions of dollars of cryptocurrency using a self-hosted wallet — also known as peer-to-peer trading — it would be impossible to convert his crypto holdings into fiat currency without bringing it to a centralised cryptocurrency exchange, where KYC is now the norm.

Moreover, transactions that amount to billions of dollars will draw the attention of law enforcement and compliance teams.

Large transactions into and out of exchanges take place on blockchains whose data is publicly available and can be easily tracked and monitored.

In 2022, on average, $14bn worth of cryptocurrency flows into cryptocurrency service every day, down from $20bn in 2021, according to Chainalysis.

Even in this large pool of activity, Chainalysis believes it would be difficult to disguise a mass influx or a mass exit event.

Study limitations

While noting that cryptocurrency does not offer an easy fix for Russian sanctions busters, Chainalysis does admit that this is less true on a smaller scale.

“Crypto-based sanctions evasion will look like other forms of money laundering we observe on the blockchains,” the report notes, with “small amounts of cryptocurrency gradually moved to cashout points.”

And to spot this kind of crypto-based sanctions evasion, more advanced blockchain monitoring systems are required, combined with traditional financial investigation techniques.

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