Despite attempts by regulators and lawmakers to further restrict cryptocurrency in the name of Russian sanctions, the nature of blockchain technology makes conventional methods still the most effective way for Russian authorities to evade sanctions.
As the world has reacted to the invasion of Ukraine by imposing economic sanctions against Russia, the crypto sector has found itself at the centre of the debate over whether it provides a weak link in the chain in terms of enforcement.
In the United States, Senator Elizabeth Warren wrote to secretary of state Janet Yellen asking what progress the US State Department has made in ensuring crypto firms comply with Russian sanctions and quoting reports that Russian entities are preparing to use an array of “cryptocurrency-related tools as its disposal” to evade sanctions.
President Joe Biden has also issued an executive order on digital assets, which states that digital assets pose “significant illicit finance risks” and may be used to “circumvent United States and foreign financial sanctions regimes”.
Meanwhile, in the EU, authorities have clarified the term "transferable securities" to make sure crypto-assets are covered by the various waves of sanctions, detailed in VIXIO’s Ukraine sanctions tracker.
And in the UK, the Financial Conduct Authority (FCA) has specifically singled out the crypto sector in a reminder to comply with sanctions against Russia, which also sets out how firms can reduce the risk of evading sanctions via crypto-assets.
Everything is public
From the way regulators have been reacting, it would not seem unreasonable to assume there are significant risks that crypto-assets pose in helping Russian authorities evade sanctions. However, this is far from the accepted view.
Crypto analyst Vlad Totia has told VIXIO that it would be very difficult for Russia to use cryptocurrency to evade western sanctions and that people are confusing anonymity with privacy.
“Every blockchain transaction is public. Coinbase, for example has public wallets, so you can tell more easily than big banks if someone does anything back-handed.
“And It’s not about the tool being used, it’s about the sanctioned institution behind that causes the problem.
“You are not just sanctioning Vladimir Putin’s wallet, you are sanctioning him and his purchasing power, making it illegal to do business with him.”
His comments echo what crypto industry players have said recently, with Brian Armstrong, CEO of Coinbase, tweeting that there was not a high risk of Russian oligarchs using crypto to avoid sanctions due to crypto’s open ledger, so “trying to sneak lots of money through crypto would be more traceable than using U.S. dollars cash, art, gold, or other assets".
Additionally, he made it clear that “it would be a mistake to think crypto businesses like Coinbase won’t follow the law. Of course we will.”
Some regulators, including the National Security Council's director of cybersecurity Carole House, have said the scale that Russia would need to circumvent all financial sanctions “would almost certainly render cryptocurrency as an ineffective primary tool for the state".
Totia said that authorities were using the Ukraine conflict as a means to achieve new regulatory restrictions on cryptocurrency, especially given “the vast majority of money laundering is happening via the conventional banking system, not crypto”.
This view is corroborated by a recent paper from Europol, which found that “the overall number and value of cryptocurrency transactions related to criminal activities still represents only a limited share of the criminal economy when compared to cash and other forms of transactions”.
According to Totia, “there’s a long list of politicians from any country that either through malevolence, misunderstanding or self-interest, want to curtail this as much as possible”.
Isolated from global markets
Added to this would be the difficulty of Russian authorities to exchange crypto for fiat money, making any attempt by Russia’s central bank to use its $650bn foreign exchange reserves a difficult prospect, which could incentivise Russia to end the war more quickly.
“While you can’t sanction crypto wallets, you can sanction the transfer of crypto to fiat. Sanctions have already cut off the Russian central bank from accessing foreign exchange markets and if you’re a Russian entity, you’re not able to participate in the global economy," Totia said.
Asked if players such as Binance, arguably the largest crypto exchange to continues operating in Russia, could end up helping authorities evade sanctions, Totia was unconvinced.
“They have no incentive to do business with Russia. Binance already has its own stablecoin which is pegged to the dollar, which has brought it under the radar of the US government.
“If Binance or other crypto entities tried to evade Russian sanctions, it could lose markets in the US and EU.”
Technically possible
Despite the difficulty Russian authorities would have using cryptocurrency to evade sanctions, it is in theory possible to do this through decentralised finance (DeFi) to trade assets in synthetic stocks, for example.
“The Russian government could theoretically try to curtail sanctions by issuing an asset backed crypto, which could be a way for them to sell their oil.
“However, they would still have the problem of trying to exchange the crypto asset into fiat currency or find people willing to accept these crypto assets knowing this, which would make this venture very unlikely to succeed.”
Instead, Totia suggested letting Russian authorities use crypto, allowing regulators to track the money laundering route more effectively and stop it.
“There is a valid argument to let Russian financial institutions buy cryptocurrency from centralised exchanges, because it will enable governments to track where the money goes. Western governments could increase the effectiveness of sanctions by doing this.
"So it’s even less probable that Russia will use crypto to evade sanctions.”
In the long term, however, Totia was less optimistic about the effectiveness of sanctions, envisaging a time where entities no longer have to exchange crypto into fiat assets.
“As crypto becomes more mainstream, it will become harder to put sanctions on large, populous countries. Sanctions of the future will look different, though not necessarily better or worse.”