On Feb. 24, 2022, the Russian Federation started a “special military operation” against Ukraine. NATO states and their partners immediately imposed far-reaching economic sanctions on Russia, such as excluding Russian banks from SWIFT, freezing central bank assets and seizing assets of Russian oligarchs. But one of the most striking aspects of the sanctions has been the weaponization of the financial system by the U.S. and its allies.
Cryptocurrencies have often been praised as a way of “leveling the playing field” against banks’ real or perceived mistreatment of individuals. Some may hope that the crypto-powered alternative financial system can be used to circumvent economic sanctions on Russia
. Already, Russian financial regulators are revising their policies: Sberbank, the country’s biggest bank, received a digital assets license
only months after there were plans to ban crypto in Russia. In this report, CoinMarketCap Alexandria looks into:
- What role Western leaders foresees for crypto.
- How exchanges reacted to sanctions.
- Whether cryptocurrencies are actually effective at dodging sanctions.
- How the sanctions will impact the future of crypto in Russia and the world.
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The Western policy approach was clear: crypto must not be a way to circumvent sanctions.
For Western policymakers, this situation is a welcome opportunity to showcase why “the regulatory approach” is the way to go in the future. If crypto isn’t regulated, war-mongering regimes, criminals and other nefarious actors will use it to their advantage. Jerome Powell said as much in a recent U.S. Congress hearing
“There isn’t in place the kind of regulatory framework that needs to be there. [...] What’s needed is a framework — in particular, ways to prevent these unbacked cryptocurrencies from serving as a vehicle for terrorist financing, just general criminal behavior, tax avoidance and the like.”
The U.S. and the EU stand united when it comes to regulating crypto. France’s finance minister, Bruno Le Maire, also underscored that crypto should not be used to circumvent the financial sanctions and that the EU was taking measures against that happening.
In other words, nothing new on the Western front.
Exchanges are in a delicate spot. On the one hand, they need to and want to comply with sanctions. No exchange wants to anger Uncle Sam, so the industry was quick to assure the public that crypto would not help the Russian government to access funds. Ripple CEO Brad Garlinghouse said
that “in order to convert crypto to fiat, exchanges/etc rely on banking partners who could lose their licenses if someone on the OFAC list is able to slip through.”
Other exchanges like Coinbase also took active measures to shut down accounts that looked guilty of foul play. 25,000 wallets with allegedly illicit activity were blocked on Coinbase, with smaller exchanges following suit. However, the industry is also careful to not blindly tow the government’s line. Binance denied unilaterally freezing all funds of Russian users, which would have almost certainly caused a lot of financial collateral damage among innocent people.
With governments firmly advocating stricter regulation and centralized exchanges caught in the middle, the question remains: how effective is crypto really for dodging sanctions?
To a layperson, crypto may look like a good way to access financial services when the banking system doesn’t work. But there are a lot of reasons why crypto is no good for evading sanctions.
Let’s start at the governmental level.
Governments use the dollar as a reserve currency for many reasons, but one of the dollar’s biggest advantages is its stability. What government wants to trade in BTC when you could lose 10-20% of your revenue in days? Stablecoins are obviously not an option because they are dollar-backed and would be easy to choke off as an alternative payments channel. Bitcoin is simply too volatile to function as a legitimate alternative means of payment.
Moreover, even for governments with an especially reckless economic approach (Hello, El Salvador
!), the crypto markets don’t have enough liquidity
. A tiny country like El Salvador can do business in Bitcoin, but a major commodity exporter like Russia needs more liquidity than Bitcoin provides
. Most of its current account surplus comes from exporting commodities paid for in dollars.
Matthew Le Merle, co-founder and managing partner of Blockchain Coinvestors, said
“Crypto alone can’t sustain Russia’s needs now. Russia’s total annual imports are more than $200 billion and its banking sector’s total assets are $1.4 trillion. There is simply no way crypto can fill the gap Russia requires.”
Imagine receiving a lot of money daily from selling oil and gas, but the market is too thin for your orders. Because of their comparatively poor liquidity, the cryptocurrency markets are also easier to manipulate than traditional capital markets.
If we talk about dodging sanctions on an individual level, the public nature of the blockchain becomes a problem. Because Bitcoin is a public ledger, big transaction volumes are visible to everyone.
is not that difficult for intelligence services to identify patterns and start connecting whale accounts to real-world identities
. David Carlisle
, director of policy and regulatory affairs at Elliptic, finds it likely that Russian individuals and entities will try to use crypto to dodge sanctions, but with little success:
“It’s critical to keep in mind that even where nefarious actors attempt to use crypto, law enforcement can trace this activity owing to its transparency, and crypto businesses can use solutions such as blockchain analytics to comply with sanctions requirements.”
U.S. and European financial regulators emphasized that financial transactions in fiat or digital currency are subject to sanctions. Violators and those helping with sanctions evasion are guilty of a criminal offense and would be punished to the full extent of the law.
, partner at the Dilendorf Law Firm, said that identified wallets would immediately be blacklisted by US authorities:
“The minute the U.S. government learns which wallet belongs to the Russian government or its supporting groups, these blockchain wallets will be immediately added to OFAC’s SDN list.”
Matthew Le Merle thinks that crypto is an inefficient way to work around sanctions. According to him, offshore entities and tax havens embedded in the global financial system (Hello, Panama Papers!) are a much better way if you want to avoid sanctions, considering the far-reaching technology and analytics capacity the U.S. government and other enforcement agencies have.
probably did not expect to have its assets frozen and consequently did not prepare its own blockchain infrastructure
. Converting significant amounts of wealth in and out of the crypto ecosystem is still difficult, and major exchanges are the entry points where Western governments can clamp down. Christopher Wray, the head of the FBI, said
in a Senate hearing:
“Ultimately what they really need to do is get access to some form of fiat currency, which becomes more challenging.”
Of course, crypto can substitute regular financial transactions to a certain degree. Permissionless decentralized exchanges do not offer the liquidity of their centralized counterparts but can be used to get medium-sized sums out of Russia. In theory, not much hinders a blacklisted wallet to do business on a decentralized exchange. DeFi protocols have either a very lean or no compliance department at all.
“The question is how well individual decentralized finance traders are equipped in spotting sanctioned wallets in peer-to-peer transactions. U.S. regulators must work with the international community and private actors to increase AML/CFT controls of DeFi networks to ensure that nefarious actors are not using these platforms to evade regulations and sanctions.”
While that’s not enough to offset sanctions for entities or groups of rich individuals, the odd crypto-savvy oligarch could slip through the cracks. The same goes for mining. Russia as a whole will not be able to offset adverse economic effects through mining, but it may encourage the business more than it did in the past.
Thus far, there are no signs of crypto being used to funnel money out of Russia in any big way. While trading volumes on the BTC/RUB pair hit all-time highs, that was likely due to capital flight out of the ruble and into Bitcoin. The currency pair has since stabilized due to capital controls imposed by the Russian government and a presidential decree that commodity exports must be paid for in rubles.
Salman Banaei, head of public policy at Chainalysis, also said that his company did not notice unusual trading sizes:
“We’re not seeing the large types of inflows we would see that would be indicative of inflows of large amounts of money that would correspond to a significant amount of an oligarch’s net worth.”
Overeager commentators and the odd politician have asked for a blanket ban of Russians on crypto exchanges. However, Parker, counsel and head of the anti-money laundering and sanctions practice at Ferrari & Associates, reminded the public
that de-platforming Russians from crypto exchanges is not a desirable outcome
. Quite the contrary, he underscored that the use of crypto itself does not make one susceptible.
“Russian citizens have not been sanctioned. Using crypto to transact in place of designated Russian banks is not sanctions evasion — it’s sanctions compliance.”
Still, one of the trends that are becoming increasingly clear is increased regulation.
Several experts have pointed out that even crypto’s limited potential to dodge sanctions could backfire for the industry
. Ross Buckley, KPMG-KWM professor of disruptive innovation at the University of New South Wales said
“In my view, the Ukraine crisis and related sanctions pose a massive challenge to the crypto industry. If cryptocurrencies are used to evade sanctions, a strong regulatory crackdown should be expected. Sovereign nations are highly unlikely to tolerate the loss of capacity to impose sanctions. In the absence of a centralized coordinator of the industry, I cannot see how cryptocurrencies as a whole won’t be used to circumvent the sanctions and thereby provoke a strong regulatory backlash.”
Of course, crypto can be a force for good. UkraineDAO
raised $6.75 million and crypto donations
as a whole exceed $60 million at this point. But fiat donations far exceed those in crypto, without the wrong but persistent public perception they could be used to launder money. In addition to launching its Binance crypto charity card, Binance has donated $10 million and pledged $10 million.
Still, crypto risks falling victim to the regulators’ narrative. Haohan Xu, CEO of global digital asset trading network Apifiny, explains that if rogue states like Russia adopt crypto and alternative payment systems, traditional advanced economies could easily brand crypto as an enabler of authoritarianism.
“The method of excluding Russia from participating in the U.S.-controlled global financial systems will force Russia to adopt other systems, which, naturally, will drive the growth of these systems that the U.S. does not control. [...] In this case, crypto would be legitimized in some parts of the world, and become a victim to hardline regulations from countries that are enemies of Russia. At issue is the broader argument of centralization and control versus decentralization and freedom.”
It's hard to see Western economies just yielding the cryptocurrency playing field to undemocratic countries. But if regulation hits crypto with a heavy hand, does that mean that it could thrive in countries like Russia?
Within Russia, two issues are already gaining importance: a CBDC and crypto mining.
Russia’s Stance on CBDCs
Stanislav Tkachenko, a professor of international affairs and economics at St. Petersburg State University thinks Russia could be interested in both a CBDC and promoting cryptocurrencies
. After China launched its E-Yuan, Russia may simply want to copy China’s approach. Introducing a CBDC could also have very positive practical effects on bilateral trade between the two countries. If Russia wants to avoid using the dollar, using a digital yuan or a digital ruble would be a frictionless way to make it happen.
Sergei Katyrin, president of Russia's Chamber of Commerce, put forward a proposal to Prime Minister Mishustin: employ a CBDC for settling payments with African states
as part of Russia's business activities on the continent. Katyrin wrote in a letter
to the Prime Minister:
"It seems useful to instruct the Ministry of Finance of the Russian Federation, together with the Central Bank, to ensure providing intergovernmental agreements with African states on the use of national currencies and cryptocurrencies in mutual settlements and payments."
This follows Russia's first trial of its digital ruble
and plans by Congo and the Republic of Congo
to adopt the Telegram-built TON blockchain (Telegram was founded by Pavel Durov, who officially does not support Russian state policies). Elvira Nabiullina, head of the Central Bank of Russia and a famous critic of digital assets, also started
striking a more conciliatory tone towards crypto:
“We need to see if we are too tight here and we need to ease up these projects on digital financial assets. This can become another channel for attracting funding through digital financial assets.”
That is a remarkable turnaround in only a few months after Russian financial authorities were very much anti-crypto for a long time.
Crypto Mining in Russia
On the other hand, Russia is becoming much more mining-friendly. According to Tkachenko, Russian energy producers could be crowded out of international markets due to sanctions and turn to miners to substitute for lost business. Russia may also want to gather a bigger share of the global Bitcoin hash rate and indirectly exert influence over the network.
Mining bitcoin would also be a good political hedge for Russia
in case its CBDC bombs like the Venezuelan petro
. A Russian CBDC would likely not gather much interest from economic powerhouses or its own citizens, for that matter. And while it would increase the state’s control over capital flows in the country, citizens would have to be either incentivized or forced to use government-backed crypto. Mining bitcoin through state-sponsored energy companies would allow the state to retain a degree of influence over an external payment ledger and tap another revenue channel for its energy companies.
The United States, wary of Russia potentially leveraging mining, has already reacted by sanctioning Russia-based mining services
. This marks yet another front where the U.S. is trying to deny Russia access to the global financial system, although the efficiency of mining-related sanctions remains to be seen.
The Outlook for Crypto in Russia
Overall, Russia is already in the process of becoming more crypto-friendly.
However, it is doing so out of necessity and not out of conviction or dedication to the cause of crypto. Already, Russian banks are instructed
to keep an eye on inflows and outflows from the crypto ecosystem to fiat currencies, as Russians are said to own more than $200 billion
worth of cryptocurrencies.
The latest update came on April 15 when the Russian daily newspaper Kommersant reported
a draft bill that would regulate cryptocurrencies as means of payment
. And on April 28, Russian media Izvestiya reported
that new amendments had been made to a crypto bill that would make exchanges and wallets provide customer data if judicially requested.
Furthermore, Russian authorities will regulate crypto mining by creating a centralized registry of miners in the country. Undoubtedly, the state will try to disincentivize and regulate the use of Bitcoin in favor of its own digital currency, while using its comparative advantages in the global political arena
More Russian influence in crypto could be insofar beneficial as it would force free-market economies like the U.S. not to surrender a new technology without a fight. Comparatively more freedom for crypto miners in Russia would make overreaching regulation a harder sell in Western countries. The U.S. and European countries increasingly look to be at a crossroads, where they have to define their long-term position on cryptocurrencies.
They say competition is good for business. If that’s true, cryptocurrencies could be in for a golden age.
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