Sanctions for Russia: Why Cryptocurrencies Won't Save Them
European Union, United Kingdom, United States and Canada announced new sanctions on Monday, targeting Russia's central bank and national wealth fund. Even Switzerland and China announced sanctions crippling the financial system of the aggressor. The US Treasury Department said that it limited Vladimir Putin's regime's ability to use Russia's $630bn in foreign reserves. The move came just a day after the US, EU, and its allies cut off some Russian banks from SWIFT, a secure messaging network used worldwide. So now, there are opinions and speculations that Russia can ease the burden of sanctions using cryptocurrencies.
Low Level of Crypto Adoption
"Enforcing sanctions requires the ability to track transactions – typically through the banking system. There are some examples of when countries such as Iran and North Korea have used cryptocurrencies to avoid sanctions. Russia's case is different as the country has almost no room for manoeuvre due to a scale of economic impact on country's financial stability as well as extremely low level of crypto adoption in the country," says Andrius Bartminas, one of the founders of Blockchain Lithuania Competence Center and the CEO of "SUPER HOW?". He also states that at this point, even Ukraine has an advantage in terms of crypto adoption over Russia. Unlike North Korea and Iran, Russia has been deeply rooted in the global financial system for decades. Eighty percent of its daily foreign exchange transactions and half of its international trade are conducted in dollars. Therefore, jumping to another alternative system is not so easy.
On February 18, Russia's ministry of finance introduced a cryptocurrency bill in parliament, pushing forward with a plan to regulate these digital assets. It did so over the objections of the country's central bank, which has suggested punishing crypto trading and issuance with fines up to 500,000 Rubles ($6,360) for individuals and one million Rubles for companies, the TASS news agency reported.
Public Visibility of Crypto Transactions
Some experts have claimed that cryptocurrencies can be used to evade sanctions and hide wealth, though it could prove only minimally successful.
"To acquire, move substantial amounts of cryptocurrencies and convert it to FIAT currency (a government-issued currency that is not backed by any physical commodity) is exceedingly difficult. Moreover, on a blockchain, every transaction and the address associated with it are visible to the public. Even without knowing the exact owner of the address, anyone can see the flow volume. Once a suspicious address is flagged, those assets can be monitored and tracked to the endpoint of the exchange and then freezed or even seized. Even companies might monitor sanctioned addresses for any transactions and refuse to transact with these addresses entirely," says Vytautas Kašėta, the president of Crypto Economy Organisation.
Active Involvement of Crypto Exchanges
Crypto exchanges in Europe, the United States and Asia will likely stop nearly all dealings with Russia as they are pushed by their own regulators towards international anti-money laundering and combatting the financing of terrorism (AML/CFT) controls and compliance. Ukrainian vice prime minister Mykhailo Fedorov had requested crypto exchanges outright freeze Russian traders on Sunday. Following this, crypto exchanges Binance, Coinbase and Kraken already is blocking the accounts of any Russian clients targeted by sanctions, and surely with more exchanges to follow the path.
Moreover, such companies as Chainalysis, Confirm, Elliptic has previously proven their effective role in combating crime, money laundering and illicit activities using cryptocurrencies. For example, as Elliptic has previously shown, Russia-linked separatist groups in the Donetsk and Luhansk regions have solicited Bitcoin donations supporting their militant activities. Immediately on the announcement of sanctions targeting those regions, Elliptic took steps to ensure its customers could screen wallet addresses and transactions involving these groups in Donetsk and Luhansk. Having all that transactional data that is accessible in real time on blockchain is even more effective than on a classical financial infrastructure where a large-scale international investigation involving many counterparties is required to track and prevent illicit activities.
The necessity for self-regulation and sanctions
The rise of chain and transaction analysis tools such as Chainalysis, Elliptic, Crystal and others gives the crypto community the power to self-regulate effectively. The Crypto community, on the other hand, now clearly understands that self-regulation processes are vital for the decentralized infrastructure and crypto economy.
“Putin's war in Ukraine has attracted our attention to another huge problem, that Russia is consolidating illicit crypto funds (mostly ransomware and stolen crypto funds) and illicit businesses like Suex, Evil Corp, Finiko, Hydra Market, that include money laundering and ransomware services (including Ryuk, Conti, Maze, and several others) as stated in Chainalysis 2022 crypto crime report. Most of the ransomware businesses are based in Russia and Iran, so we need to start implementing self-regulatory sanctions into decentralized finance protocols as well as centralized crypto services," says Vytautas Kašėta.
Crypto will not save the economy of Russia
"Crypto will not save Russia from sanctions. On the contrary, it can, even more, cripple the economy and those who are trying to skip sanctions with their wealth. A strong push from the government to the public to use cryptocurrencies might create strong competition for a centralized national currency, and the possibility to track and trace cryptocurrencies at large might leave sanctioned subjects without their wealth,” says Andrius Bartminas.