Ukraine war: Can Russia use crypto to avoid sanctions?

by Umberto Bacchi | @UmbertoBacchi | Thomson Reuters Foundation
Friday, 4 March 2022 16:45 GMT

A representation of the virtual cryptocurrency Bitcoin is seen in this picture illustration taken October 19, 2021. REUTERS/Edgar Su

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From bitcoin mining to cyber crime, Russia is eyeing cryptocurrencies to ease the impact of western sanctions - but how would that work?

By Umberto Bacchi

TBILISI, March 4 (Thomson Reuters Foundation) - Russia could turn to cryptocurrencies like bitcoin as a way to circumvent western sanctions for its invasion of Ukraine, tech experts have warned.

Western sanctions have forced companies and financial firms to halt business in the country but many of the world's largest crypto exchanges - including Binance and U.S.-based Kraken and Coinbase - have stopped short of a blanket ban on Russian clients.

Here is how cryptocurrencies could impact sanctions against Russia:

WHAT SANCTIONS HAVE BEEN IMPOSED ON RUSSIA?

The United States and its allies have unleashed a slew of sanctions targeting Russia's banks, state-owned entities, and elites, among others, following the country's invasion of Ukraine.

Major Russian banks have been shut out of the SWIFT international payments system, while travel bans and asset freezes hit oligarchs and officials close to Russian President Vladimir Putin.

Measures targeting Russia's central bank have blocked part of its assets preventing it from using its $630 billion foreign reserve war chest to prop up the rouble, which went into freefall.

Russian households and businesses have rushed to convert roubles into foreign currency, while some are scrambling to invest savings into crypto.

Trading volumes between the rouble and cryptocurrencies jumped three-fold on Monday from a week earlier, according to market data provider CryptoCompare. 

WHY WOULD RUSSIA TURN TO CRYPTOCURRENCIES?

Bitcoin and other cryptocurrencies were designed to be free of central financial authorities like governments, banks and central banks.

They allow for "peer-to-peer" transfers that can be done between users online without any intermediaries.

Russian authorities and sanctioned individuals might use this set-up to shore up their assets and continue making international payments, according to crypto analysts.

"It is highly likely that we will see Russia try to engage in some activity via crypto," David Carlisle, director of policy and regulatory affairs at blockchain analysis firm Elliptic, told a webinar about sanctions and cryptocurrencies this week.

The prospect has caused concern on both sides of the Atlantic, with EU and U.S. lawmakers calling for measures to be taken to close loopholes and ensure Russia cannot use crypto to skirt sanctions.

HOW WOULD THIS WORK?

Anti-money laundering and crypto experts said people targeted by sanctions may try to move funds via so-called privacy coins - a class of cryptocurrencies that obscures the identity of users more than bitcoin.

Russia could use crypto to replenish its coffers, according to Carlisle.

The gas-rich country could tap into some of its resources to engage in crypto mining  - the energy-intensive computing process that leads to the creation of bitcoins and other digital money - something that Iran has already done in recent years, he said.

It could also follow the example of North Korea, deploying state-sponsored hackers to target crypto-exchanges, steal money and lead ransomware attacks on western entities, he added.

HOW EFFECTIVE WOULD THIS BE?

Caroline Malcolm, head of international public policy and research at blockchain data platform Chainalysis, said Russia can leverage cryptocurrency to evade the sanctions "but only at a relatively small scale".

Carlisle of Elliptic said the world's 11th largest economy would have to harness crypto "at a very substantial scale" to significantly dent sanctions' impact, which he said was no mean feat.

For example, the firm estimates that Iran might have generated only around $1 billion dollars over the past few years through crypto mining.

"These days crypto is obviously very volatile and Russia might not need that in the face of some of the challenges it is having with its currency," Carlisle added.

Moving large amounts of money undetected could also prove tricky, due to the nature of blockchain-based systems, said Malcom. "The transparency of crypto provides opportunities to identify and shut down Russian sanctions evasion," she said.

HOW HAVE OTHER NATIONS REACTED?

Ukraine has asked for the digital wallet addresses of Russian users to be blocked, a move that would effectively stamp out their ability to trade crypto.

But a blanket ban has so far been resisted by leading  crypto exchanges, which have however said they will comply with government sanctions.

https://www.reuters.com/technology/coinbase-not-banning-russians-using-platform-ceo-says-2022-03-04/

EU officials said the bloc's sanctions apply to all financial transactions, regardless of how they occur, with the ban on supplying credit to Russian companies covering credit in all its forms.

The U.S. Treasury said Russian businesses or individuals would not be able to use crypto to skirt sanctions, citing problems converting digital currencies to traditional money via financial firms that are subject to anti-money laundering rules.

However the department has also reached out to cryptocurrency companies about their cybersecurity controls to ensure U.S. digital assets are safe, amid concerns that Russia could wage retaliatory cyber attacks.

Related stories:

Ukraine invasion plays out online as web sleuths document the conflict 

Russian invasion: Five ways tech is being used to help Ukraine 

Europe sizes up renewables to reduce reliance on Russian gas 

(Reporting by Umberto Bacchi @UmbertoBacchi, Editing by Zoe Tabary. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)