How Crypto May Help Russia And Its Billionaires Go Around Sanctions

How Crypto May Help Russia

In response to Russia’s invasion of Ukraine, US President Joe Biden announced on Thursday that he had authorized “tough sanctions.” These sanctions attempt to impede Russia’s capacity to transact in dollars and other major foreign currencies, and involve fines on five Russian banks with a combined asset value of $1 trillion. A large number of Russian elites, as well as their family members, will be targeted. All of this is on top of the penalties levied earlier this week. However, in a government that is taking steps to legalize cryptocurrencies and where the digital assets are already widely held, such punishments may be less effective. Typically, countries utilize physical workarounds to dodge sanctions, such as Venezuela and North Korea’s use of petroleum transfers from ship to ship, but digital assets such as cryptocurrency and decentralized exchanges could become the most effective approach to avoid fines. “Neither dictators nor human rights activists will encounter any censor on the Bitcoin network,” said Matthew Sigel, head of digital assets research at investment manager VanEck. Sanctions imposed on companies and individuals by the U.S. and its allies could essentially close them out of the West. Billionaires, some of whom have already been targeted directly, potentially stand to circumvent those penalties if they choose to use crypto, which uses blockchain technology to keep transactions anonymous. The digital currencies might help them buy goods and services and invest in assets outside of Russia — all while avoiding banks or institutions that adhere to sanctions and could trace their transactions. “If two people or organizations want to do business with each other and are not able to do so through the banks, they can do it with Bitcoin,” said Mati Greenspan, founder and chief executive officer of financial advisory firm Quantum Economics. “If a wealthy individual is concerned that their accounts may be frozen due to sanctions, they can simply hold their wealth in Bitcoin in order to be protected from such actions.”

Sanctions Workaround

Unlike fiat currencies, which must pass via third-party institutions that can track, freeze, or prohibit them, cryptocurrencies can be sent directly from one person to another, regardless of government sanctions or other restrictions.Cryptocurrency holders can also create a web of wallets with different addresses across multiple exchanges, making it difficult to track any activity and even more difficult to link transactions to a specific person. Additionally, individuals have the option of using bitcoin exchanges that are not based in sanctioned areas and hence are not bound by regulations.But any assets held in crypto wouldn’t be easily converted into fiat currencies, experts say, making any money that trades hands less disposable. And in order to circumvent banks or even centralized exchanges that adhere to sanctions, individuals would have to convince any services they are doing business with to accept digital payment, which could be difficult. The wealthy Russians who will be targeted with sanctions are “people that personally gained from the Kremlin’s policies and they should share in the pain,” Biden said on Thursday. “We will keep up this drumbeat of those designations against corrupt billionaires in the days ahead.” None of the billionaires sanctioned prior to Thursday has so far publicly revealed whether they’re crypto holders. To be sure, governments can still regulate bitcoin holdings on centralized exchanges, according to David Tawil, president of cryptocurrency investing firm ProChain Capital. He was referring to the Canadian government’s recent assault on crypto accounts belonging to truckers who were collecting payments to assist their blockades of US-Canada border crossings and a weeks-long protest in Ottawa. Money laundering through cryptocurrencies is a myth, according to Brett Harrison, head of crypto exchange FTX US, who adds that exchanges have access to technology that allows them to trace and screen wallets from sanctioned nations. Individuals would also find it difficult to convert cryptocurrencies to fiat currency through centralized exchanges without being caught, making it more difficult for them to spend. “The thing that can be prevented is the funds forever leaving an exchange where proper sanctions are properly upheld,” said Harrison. “As soon as it moves anywhere, everyone can see it because it’s on a public blockchain, but even if they could move it, no exchange will let them convert this to a currency and the second they do they are caught.” FTX frequently gets contacted by law enforcement agencies across several states and countries with subpoenas to seize funds from certain addresses, he said. The extent to which cryptocurrency can be traceable is visible from the recent arrest of two individuals related to the 2016 Bitfinex hack. The U.S. government was able to track the activity of certain wallets and as a result freeze the accounts as soon as they were converted into fiat currencies.

Crypto’s Status

The legal status of cryptocurrencies in Russia is in flux, with the government pushing for their legalization in order to attract international investment and bring domestic trading out of the shadows, while the central bank claims they are a pyramid scheme and should be banned. Putin instructed them to seek a swift agreement last month, but top government officials have yet to agree on how to regulate cryptocurrency. However, millions of Russians are already entrenched in the digital world, with cryptocurrencies valued more than 2 trillion rubles ($22.9 billion), according to a recent government study. More than 17 million Russians, or about 12% of the total population, are cryptocurrency owners, according to data from Singapore-based payment gateway TripleA. And with more sanctions pending, it could be in Russia’s interest to let rich individuals deal in crypto regardless of its legal status. “To have conflicting thoughts out there is kind of okay and they’ll get to the issue when they can get to the issue,” said ProChain’s Tawil, explaining that even the U.S. has struggled to define the legal framework and regulations surrounding cryptocurrencies. “I would think that the majority of crypto activity in Russia is frankly in rhythm with the government.”