Cryptocurrency Is No Fix for Russia’s Sanctions Woes

In the wake of Russia’s invasion of Ukraine, there has been wide speculation that Russia could evade international sanctions using cryptocurrency. Binance, the world’s largest cryptocurrency exchange, said that blocking all Russian users “would fly in the face of the reason why crypto exists.” But it’s unlikely that this can be of any real use for Moscow, because there just aren’t enough dollars in the crypto trading system to meet the needs of a country of Russia’s size.

Individuals may use crypto to work around sanctions on Russia, though evading personal sanctions may be more difficult. Cryptocurrency purchases in rubles have risen in the past week, though the numbers are still very small on the scale of cryptocurrency, let alone the rest of the financial world. On a national scale, though, the idea is a nonstarter.

The fundamental concept of cryptocurrency is: money, but unregulated. Bitcoin, the first cryptocurrency, was created by sincere libertarians who valued their privacy and wanted to evade government control of their money. It immediately attracted other actors who wanted to evade government control of their money: criminals.

Cryptocurrency advocates have long made a case for crypto’s role in evading sanctions, on libertarian principle. Justin Sun, founder of the Tron cryptocurrency, tweeted (and later deleted) about a call with Dmitry Lyakishev, Russia’s ambassador to the World Trade Organization, about the “humanitarian use case of how blockchain like Bitcoin/TRON can be implemented for Russian civilians who lack access to financial payment system.”

Sun neglected to mention that the “civilians” in question would not be the man on the street. They would be citizens with large amounts of money—from whatever source—that they want to move undercover, past sanctions and capital controls.

Money laundering for criminals and other bad actors is not a new idea. At its core, it is the process of turning dirty money you can’t use into clean money you can use. Cryptocurrency has sometimes been a useful tool for this, but it stumbles at the last hurdle: getting actual money out at the other end, and not just another crypto. The volume of the crypto economy is just too small; there aren’t enough actual dollars. When headlines speak of millions or billions of dollars in crypto-tokens, these often aren’t dollars in any realizable sense. They’re abstract value in the way that, say, a private-equity unicorn company like Theranos was once “worth” $10 billion. Turning this mark-to-market value into money you can spend is difficult even if you do it all entirely aboveboard.

It’s certainly true that cryptocurrencies have been used to evade international sanctions before. North Korea ran ransomware attacks to collect large amounts of cryptocurrency; the country has managed to turn an unknown amount, but likely in the tens of millions of dollars, into clean currency it can use.

North Korea’s actions and the individuals it employed were caught because bitcoin and its successors do their accounting on a blockchain: a permanent public ledger of all transactions ever made. While no names are on the blockchain, there’s nevertheless often enough information to allow the authorities to put two and two together. Committing crimes on a permanent public ledger of all transactions was flagged by the developers of bitcoin as a bad idea as early as the Silk Road drug market in 2011, and it proved to be so. A regulator’s greatest defense may be a bad actor’s arrogance.

Russia is rather larger than North Korea: It’s an economy of 144 million people, with a GDP of $1.5 trillion. That’s not on the scale of China, the United States, or the European Union, but not small either. The U.S. National Security Council’s director of cybersecurity, Carole House, considers it exceedingly unlikely that Russia could work around sanctions with cryptocurrency at the scale it would need. The U.S. Treasury is similarly unconcerned because it’s just too hard to move as much money as Russia would need through the crypto exchange system unnoticed.

That said, cryptocurrency’s potential to evade sanctions is already calling untoward attention to the sector. Sen. Elizabeth Warren tweeted that “U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets.” The Biden administration has considered specifically targeting Russia’s use of cryptocurrencies. French Finance Minister Bruno Le Maire has said that cryptocurrencies will be specifically mentioned in EU sanctions of Russia.

Times are pretty desperate. Russian President Vladimir Putin was first on the receiving end of international sanctions with teeth in 2014, after Russia invaded Crimea. Since then, Putin has attempted to sanction-proof the Russian economy in several ways: maintain a substantial $600 billion foreign currency reserve, bring manufacturing home, reduce reliance on imports, reduce U.S. dollar debts, and build new markets for Russia’s natural gas and oil. None of the measures has included cryptocurrency.

The Russian government is not so fond of cryptocurrency. The Bank of Russia, the country’s central bank, recently proposed extensive bans on most cryptocurrency uses. The Ministry of Finance countered with a bill to tightly regulate and tax crypto investing and to ban use of cryptocurrencies for payment; the latter proposal is apparently favored by Putin.

Some wonder if Russia could evade sanctions with a ruble-based central bank digital currency (CBDC). However, a digital ruble is barely at the concept stage. The Ministry of Finance suggested in October 2020 that a ruble CBDC could be used to reduce the country’s exposure to sanctions but then stated that such an instrument would need to comply with the highest levels of Financial Action Task Force anti-money-laundering rules.

Reports suggested that Tether, a notoriously questionable dollar-substitute “stablecoin” commonly used in crypto trading, was being used to funnel money out of Russia. This report was sufficient for EU officials to look into the matter. The basis of this report turned out to be an increase in total daily trading volume to $33 million on a single trading pair on the Binance exchange. For comparison, the total daily trading volume worldwide of tethers on all trading pairs is around $55 billion. It’s possible that the tether-ruble trading was a small number of individuals who managed to get their rubles out, but this wouldn’t be a usable channel for nation-scale sanctions evasion.

Tether states that it complies with sanctions, including freezing particular tethers used by a sanctioned entity as necessary. However, because tethers are just crypto-tokens like any others, Tether can’t make the normal transmission of tethers comply with sanctions any more than it could check each note in a duffel bag full of $100 bills handed from one crook to another. Only the exchanges can check if a customer trying to make a trade is sanctioned.

Individual-sanctions evasion with cryptocurrencies will use the same techniques as with regular money: frontmen, corporate shells, complacent banks. This has been successful, but only up to a point.

Criminals launder their cryptos using darknet “treasure men” who leave bags of cash in specified locations, small exchanges without much liquidity, questionable over-the-counter trading desks, and chain-hopping, where you exchange your way through several different cryptos to obfuscate your trail. Even this gets them to only “clean” crypto-assets, which they then have to cash in.

And the authorities aren’t stupid. The U.S. attorney general produced a Cryptocurrency Enforcement Framework in October 2020, listing various types of financial malfeasance facilitated by cryptocurrencies and how these have been traced in particular cases, including North Korea’s sanctions evasion.

The Treasury has warned that cryptocurrencies can weaken sanctions; its prescriptions include international coordination to hamper bad actors from cashing in their cryptos. The Financial Action Task Force has tightened its recommendations in just the past few years on traceability of cryptocurrency transactions; we are headed for a two-speed system of traceable regulated investors versus questionable actors who are left out in the cold.

Cryptocurrency can be useful for payments. Ukraine has officially requested donations, including in cryptocurrency. The country has received $22 million in cryptocurrency in the past week, a small enough volume to cash out relatively easily. For once, crypto might have done a little good. It’s unlikely it’ll do much more than that.