Why Russia can’t (and won’t) use crypto to evade sanctions
The Russian invasion of Ukraine marked a turning point for Bitcoin markets, but brought with it serious accusations across the world’s media that crypto could be used as a way for Moscow to evade sweeping sanctions imposed by the US, EU and UK.
Here I will explain why this won’t happen.
The sanctions are significantly harsher than any levied against Russia previously, including closing EU airspace to Russian aircraft, cutting off the country’s largest banks from the interbank SWIFT payments settlement system, and sanctioning Russia’s central bank to freeze its transactions.
On 28 February Switzerland announced it would join the EU sanctions targeting Russian assets, something CNBC reporters called “a landmark shift in its historic position of neutrality”.
Russia’s largest lender, Sberbank, announced four days later it was pulling out of European markets. As of December 2020 the state-controlled bank’s European subsidiaries had assets worth $14.4bn. Those subsidiaries were going through “abnormal cash outflows and threats to the safety of employees and branches”, Sberbank said, adding that it was no longer able to supply liquidity to its satellite arms in Europe.
Conflict currency?
Bitcoin gained “conflict currency credentials” as Reuters put it on 1 March, with people seeking to move value across borders in a way that was not hamstrung by delays and instability in the banking systems of Ukraine and Russia.
“Bitcoin has leapt since Russia’s invasion of Ukraine,” wrote reporters Medha Singh and Lisa Pauline Mattackal, “bolstered by people in those countries looking to store and move money…in decentralised crypto.
“Bitcoin trading denominated in the Russian [currency] went into overdrive when the invasion began on Thursday [24 February] with daily volumes rising 259% from a day earlier to $13.1m according to data from CryptoCompare.”
We heard from journalists stories of long lines and bank runs in Russia, with citizens panicking over the massive currency devaluation of the ruble.
One man told The Guardian: “It said they had dollars so I came here immediately,” said Alexei Presnyakov, 32, pointing to an app for Russia’s Tinkoff Bank, indicating he could withdraw hard currency. About 20 people were queued in line. “Yesterday [the rate] was 80 [to the dollar]. Today it’s 100. Or 150.”
With its assets frozen, the Russian central bank doubled interest rates from 9.5% to 20% in a bid to stabilise the ruble.
The ruble crashed anyway. See for reference this chart from the New York Times.
$38m in crypto donated to Ukraine
On the Ukrainian side, government Twitter accounts started to post in late February asking for donations in Bitcoin (BTC) , Ethereum (ETH) and Tether (USDT).
Cryptoassets have emerged as an important tool providing a speedy, cross-border alternative crowdfunding method. Donations, like all cryptocurrency transactions, are peer-to-peer, meaning they can bypass financial institutions or malicious actors who may be blocking payments to groups.
As Castle Island Ventures partner Nic Carter wrote on Twitter: “So it turns out having a digital bearer asset that can’t be seized or frozen is pretty important after all?”
Blockchain regulatory compliance firm Elliptic noted that by 2 March, 48,000 cryptocurrency addresses had sent over $30m in crypto donations in BTC, ETH, USDT and TRON to the Ukranian government and the NGOs providing support to the Ukrainian military. The Kviy-headquartered NGO Come Back Alive provides body armour, medical kits and helmets to Ukrainian soldiers, as well as providing night vision equipment, according to CNBC.
In late February, popular crowdfunding tools like Patreon shut down the ability to donate to NGOs like Come Back Alive, citing policy issues.
The total fundraising figure to date of $37.9m includes a $5.8m donation by Ethereum and Polkadot founder Gavin Wood, as well as a CryptoPunk NFT valued at over $200,000.
The situation highlights Bitcoin’s cross-border value transfer credentials. But could crypto be damaged irreparably if Russia using those same features to evade sanctions?
Could Russia use crypto to evade sanctions?
The question of Moscow using crypto to evade sanctions has become a huge topic of conversation in recent days. But the idea conveniently bypasses a litany of facts about Bitcoin and crypto markets in general.
As we note above, Bitcoin trading denominated in the ruble skyrocketed over 250% when the invasion began. But look at the dollar value of trades: daily volume is less than $15m.
The point being: there is enough liquidity on cryptoexchanges for citizens, but not for oligarchs.
Russia will not use crypto to avoid sanctions. Ordinary citizens will use crypto to protect against the devaluation of the ruble, which has happened and will continue to happen as a result of those sanctions.
As Politico reported on 25 February, the US Treasury Department knows there is no realistic risk of Russia using crypto to evade sanctions at any meaningful scale.
“Treasury officials say they aren’t overly worried about crypto undermining the efforts to choke off the Kremlin’s access to capital. Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time consuming and would likely be visible in the broader crypto market, given the massive investment portfolios of individuals and institutions named in the sanctions.”
Russian SDNs (Specially Designated Nationals and Blocked Persons) include billionaires like Alexei Mordashov, Russia’s richest man and the chief executive of the country’s largest steel and mining company Severstal. He alone has a net worth of more than $29bn.
Secondly, public blockchain ledgers are terrible ways to launder money. They are transparent and open, and anyone can view a list of transactions at any time. Coupled with the skill of forensic blockchain analysts and compliance firms like Chainalysis, Elementus and Elliptic and we are talking flows of money multiple orders of magnitude larger than it would be possible to conceal.
We know that Western law enforcement agencies have good visibility into the on-ramps and off-ramps for crypto networks: US federal agencies including the FBI, DEA, CFTC, SEC and IRS have all paid lucrative contracts for the services of forensic crypto analytics businesses, including Chainalysis.
And as Todd Conklin, counselor to the deputy US Treasury secretary told Politico: “The scale of what they have to move, and where they have to move things from, [crypto is] not necessarily going to be that concerning”. Attempt to move that much capital through exchanges would contribute to “more of a spike in the crypto market than has been observed”.
The SWIFT angle: Makes no sense
On 25 February the US, EU and UK enacted a huge list of sweeping new sanctions targeting major Russian companies, financial institutions, restricting sovereign debt, along with designating certain Russian elites as SDNs. They include booting Russia from SWIFT, the interbank settlements network, which has around 11,000 members worldwide.
So could crypto markets help to mitigate sanctions by offering an alternative to SWIFT?
Legal expert Jake Chervinsky, head of policy at the Washington DC-based Blockchain Association explains why using crypto to avoid sanctions and offer an alternative banking route for capital is not only costly and unappetising but also illogical.
If Russia wants an alternative to SWIFT, rather than using a public network like Bitcoin that they cannot and will never be able to control, they are far more likely to use CIPS, the onshore yuan clearing and settlement system offered by China.
As the South China Morning Post reported on 1 March, sanctions on Moscow are likely to accelerate the connection and transactions between Chinese and Russian payment systems.
China decided to establish its own international payment system in 2012 and CIPS began operations in 2015.
Russia and China have been collaborating for years on a de-dollarisation project, according to the Atlantic Council think tank. The move became a specific priority for Russia following its annexation of Crimea in 2014 and the subsequent imposition of Western sanctions, vastly limiting the ability of state firms and banks to raise financing in Western markets. The scale of the de-dollarisation project has only increased in recent years.
Among the sanctions are that US investors will now not be able to purchase new equity or new debt in: Gazprom, the world’s largest natural gas company; Alrosa, the world’s largest diamond mining company; Sovcomflot, Russia’s largest maritime and freight shipping company; and Alfa Bank, Russia’s largest privately owned financial institution.
The US then expanded this list further days later to include Russia’s central bank, the Russian Direct Investment Fund and Kirill Dmitriev, the CEO of that $10bn sovereign wealth fund.
Chervinsky continued: “UK, EU and US persons are cutting ties with Russian SDNs, regardless of which payment systems they were using previously. There is no reason at all to believe that the existence of crypto will convince any of them to wilfully violate sanctions laws, risking fines and jail time.”
To conclude:
- Crypto markets are too small and ruble pairs too rare to make any dent in the amount of money that Russia needs to move to avoid sanctions
- With Russia cut off from the world’s crypto markets, they can’t source enough liquidity for it to matter
- Public, open, transparent networks like Bitcoin that Moscow cannot control are far less likely venues for moving capital than China’s SWIFT alternative CIPS
- Law enforcement already has good visibility on crypto on and off-ramps
- Russia cannot hide its tracks with crypto, making the asset class useless for sanctions evasion.
[I am the Head of Research at ETC Group, which issues 100% physically-backed crypto ETPs on regulated exchanges throughout Europe, including BTCE (Bitcoin), ZETH (Ethereum), ESOL (Solana), RDAN (Cardano), EXTZ (Tezos), PLKA (Polkadot), BTCH (Bitcoin Cash), STLR (Stellar) and ELTC (Litecoin).]
