Do Cryptocurrencies Offer Russians a Way Round Sanctions?

With Russia largely blocked from the US dollar-based global financial system as a result of sanctions, some policymakers and money-laundering experts have warned that cryptocurrencies could provide a hidden route for wealth to be preserved.

US Senator Elizabeth Warren said "cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to avoid economic pain" and called upon US regulators to clamp down. Mykhailo Fedorov, Ukraine's deputy prime minister, has repeatedly called upon cryptoexchanges to block Russian users since the invasion began.

In recent days, trading between the Russian ruble and various cryptocurrency assets, such as bitcoin, has more than doubled. Research outlet CryptoCompare reported a threefold increase from a week earlier, with ruble-crypto trading volumes of around 15.3 billion rubles ($140.7 million, €128 billion) on Monday.

Chainalysis, a blockchain analysis firm, told DW that while that was a "notable spike," it was still a fraction of the volume seen during all-time highs in ruble-crypto trading, such as in May 2021.

Cryptocurrency exchanges have resisted several calls to block Russian users as a whole and are not yet legally required to do so by sanctions. That is at odds with the mainstream financial system, which has moved to isolate Russia by cutting it off from SWIFT, hitting its banks and limiting its capacity to use its reserves of foreign currency. Scores of companies from the business world have also cut commercial ties, including several payment services such as Visa, Mastercard and Apple Pay.

Complying with sanctions

Cryptocurrency exchanges say they will comply with sanctions and abide by the law.

Exchanges like Coinbase say the law, rather than blanket bans, is their priority.

"At this time, we will not institute a blanket ban on all transactions involving Russian addresses," a spokesperson for Coinbase, the biggest cryptocurrency exchange in the US, told DW. "Instead, we will continue to implement all sanctions that have been imposed, including blocking accounts and transactions that may involve sanctioned individuals or entities."

Binance and Kraken, two other major exchanges, have also said they will comply with sanctions, but will not implement wholesale bans on Russian activity.

Changpeng Zhao, the chief executive and founder of Binance, told the BBC his company would follow the international sanctions "very, very strictly" but insisted against a blanket ban on Russia.

"We differentiate between the Russian politicians who start wars and the normal people; many normal Russians do not agree with war," he said.

The likes of Binance and Coinbase are major global exchanges, but there are thousands of much smaller, less strict exchanges globally, meaning that even if larger exchanges were to limit access to Russia as a whole, others could step in. "It just moves Russian users to other smaller platforms," said Zhao.

'An ineffective primary tool'

Chainalysis says that the cryptocurrency sector has the tools to prevent sanctioned individuals from escaping detection. It has its own system for alerting its clients to suspicious activity.

"For instance, in the past, as soon as bodies like OFAC (US government agency responsible for enforcing sanctions) identify specific cryptowallets linked to sanctioned individuals and entities, we are able to, within the hour, place an alert on those wallets so that our customers, whether they be government or industry, will know if there is any transaction activity relating to that wallet," explained Caroline Malcolm, head of international policy at Chainalysis.

Several policymakers have said wealthy Russians could use cryptocurrencies to evade sanctions.

"An exchange would receive an alert immediately if someone is trying to move funds from a sanctioned wallet address into the exchange in order to convert that into cash."

She says another factor to consider is that the majority of cryptocurrency transactions are recorded on publicly available blockchain ledgers. She pointed to the recent seizure by the US Department of Justice of $3.6 billion in bitcoin stolen in the 2016 Bitfinex hack as evidence that it is getting much harder to shift illicit funds via blockchains.

US officials appear to agree that cryptocurrency is not a significant escape route for the Russian state or sanctioned individuals.

"The scale that the Russian state would need to successfully circumvent all US and partners' financial sanctions would almost certainly render cryptocurrency as an ineffective primary tool for the state," Carol House, director of cybersecurity for the US National Security Council, said this week.

The US Treasury says sanctioned individuals or companies will struggle to hide wealth via crypto. "Even at the level of individual elites, laundering billions of dollars through digital wallets would expose themselves to those tracking flows within virtual currency markets," a spokesperson told Reuters.

Ideological barriers

Even if more pressure falls on crypto exchanges to entirely block off Russian users, a major ideological issue stands in the way. A central appeal of early cryptocurrencies such as bitcoin, as well as practically all DeFi (decentralized finance), is that they circumvent traditional banks and governments.

4/6 Our mission at @krakenfx is to bridge individual humans out of the legacy financial system and bring them in to the world of crypto, where arbitrary lines on maps no longer matter, where they don't have to worry about being caught in broad, indiscriminate wealth confiscation.

— Jesse Powell (@jespow) February 28, 2022

"Our mission at Kraken is to bridge individual humans out of the legacy financial system and bring them into the world of crypto, where arbitrary lines on maps no longer matter, where they don't have to worry about being caught in broad, indiscriminate wealth confiscation," Kraken CEO Jesse Powell said on Twitter, adding that bitcoin is "the embodiment of libertarian values."

Binance said in a statement that "crypto was meant to provide greater financial freedom for people across the globe."

Yet exchanges have indicated that should they be legally compelled to issue a blanket ban on Russian users, they would do so.

"We comply with sanctions frameworks and the law — that's our sole goal here," said a spokesperson for Coinbase.

Edited by: Hardy Graupner