Cryptocurrency Could Be a New Way for Billionaires to Avoid Sanctions

Individuals and other organizations targeted in the aftermath of Russia's invasion of Ukraine may avoid sanctions if they utilize cryptocurrency.

Cryptocurrencies may aid Russia and its oligarchs in mitigating the effects of Western sanctions.

In reaction to Russia's invasion of Ukraine, US President Joe Biden said Thursday that he has approved "tough sanctions." These attempt to impair its capacity to do business in dollars and other major foreign currencies, and include fines on five Russian banks with assets worth an estimated $1 trillion. A wide range of Russian elites and their families will also be targeted. This is in addition to the sanctions levied earlier this week.

However, in a government that is taking moves to legalize cryptocurrencies and where the digital assets are already widely held, these punishments may have less weight. Typically, countries utilize physical workarounds to dodge sanctions, such as Venezuela and North Korea's use of ship-to-ship petroleum transfers, but digital assets such as cryptocurrency and decentralized exchanges may become the most effective approach to avoid fines.

"Neither dictators nor human rights campaigners will face censorship on the Bitcoin network," said Matthew Sigel, director of digital assets research at VanEck.

Sanctions imposed by the United States and its allies on firms and persons might effectively shut them out of the West. Billionaires, some of whom have previously been directly targeted, may be able to avoid such sanctions if they chose to adopt cryptocurrency, which employs blockchain technology to make transactions anonymous. They might use digital currencies to purchase goods and services and invest in assets outside of Russia, all while avoiding banks or organizations that follow sanctions and can track their activities.

"If two individuals or organizations want to conduct business with one other but are unable to do so via banks, they may do it using Bitcoin," said Mati Greenspan, founder and CEO of financial consulting company Quantum Economics. "If a rich person is afraid that their accounts may be blocked as a result of sanctions, they may simply keep their money in Bitcoin to insulate themselves from such acts."

Sanctions Workaround

Unlike fiat currency, which must be routed via third-party organizations that may trace, freeze, or ban them, cryptocurrencies can theoretically be moved from one person to another without regard for government penalties or other limitations.

Cryptocurrency holders may also create a network of wallets with various addresses spread over many exchanges, making it incredibly difficult to trace any activity and much more difficult to link transactions back to a specific person. Furthermore, consumers may choose cryptocurrency exchanges that are not situated in areas that impose fines and hence are not have to conform to legislation.

Experts warn that any assets kept in crypto would be difficult to transfer into fiat currencies, making any money that changes hands less disposable. To avoid banks or even centralized exchanges that adhere to sanctions, people would have to persuade any services with which they do business to accept digital payment, which may be challenging.

The affluent Russians who would face penalties are "those who directly benefited from the Kremlin's actions and should participate in the pain," Biden said on Thursday. "In the next days, we will keep up the drumbeat of such designations against corrupt millionaires."

So yet, none of the billionaires sanctioned prior to Thursday have publicly disclosed whether or whether they own cryptocurrency.

To be sure, governments may still put controls on cryptocurrency holdings on centralized exchanges, according to David Tawil, head of crypto investment company ProChain Capital. He linked to the Canadian government's recent raid on crypto accounts held by truckers who were collecting payments to assist their blockades of US-Canada border crossings and a weeks-long protest in Ottawa.

According to Brett Harrison, head of crypto exchange FTX US, assuming that cryptocurrencies make money laundering simpler is a mistake. He argues that exchanges have access to technology that enables them to trace and filter wallets from sanctioned nations. Individuals would also find it impossible to transfer cryptocurrencies to fiat currency via centralized exchanges without being discovered, thereby making it more difficult for them to spend.

"What can be avoided is monies leaving an exchange when appropriate sanctions are maintained indefinitely," Harrison said. "Everyone can see it as soon as it travels anyplace since it's on a public blockchain, but even if they could transfer it, no exchange would let them convert it to a currency, and the second they do, they're caught."

According to him, FTX is routinely approached by law enforcement authorities from various states and countries with subpoenas to take cash from certain locations. The recent arrest of two people linked to the 2016 Bitfinex breach demonstrates the degree to which cryptocurrencies may be traced. The United States government was able to follow the activities of specific wallets and, as a consequence, freeze the accounts as soon as they were changed into fiat currency.

Crypto’s Status

The legal position of cryptocurrencies in Russia is changing, with the government seeking to legalize them in order to attract international investment and bring domestic trade out of the shadows, while the central bank maintains they are a pyramid scheme and should be prohibited. Putin asked them to seek a rapid resolution last month, but senior government officials have yet to agree on how to regulate cryptocurrency.

According to a recent government report, millions of Russians are already entrenched in this digital realm, owning more than 2 trillion rubles ($22.9 billion) in cryptocurrencies.

According to statistics from Singapore-based payment gateway TripleA, more than 17 million Russians, or around 12% of the overall population, possess bitcoin. With additional sanctions on the horizon, it may be in Russia's best interests to allow wealthy people to trade in cryptocurrency regardless of its legal status.

"It's good to have contradictory opinions out there, and they'll get to the problem when they can get to the issue," said ProChain's Tawil, stressing that even the United States has failed to clarify the legal framework and rules around cryptocurrencies. "I believe the bulk of crypto activity in Russia is, honestly, in sync with the Kremlin."

Other nations in the former Soviet Union are also becoming increasingly interested in cryptocurrency. The Ukrainian parliament approved a plan to legalize cryptocurrencies last week, while Kazakhstan is working to properly control and tax its thriving crypto-mining business.

Following Russia's invasion of Ukraine, U.S. stocks initially fell, with the S&P 500 Index falling as much as 2.6 percent and the tech-heavy Nasdaq 100 falling as much as 20 percent from its previous record high in November. Since then, stocks have recovered their losses, with the Nasdaq 100 turning positive. Bitcoin fell as much as 8.5 percent to $34,337, increasing its loss to about 50% from its all-time high in November.

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