More On: russia
According to analysts, sanctions are likely to push Moscow to develop alternatives to the US-led financial system.
According to cryptocurrency analysts, Russia will not be able to avoid a barrage of sanctions aimed at punishing Moscow for invading Ukraine if it relies solely on cryptocurrency.
On Monday, the United States, the United Kingdom, the European Union, and Canada announced new sanctions against Russia's central bank and national wealth fund. The US Treasury Department announced that it would restrict Russian President Vladimir Putin's ability to use the country's $630 billion in foreign reserves.
The move came just one day after the United States and its allies disconnected some Russian banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication), a secure messaging network used for trillions of dollars in transactions.
On Monday, Russia's economy was already in free fall. The ruble hit an all-time low, the central bank raised its key interest rate to 20%, and the stock exchange remained closed.
Enforcing sanctions necessitates the ability to track transactions, which is typically accomplished through the banking system. Both Iran and North Korea have used cryptocurrencies, which operate outside of the financial system, to circumvent sanctions.
"Crypto can be used to evade sanctions and hide wealth," Al Jazeera's Roman Bieda, the head of fraud investigations at Coinfirm, a blockchain risk management platform, explained.
However, crypto experts told Al Jazeera that Russia's situation is different, as the country has less leeway due to the magnitude of the economic blow and its limited adoption of digital currencies.
Hundreds of billions of dollars are being replaced.
Russia, unlike North Korea, Venezuela, and Iran, has been deeply ingrained in the global financial system for decades, according to Ari Redbord of TRM labs, a blockchain intelligence company. Dollars account for 80% of its daily foreign exchange transactions and 50% of its international trade.
"It is extremely difficult to move large amounts of cryptocurrency and convert it to usable currency," Redbord explained. "Russia cannot use cryptocurrency to replace the hundreds of billions of dollars that may be blocked or frozen."
There are also safeguards in place to prevent sanction evasion through the use of cryptocurrency. Every transaction and the address associated with it are visible to the public on a blockchain ledger, which is where cryptocurrency exchanges are recorded.
According to Coinfirm's Bieda, while sanctioning governments cannot know who the owner of the address sending crypto is, they can see the flow volume — or the amount of money that is moved. When a suspicious address is flagged, the funds associated with that address can be tracked.
Mining cryptocurrency with excess energy is an option, but it is insufficient.
Oil and gas are one sector of Russia's economy that has not been targeted by the sanctions, despite the fact that companies such as Shell and BP have announced plans to withdraw from the country.
According to Rystad Energy, an Oslo-based research firm, Russia is one of the world's largest oil exporters, accounting for 25% of European oil. In addition, the country supplies roughly 40% of Europe's natural gas.
If future sanctions target the energy sector, Moscow could follow in the footsteps of Tehran by using surplus energy or computing power to generate cryptocurrency, according to Tom Robinson, co-founder of Elliptic, a London-based blockchain analysis provider.
"Cryptocurrency mining allows them to monetise their energy reserves on the global market without having to move them outside the country," Robinson explained.
However, for a major crude and gas exporting power like Russia, that would likely be a drop in the bucket.
Sanctions on oil and gas appear unlikely for the time being, according to Rystad Oil analyst Louise Dickson.
"A disruption in Russian oil supply of up to 5 million barrels per day would not only exacerbate the already fragile global energy crisis, but it could be interpreted as an act of war by Russia," she said.
Diminishing the dollar's global significance
The US Treasury Department recently warned that digital currencies and alternative payment platforms could undermine US sanctions' effectiveness.
According to Chainalysis, roughly 74% of ransomware revenue in 2021 — more than $400 million in cryptocurrency — went to entities "highly likely to be affiliated with Russia in some way."
According to the Treasury Department, new technologies have enabled malicious actors to hold and transfer money outside of the traditional dollar-based financial system, while also empowering "adversaries seeking to build new financial and payments systems intended to diminish the dollar's global role."
Although the sanctions against Russia are intended to put pressure on Moscow, Ryan Selkis, founder of crypto research firm Messari, told Al Jazeera that they may hasten the arrival of the new financial order that the US has warned about.
"Russia's exclusion from SWIFT and loss of access to its reserves will hasten the de-dollarization of trade," said Selkis. "I don't believe the dollar will ever be displaced in the West."
Source: Al Jazeera
** Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of USA GAG nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.