More On: Bitcoin
As Moscow's conflict on Ukraine drags on and the Russian economy and currency plummet, Washington is said to be experimenting with a new tactic to put pressure on Putin: sanctions targeting cryptocurrencies such as bitcoin and ethereum.
Early Wednesday, the Department of Justice announced the formation of a new task force tasked with enforcing sanctions. It will focus on efforts to exploit cryptocurrencies to dodge US sanctions, launder revenues of overseas corruption, or escape US reactions to Russian military aggression as part of this.
Russia's access to digital money is being targeted as the US and its allies, including the usually neutral Switzerland, impose harsh sanctions on Moscow.
The fear is that the Kremlin, as well as other ancillary players backing the onslaught on Ukraine, may use digital tokens, which are neither controlled or issued by a central authority like a bank, to avoid the sanctions regime. Bitcoin, like most cryptocurrencies, is decentralized and borderless, meaning it has no regard for national borders. Digital currencies are also resistant to transaction blocking since there is no central authority to do so.
The underlying financial foundations of the country have also aided in the shock absorption. According to CNBC, Russia has an 18% debt-to-GDP ratio, a current account surplus, and the price of oil rising beyond $113 a barrel (its highest level in more than a decade) is unquestionably a windfall. So far, the White House has refrained from imposing sanctions on Russian oil sales.
Furthermore, analysts told CNBC that Russians have been anticipating a crackdown like this for months.
"Russia's elite and financial agencies have been preparing for sanctions for some time," said Salman Banaei, the North American director of public policy for Chainalysis, a company that tracks activity on blockchain networks.
Felix acknowledged that any money movement took place before Russia's incursion.
Transactions on centralized bitcoin exchanges in both the Russian ruble and the Ukrainian hryvnia have skyrocketed to their greatest levels in months since Russia invaded Ukraine on February 24, according to statistics from crypto data provider Kaiko. This is most certainly one of the reasons why Ukraine urged all of the biggest crypto exchanges to prohibit Russian customers — a request that several key players have rejected, arguing that such a step would go against the core reason why cryptocurrencies exist.
Despite rising crypto acceptance and increased rhetoric from international leaders about blocking sanctioned Russians from digital currency exchanges, crypto as a means of circumventing sanctions isn't really a realistic alternative at scale.
To begin with, crypto markets have limited liquidity, and token transactions are designed to be traceable via the blockchain, a public record. Aside from that, experts told CNBC that there are better and wiser methods to get through global financial blockades than utilizing bitcoin.
"The size and scale of crypto markets — and their current state of liquidity — are insufficient to offset what happens from banking disruptions and other sanctions-related disruptions," said Yaya Fanusie, a fellow at the Center for a New American Security who assesses national security and money laundering risks associated with digital assets.
"It's as if your money was held hostage for a month and you had to rely on your piggy bank to make ends meet," he explained.
Sanctions are nothing new for Russia
Sanctions are nothing new to Russia, and its political elite has spent years devising innovative workarounds.
After Russia annexed the Crimean peninsula in Ukraine in 2014, it was met with worldwide outrage. A passenger airliner flying from the Netherlands to Malaysia was shot down by a Russian-made surface-to-air missile launched over pro-Russian separatist-held area in eastern Ukraine in the same year.
Since then, President Vladimir Putin has put in place buffers to protect Russia from the consequences of Western sanctions, which experts say have cost the country $50 billion per year.
Sanctions usually function like this: a government creates a list of persons and corporations that must be avoided, and anybody who does business with these blacklisted firms faces stiff penalties. However, according to Sarah Beth Felix, an expert on anti-money laundering and sanctions compliance, sanctions are only as good as the KYC (Know Your Customer) onboarding requirements.
"Depending on how rigorous that is, the data dictates whether or not the punishments are truly effective," Felix explains. "That's agnostic when it comes to the underlying flow of cash, whether it's crypto, fiat, wires, payable-through accounts — it all lives or dies on the underlying data that's gathered and confirmed on the ownership of the company, the individual, and all that stuff."
Diversifying away from US treasuries and the dollar was an important part of Putin's strategy, as was creating a new debt structure based mostly on euros and gold. Putin's war chest has $630 billion in foreign reserves, which operate as a financial buffer against the impact of broad sanctions.
"I would guess billions of dollars have already flowed via these front organizations and shell firms controlled by Russian enterprises and people throughout the world, regardless of whether it included crypto or traditional bank-to-bank wires," Felix added.
Banaei agrees that huge amounts of cryptocurrency are unlikely to be moved around by designated individuals at this time. Instead, Banaei claims that if bitcoin was being used to circumvent sanctions, it would have happened gradually over several months.
"At the end of the day, the obvious, gigantic gap that we have is in the transparency of who owns what firms, not only in the United States, but globally," Felix added.
Bitcoin was never going to work in the first place
Even if Russia decided to utilize cryptocurrency to circumvent sanctions, its economy is too large, the cryptocurrency market is too small, and any large transactions would almost certainly be identified.
"The magnitude of the crypto markets is insignificant in comparison to what's going on in the financial sector," Fanusie remarked.
The United States has imposed additional debt and equity limitations on some of Russia's most important state-owned firms, totaling over $1.4 trillion in assets. These companies will be unable to raise funds in the United States, which is a crucial source of finance. The overall market capitalization of cryptocurrencies is estimated to be approximately $1.9 trillion.
Cryptocurrencies are also lightly traded, making it difficult to purchase huge amounts of digital tokens such as bitcoin. On Binance, the world's largest cryptocurrency exchange, the bitcoin-ruble pair has a maximum market order of roughly $250,000 per deal, compared to the bitcoin-US dollar pair, which has a maximum market order of around $2.6 million.
The magnitude of the transactions that the Russian government would need to perform, according to Delston, would be multiples of what ordinary Russian residents are doing presently. Not only would this be problematic due to liquidity constraints, but it might also raise red flags about the transaction.
"On the blockchain, the transaction size is instantly public, and really large transactions would be quite obvious to anyone searching," Delston said, adding that cryptocurrencies aren't the haven of anonymity that they're sometimes portrayed as.
While crypto offers the benefit of avoiding bank-to-bank wire transactions (which are closely monitored for sanctions compliance), every transaction is recorded on a public, permanent, and unchangeable blockchain ledger and can be tracked in nanoseconds.
"If I hand you a $5 bill, you can never track it back to me," Felix added. "However, if I transfer you money through my wallet, that's always connected back to my wallet ID, which contains all of my CIP (Customer Identification Program) information if I went through a licensed exchange."
A single tip in the cryptocurrency market can uncover a network of wallet addresses involved in ransomware fraud and money laundering in hours, according to Chainalysis' Banaei, whereas a similar tip relating to a traditional bank wire could take several months to reach a similar level of visibility into a criminal network and its money laundering.
While privacy tokens such as monero, dash, and zcash provide additional anonymity, they are less liquid than other tokens since many regulated exchanges have declined to offer them owing to legal concerns.
There's also the issue of what to do once you've obtained the cryptocurrency.
"Buying things with bitcoin is difficult, especially big goods," Delston tells CNBC. He claims he is unaware of any large electronics businesses, food exporters, or spare parts manufacturers who take cryptocurrencies as payment, despite the fact that they are "all the types of goods that a country like Russia would require because it does not create it on its own."
While crypto exchange compliance with the global sanctions framework hasn't always been stellar, Fanusie claims it's improving as these platforms expand their internal compliance teams.
Federal prosecutors are also beefing up their crypto-policing efforts. The US Justice Department announced a new cryptocurrency enforcement unit in February.
Isn't a digital ruble a good idea?
While the potential for bitcoin to aid sanctions evasion has received a lot of attention, Fanusie believes the greater story is what sanctioned actors are doing with central bank digital currencies, or CBDCs.
In October 2020, the Bank of Russia published a consultation document for a "digital ruble," and Central Bank Governor Elvira Nabiullina stated that the country intends to prototype and pilot it this year.
The digital ruble would be a virtual version of Russia's national currency, regulated centrally by the Bank of Russia and based on distributed ledger technology, similar to China's digital yuan.
A Moscow publication said at the time, quoting authorities, that a digital ruble would minimize reliance on the currency while also reducing susceptibility to sanctions.
Former US Treasury official Michael Greenwald warned CNBC well before Russia's invasion of Ukraine that a digital currency may be troublesome for the US.
"What concerns me is if Russia, China, and Iran each develop central bank digital currencies to function outside the dollar, and other nations follow suit," he added. "That would be a cause for concern."
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