More On: Bitcoin
Following Russia's invasion of Ukraine, prominent Russian oligarchs have been subjected to hefty penalties. The Russian currency has fallen as a result of the invasion, and Russians are flocking to banks to withdraw rubles and US dollars.
Bitcoin is frequently referred to as "anonymous." This is not correct. Bitcoin is more accurately described as pseudonymous. Anyone with an Internet connection can view the whole history of Bitcoin transactions. Transactions are associated with accounts, which may be found by performing a simple search of the Bitcoin blockchain.
A Bitcoin user, for example, moved 919.877 BTC (worth about $41 million at the time of writing) to an account hosted by the popular cryptocurrency exchange Coinbase yesterday. 17QyR2ixNj1AgpD5ZuXubvSJ3gPPQVcsvp is the account's address. If you look at the account, you'll notice that the owner(s) of the account have made over 700 transactions. This transparency is intentional.
Despite the fact that an address does not come with a name, investigators can use methods such as clustering to link a Bitcoin address to an individual. Chainalysis, a blockchain data platform, was able to identify a generous donor to Alt Right individuals and organizations by connecting the wallet to a site that allows users to link their Bitcoin wallet address to an email address. Researchers were able to identify a French computer programmer as the donor after discovering the email address.
As the Chainalysis report noted:
Because of the Bitcoin network's transparency, the Southern Poverty Law Center has been able to assemble a list of wallets affiliated with racists and others catering to radical ideology.
“[T]hanks to the inherent transparency of cryptocurrency blockchains, law enforcement can track these transactions in real time and work with cryptocurrency businesses to prevent funds from reaching violent groups who may use them to fund their operations and commit acts of violence.”
Because of the transfer to Coinbase, one of the most popular bitcoin exchanges, I highlighted the 919.877 BTC above in particular. To comply with Know Your Customer (KYC) rules, Coinbase validates the identities of its customers. The person who created the account containing the 919.877 BTC went through Coinbase's identification verification process. Coinbase has already agreed to prohibit transactions involving sanctioned Russians, but has declined to ban all Russian users.
There are a few measures you must take if you are a Russian oligarch looking to use cryptocurrencies to avoid sanctions:
- Use your $, €, £, or ₽ to buy cryptocurrencies at an exchange
- Sell your cryptocurrencies for $, €, £, or ₽ on the exchange
- Transfer the $, €, £, or ₽ from the exchange to a traditional financial institution.
An oligarch who is able to purchase cryptocurrencies on an exchange using fiat currency may attempt to evade investigators by transferring their holdings to a tumbler. However, these are not without substantial limitations, and some exchanges refuse to accept assets that have gone via tumblers. If tumblers aren't a feasible option, a terrified oligarch may turn to privacy-oriented cryptocurrencies like Monero, which allows users to conceal transaction history.
However, Monero will not assist you in resolving the issues raised in step #3. Even if purchasing Monero makes it more difficult for investigators to trace your holdings, you must still find an exchange that allows you to sell your cryptocurrencies for fiat and then transfer that cash to a financial institution such as a bank. Or you may wait for Monero to become a widely accepted cryptocurrency for everyday payments, which is unlikely to happen anytime soon.
There are some transactions that do not necessitate identity verification. These may sound enticing to sanctioned oligarchs, but converting cryptocurrencies into fiat and using bitcoin for purchases will quickly put them back on the radar of investigators.
Given the costs and hazards of transferring and hiding huge bitcoin transactions, it is doubtful that many billionaires will use cryptocurrencies to avoid penalties. This should assuage senators like Sen. Elizabeth Warren (D-MA), who tweeted yesterday, "Cryptocurrencies risk weakening sanctions against Russia, allowing Putin and his cronies to avoid economic hardship." Financial regulators in the United States must take this issue seriously and tighten their oversight of digital assets."
The turmoil in Ukraine does not need more inspection of cryptocurrencies by financial officials. Legislators should keep in mind that for millions of law-abiding people throughout the world living under authoritarian regimes, cryptocurrencies provide a way to avoid corrupt, untrustworthy, and unstable institutions. They are, however, of limited use to notable worldwide pariahs looking to conceal billions of cash.
** 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.