Erik Weijers, 9 months ago
Many people watching crypto have been wondering: should we be worried that Putin and his gang could use crypto to evade sanctions? For several reasons, that doesn't seem to be too likely.
The United States and allies have imposed heavy sanctions on Russia as punishment for its invasion of Ukraine. The purpose of the international community's sanctions is to hit certain institutions, governments and individuals hard. In addition to those punitive measures, the assets of Russian oligarchs and the Central Bank have been frozen. Also, hardly any Russian banks can participate in SWIFT any longer (the messaging system for international banking transactions).
We list four reasons why crypto is not as easy a money-laundering tool for Russian oligarchs as onr might think.
How exactly do the sanctions (punitive measures) work? They are not directed against everyone in Russia. They are directed against Putin, his rich inner circle (the oligarchs), the Russian government and other state bodies, such as the central bank. There is an actual list of these entities.
The US and its allies are now prohibited from trading with entities on this blacklist. So these particular Russian individuals or institutions cannot trade goods or services with a country that supports the sanctions. And they also cannot sell products on international markets, or own property there.
What's important is the following: people from the Western alliance are now prohibited from doing transactions with people on the blacklist. No matter what means of transaction they use: euros, dollars, gold or Bitcoin. There are penalties for this. With those fines and a prison sentence in mind, there is no reason to assume that people will suddenly switch to Bitcoin en masse. It is not morally acceptable and not worth the risk. Let alone if it will be easy – more on this below.
The crypto markets are too small to handle the huge volumes in play here. Sure, the Bitcoin blockchain can handle large volumes, approaching the tens or hundreds of billions at stake. But it is enormously complicated to launder money on a large scale through a vast array of wallets, exchanges and privacy coins. Especially if it is a large sum of money, your transactions will stick out like a sore thumb. There are all kinds of 'whale spotters' who are on top of this.
In addition, trading pairs between Bitcoin and the Rouble are much less liquid than those between Bitcoin and the Dollar or the Euro.
American or European crypto exchanges are regulated and abide by the law. They provide customer data if instructed to do so. And for them it is now illegal to do business with blacklisted Russian individuals. This is analogous to how Russian banks can no longer use SWIFT (the most widely used protocol for international communication between banks). Similarly, they can no longer use crypto services. Without crypto exchanges cooperating, it's a lot harder to convert your ruble into crypto.
Second, consider the transparency of the blockchain: as was again demonstrated with the arrest of the Bitfinex hackers, it is extremely difficult to move and cash out crypto without at some point revealing your identity. On a blockchain, everything can be traced.
It is more likely that Russia, if it wants to move money around the world, will focus on traditional forms of money laundering. For example of shell companies and shady banks. They may also use foreign currency from countries that do not support sanctions. The Chinese Yuan is the obvious one.
Putin has spent years making Russia resistant to sanctions. He has invested reserves in a variety of foreign currencies and gold. He has also brought manufacturing capacity to Russia. Crypto was not part of his strategy in doing so.
Sanctions have made it much more difficult and even criminal for anyone to conduct transactions with blacklisted Russian entities. Whether by traditional means or crypto. In both cases people leave traces and in both cases people face penalties.
Some people argue, for example the Ukrainian Deputy Prime Minister, to close crypto trading to all Russians. That would hit the ordinary Russian, who is not responsible and only bears the brunt of this war - enormously hard. It is precisely the ordinary Russian citizen who needs Bitcoin now more than ever, to protect himself from a fall of the ruble. The largest crypto exchanges are therefore opposed to this. Coinbase, Binance and FTX have made it know that they won’t want to freeze the accounts of millions of innocent Russian citizens.
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