US and European sanctions over the last week and a half have put the screw on the Russian government and its oligarchs, who are likely using alternative methods to move their money across borders.
“We believe it is very likely that Russian companies and citizens will try to use crypto assets such as Bitcoin or US dollar-pegged stablecoin such as Tether (USDT) to circumvent economic sanctions,” said Josh Olszewicz, head of research. at Valkyrie Funds, a digital asset investment manager.
Stablecoins are pegged to fiat or cash-backed by central banks, while bitcoin and other non-stable digital currencies derive their value from supply and demand and otherwise have no intrinsic value. Non-Fungible Tokens or NFTs are digital tokens tied to assets other than cash, but these "assets" can also be as valuable as art and real estate or as insignificant as a random photograph or stuffed animal.
In addition to freezing the assets of Russia's top oligarchs, the US and European governments have banned Russian banks from using SWIFT, the world's largest financial messaging network. The sanctions appeared to have almost immediate and far-reaching economic consequences, as billions of dollars were suddenly unavailable to Russian banks.
Aside from cryptocurrencies, even SWIFT's financial messaging network can be easily manipulated to hide cash transfers from sanctioned entities, according to Mark Gazit, CEO of ThetaRay, an AI-powered transaction monitoring solution for cross-border payments.
SWIFT itself is a relatively secure network, but it's not difficult to set up shell companies and funnel money through them, then use the financial messaging system to transact across borders, Gazit said.
"It's a pretty old system," he said. "It was developed in 1973. That's why all the security precautions you would expect from a newer system don't exist in SWIFT, which creates a lot of problems even before the current situation exists. The problem is that the system doesn't really authenticate transactions."
What is needed, Gazit said, is AI-based software that can examine financial transactions themselves, not just identify senders, to determine whether or not they are nefarious. In addition, some countries that are still connected to SWIFT are sympathetic to Russia and are likely to act as intermediaries for the transfer of rubles, Gazit added.
The US and European governments are increasingly concerned that the Russian government, its banks and oligarchs are using alternative means to move assets in and out of the country.
In a letter to Treasury Secretary Janet Yellen, US politicians noted that Russia could use "dark web markets" in cryptocurrency to circumvent sanctions and asked whether governments need additional tools to stop such moves. “These reports are made even more concerning by analysis suggesting that the cryptocurrency industry may not be living up to its responsibility to comply with US sanctions,” the letter said.
Following previous financial sanctions, the Treasury Department implemented new regulations last week to prevent Americans from using cryptocurrencies to circumvent Russian sanctions. Treasury officials have also asked cryptocurrency exchanges such as Coinbase, Binance, and FTX to block sanctioned individuals and their addresses.
Coinbase, the largest U.S. cryptocurrency exchange, responded by saying that it had no intention of imposing a blanket ban on Russian customers, but would block trading activity involving sanctioned individuals or entities, Coindesk reported. Binance, along with several other exchanges, have publicly stated that they will not block all Russian users or IP addresses, but rather target sanctioned entities.
“Binance follows the sanctions rules very strictly,” Binance CEO Changpeng Zhao told Bloomberg last week. Extending the restrictions beyond the sanctioned list would be "unethical on our part," he said.
However, two key providers in the Ethereum digital currency ecosystem have instituted access restrictions to prevent users in "certain jurisdictions" from evading Russian international sanctions. Users of MetaMask and Infura, on-ramps and off-ramps of Ethereum cryptocurrency exchanges, told users that attempts to access Ethereum networks in those regions would return error messages.
“No lawmaker or regulator can stop an on-ramp and off-ramp on an unregulated or internationally blacklisted exchange,” said Avivah Litan, a senior vice president and analyst at research firm Gartner. But crypto organizations can; he called the decision by MetaMask and Infura "very significant" because it shows that some decentralized crypto networks are trying to comply with the sanctions.
“Of course they could hide their locations in the future, so they can avoid location-based sanctions,” Litan said. But sanctioned entities can only spend their money within decentralized crypto networks, and can only enter new converted fiat currency. in crypto and withdraw it using exchanges that do not cooperate with the sanctions.
So, for example, sanctioned Russian entities cannot withdraw their money from blockchain financial systems that have banned them. Likewise, they cannot withdraw money from frozen bank accounts to buy cryptocurrencies, Litan said.
Cryptocurrencies operate on blockchain-based electronic ledgers, which provide anonymity through encryption. Thus, sanctioned entities can only be prevented from buying or selling crypto through the on-ramps and off-ramps of exchanges. These on-ramps include digital wallets used to store bitcoin and other crypto assets and APIs or software interfaces with crypto exchanges.
However, the sanctioned entities must be identified in the blockchain network to block their movements outside the blockchain/crypto networks. And they can use fake identities to get accounts on centralized exchanges, Litan explained.
“So, in summary, yes, sanctioned entities and criminals can hide in cryptocurrency networks, but they find it very difficult to get their money in and out of those networks,” Litan said. "Russian-sanctioned entities cannot be prevented from holding and transacting cryptocurrencies or stablecoins within crypto networks."
Olszewicz of Valkyrie Funds agreed, adding that “of course” there will be people who will get away with helping Russians (especially oligarchs) launder their money through cryptocurrency.
“But the vast majority of sanctions officials are likely to be in trouble,” Olszewicz said. "Penalties for violating sanctions are severe enough to deter most bad guys, and forensic accounting tools, regulators, and other investigators will likely catch up with almost anyone who helps sanctioned individuals sooner than many believe".
Sanctions Drive Crypto Rise
Due to widespread financial sanctions on cross-border financial networks, the value of cryptocurrency markets rose sharply last week.
Last Monday, Bitcoin jumped 10,4% to €41.807,16, while Ether rose 7,6% to €2.826,54. US stocks fell sharply earlier in the day before recovering much of their losses.
For ordinary Russians, or anyone anywhere in the world, using Bitcoin as an economic loophole against forces beyond their control "is really a feature, not a bug" of the cryptocurrency, Olszewicz said.
“Bitcoin, cryptocurrencies and stablecoins have at times acted as a vital economic lifeline for many people in Ukraine and Russia, and it is likely that digital currencies will continue to act as a banking and payment rail without the need for a third-party intermediary, like SWIFT. ."
Valkyrie Funds CEO Leah Wald said crypto networks could be at the tipping point many have been waiting for, “where Bitcoin and other currencies may have gone mainstream,” according to CNBC.
As the invasion of Ukraine unfolded, cryptocurrency trading volumes for the ruble and Ukrainian hryvnia trading pairs reached their highest level in months, especially for stablecoins, according to cryptocurrency trade data provider Kaiko. .
“Cryptocurrency exchanges could serve as a powerful safe haven for assets while also providing a way to circumvent sanctions,” according to Kaiko's market report in February.
The invasion of Russia puts the cryptocurrency industry “in a unique and precarious position, having to balance the application of sanctions without having the power to restrict transactions on decentralized networks,” the Kaiko report says.
“Cryptocurrencies and stablecoins in particular are safe havens if you live in a country where your currency is devaluing,” Litan said. “It's about trusting protocol rather than trusting the government or a particular company. I think this war shows that the protocols are much more reliable than some governments.
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