Share on linkedin
Share on twitter
Share on facebook
Share on email
Preetam Kaushik takes a long hard look at whether cryptocurrencies, cryptoassets, and other virtual platforms will provide oligarchs with the means to circumvent sanctions

As sanctions begin to rattle Russia’s financial ecosystem, there is growing concern that Putin and his billionaire enablers will resort to cryptocurrencies in a bid to preserve the wealth they amassed during his two-decade-long autocratic regime. 

At the heart of this move is the fact that the sanctions have mostly blocked Russia from the US dollar-based global financial system. This has led many policymakers and anti-money-laundering experts to highlight the potential of cryptocurrencies and cryptoassets to provide sanctioned individuals and entities with the means to circumvent the rules.

These fears were initially raised just days after the invasion, when the research outlet CryptoCompare noted a threefold increase in trading between the Ruble and cryptocurrencies over the previous week. But to put it into perspective, while this was a notable spike it was only a fraction of the volume seen in the all-time highs in Ruble-crypto trading such as in May of last year. 

In fact, in the month since the invasion the blockchain data platform Chainalysis has tracked just USD 62 million in cryptocurrency being sent from Russia-based crypto wallets to other addresses. Almost pocket change for the average oligarch.

Yet the threat remains and as the sanctions bite even deeper into the oligarch’s ability to transfer money through the traditional financial systems, the use of cryptocurrencies may well become a more viable option.

“Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to avoid economic pain.”

~ US Senator Elizabeth Warren.

The use of crypto to circumvent sanctions has precedent 

Iran and North Korea have already taken the crypto route in an effort to thwart the effect of sanctions. Iran has long been developing government-backed cryptocurrencies and has turned the mining of Bitcoin into a state-approved national industry. While it is well documented how North Korea has used ransomware to hack and steal cryptocurrency to provide cash for its nuclear programme.  

Closer to the Kremlin, the Central Bank of the Russian Federation has long been overseeing the development of an indigenous digital currency, also known as the ‘digital Ruble’. This is in a bid to transact with countries that are ready to convert Russian crypto to their local currency without being converted into the US dollar. Officials of the Russian central bank have made no secret of their belief that the digital Ruble is expected to help Russia blunt sanctions and overcome the dependence on the US for financial transactions.

Russia’s prospective partners for such direct one-to-one digital deals include Iran, which has also been developing government-backed cryptocurrencies, and China, which claims to enjoy a “boundless” diplomatic and financial relationship with Russia.

A SWIFT response, but not from the cryptocurrency exchanges

In response to the invasion, Russia has been isolated from the SWIFT system that facilitates rapid cross-border payments, a move which has hit Russia’s banks hard and limited its ability to call on its reserves of foreign currency.

Yet cryptocurrency exchanges aren’t legally required to follow suit.

Leading crypto exchanges such as Binance and Coinbase have said they would fully comply with all sanctions and block any accounts and transactions that may involve sanctioned individuals or entities. However, they have no plans to ban all Russians from carrying out transactions as they would want to differentiate between oligarchs who bankroll Putin’s policies, and ordinary Russians, many of whom are opposed to the war.

The fact is that even if the key global exchanges could be brought onboard, there are many thousands of small exchanges globally. So even if the major exchanges were to limit access to the whole of Russia, it would simply move Russian users to the smaller platforms. 

A weak link in the crypto chain? 

The concerns that cryptocurrencies will be used to circumvent the sanctions are at first sight supported by the fact that crypto transactions can be hidden. This is due to the fact that all the data related to crypto wallet addresses comprise a series of numbers and letters, and as a result aren’t directly linked to individuals.  

But blockchain, the technology that is used to record and store information related to cryptocurrency transactions in a decentralised manner, poses a challenge to this supposed anonymity. 

Anyone trying to exploit the cryptocurrency route cannot escape going to through certain steps to complete crypto transactions. As a result, the vast majority of cryptocurrency transactions are recorded on publicly available blockchain ledgers. This means that financial regulators can keep track and access the blockchain repository linked to any suspicious crypto deals, making it considerably harder to shift illicit funds. 

Many officials in the US seem to agree that cryptocurrency doesn’t really present a major escape route for the Russian state or sanctioned individuals.  

The US Treasury has stated that sanctioned individuals or entities would find it hard to hide wealth via cryptocurrencies, with a spokesperson commenting. “Even at the level of individual elites, laundering billions of dollars through digital wallets would expose themselves to those tracking flows within the virtual currency markets.” 

Converting energy into Bitcoin 

Another way that individuals or entities could circumvent sanctions is though Bitcoin mining. 

Iran has already taken this route in the face of decades of a near total US economic embargo that has resulted in a surplus of energy it is unable to export. As a result, Iran has used it to power Bitcoin mining which eats up enormous amounts of energy, but offers Bitcoin in return. 

Russia is also a major oil exporting country that is facing an embargo from many sides. By effectively converting this surplus energy into Bitcoin, it could provide an alternative way to bypass sanctions and keep funds flowing in from one of its biggest exports.

It is estimated that Iran-based miners account for around 4.5% of global Bitcoin mining, a figure which translates to an annual revenue of nearly USD 1 billion. At this point it’s worth noting that Russia is the third-biggest Bitcoin mining country globally, so its potential is considerable.

The darknet throws its shadow on another route to evade sanctions

Russia-based darknet marketplace Hydra, originally developed as a platform to trade narcotics using technology that masks the source of transactions, might offer sanctioned oligarchs another escape route.

While Hydra is more commonly used to trade in counterfeit currencies and steal funds using stolen credit cards, in recent weeks it has increasingly been used as a forum for cashing out Bitcoin. 

These darknet marketplaces are notoriously difficult to take down, as testified by the years of police work it took to bring down both AlphaBay and Silk Road. And with Hydra being located in Russia, it’s unlikely that any US investigation would receive help from the Russian authorities.

But even darknet sites such as Hydra aren’t the safe havens as users might hope for, as borne out by the recent arrest of a New York-based couple for allegedly laundering funds linked to the theft of 119,754 bitcoins worth USD 72 million. The couple used AlphaBay to launder the funds from the hack, until the platform was eventually infiltrated and brought down by regulators. 

The virtual safe haven is yet to be found

While the use of cryptocurrencies, cryptoassets, and other digital outlets may superficially offer a way to circumvent sanctions, the hard truth is that they all raise almost as many problems as solutions.

In fact only this week. hackers are said to have breached blockchain platform Ronin Network and extracted cryptocurrencies valued at over USD 600 million, making it the second-biggest hack of all time and raising a huge question mark over security.

Another obstacle is the sheer size of the oligarch’s wealth combined with the complexity of their existing corporate and financial structures. Transferring such vast quantities of money to multiple, untried, and often untested avenues will present a very difficult and trouble-strewn journey.

Finally, most oligarchs are accustomed to investing their cash in the very tangible form of real estate, corporate structures, and hard currency. Consequently, the prospect of transferring it to any type of virtual currencies or assets, may just simply be rather unappealing. 

Share:

Share on linkedin
Share on twitter
Share on facebook
Share on email

More from the Blog

AML talkshow

AML Talk Show Episode 28: Robert Mazur

Robert Mazur is one of the world’s leading authorities on money laundering techniques, internationally recognized as an expert by private and public sector leaders, and of course author of “The Betrayal”.

Any screening technology is only as good as its underlying data. That’s why work to find the best providers, ensuring you get screening matches you can trust.

Resources

The latest news, commentary and events from RiskScreen. For industry insight, visit our AML insight hub, KYC360.

Used by over 30,000 compliance professionals for AML news & analysis. Free CPD wallet.

Company

RiskScreen was founded by experts in financial crime. It’s because of this unrivalled subject matter expertise that companies choose to partner with us.