The West’s initial artillery of financial sanctions against Russia failed to stop President Vladimir Putin from launching a full-scale invasion of Ukraine.
Now, the United States is taking a punitive approach, announcing another round of sanctions aimed at tightening the screws on Russian banks and “corrupt billionaires”.
But some experts say such measures, which so far have not targeted Putin himself, are becoming increasingly easy to avoid, thanks in part to a wave of cryptocurrency adoption in Russia.
US and EU sanctions rely heavily on banks to enforce the rules. If a sanctioned company or individual wants to make a transaction denominated in traditional currencies such as dollars or euros, it is the responsibility of the bank to flag and block these transactions.
But digital currencies operate outside the realm of the standard global bank, with transactions recorded on a public ledger known as a blockchain.
“If the Russians decide – and they are already doing so, I’m sure – to avoid using any currency other than cryptocurrency, they can effectively avoid virtually all sanctions,” said Ross S. Delston, an anti-cryptocurrency expert. compliance with money laundering.
The US Treasury is well aware of this problem. In an October report, officials warned that digital currencies “potentially reduce the effectiveness of US sanctions” by allowing bad actors to hold and transfer funds outside the traditional financial system.
“We are mindful of the risk that, if left unchecked, these digital assets and payment systems could undermine the effectiveness of our sanctions.”
As an example, one need look no further than Eastern Europe, which has one of the highest rates of cryptocurrency transaction volume associated with criminal activity, according to research by Chainalysis.
Websites used for illicit business known as marketplaces darknet generated a record $1.7 billion worth of cryptocurrencies in 2020, most of it in Bitcoin.
And almost all the growth in the market darknet that year can be attributed to a specific Russian-speaking market called Hydra. Hydra is “by far the largest darknet marketplace in the world, accounting for over 75% of worldwide darknet marketplace revenue in 2020,” Chainalysis wrote in a report earlier this month.
Of course, evading sanctions is not as easy as dumping all your dollar-denominated funds into bitcoin. It’s hard to buy anything with cryptocurrencies, especially big things, says Delston.
Take food, for example, that Russia has historically imported. “Will a food exporter somewhere in the world accept cryptocurrencies that fluctuate every day – every moment of every day – or will they want the world’s reserve currency, US dollars?”
Another complication: the oil trade, which represents a large part of Russia’s economy, is denominated in US dollars.
To use cryptocurrency to buy anything, you need to have an outlet for a government-issued currency like the dollar, Delston says.
“It’s not a one-stop solution for Russian oligarchs,” he says, because bitcoin and other cryptocurrencies can be tracked on the blockchain. It is more difficult, though not impossible, to launder these funds because of the blockchain.
There are other ways Russia could, at least in theory, mitigate the pain of sanctions, taking cues from Iran.
Like Russia, Iran is an oil-exporting country and remains under a nearly decades-long US economic embargo, including bans on all imports and sanctions on Iranian financial institutions.
But even as a rogue state, Iran has figured out how to get some of the sanctions out of the way by turning to bitcoin mining, according to a report by analyst firm Elliptic.
Iran has a surplus of energy it cannot export, so it is using it to power bitcoin mining, which consumes huge amounts of electricity but rewards miners with bitcoin payments.
“The mining process effectively converts energy into cryptocurrency,” writes Tom Robinson, co-founder of Elliptic. “Iran’s miners are paid directly in bitcoin, which can be used to pay for imports” – something Elliptic says has almost become official policy within the Iranian government.
Elliptic estimates that miners in Iran account for approximately 4.5% of all bitcoin mining, which would translate to annual revenue of around $1 billion.
Source: CNN Brasil
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