How Crypto May Help Russia And Its Billionaires Go Around Sanctions.
In response to Russia's invasion of Ukraine, US President Joe Biden announced on Thursday that he had authorised "tough sanctions." These sanctions attempt to impede Russia's capacity to transact in dollars and other major foreign currencies, and involve fines on five Russian banks with a combined asset value of $1 trillion. A large number of Russian elites, as well as their family members, will be targeted. All of this is on top of the penalties levied earlier this week.
However, in a government that is taking steps to legalise cryptocurrencies and where the digital assets are already widely held, such punishments may be less effective. Typically, countries utilise physical workarounds to dodge sanctions, such as Venezuela and North Korea's use of petroleum transfers from ship to ship, but digital assets such as cryptocurrency and decentralised exchanges could become the most effective approach to avoid fines.
"Neither dictators nor human rights campaigners will face any censorship on the Bitcoin network," said Matthew Sigel, VanEck's head of digital assets research.
Sanctions implemented by the US and its allies on firms and persons could effectively shut them out of the West. Billionaires, some of whom have already been targeted, may be able to avoid the penalty if they opt for cryptocurrency, which uses blockchain technology to keep transactions anonymous. They may be able to buy products and services and invest in assets outside of Russia using digital currencies, all while avoiding banks or institutions that are bound by sanctions and may track their transactions.
"If two people or organisations want to do business with each other but can't do so through banks, they may do so using Bitcoin," said Mati Greenspan, the founder and CEO of financial advisory firm Quantum Economics. "If a wealthy person is concerned that their accounts may be frozen as a result of sanctions, they can simply hold their wealth in Bitcoin to avoid such acts."
Unlike fiat currencies, which must pass via third-party institutions that can track, freeze, or prohibit them, cryptocurrencies can be sent directly from one person to another, regardless of government sanctions or other restrictions.
Cryptocurrency holders can also create a web of wallets with different addresses across multiple exchanges, making it difficult to track any activity and even more difficult to link transactions to a specific person. Additionally, individuals have the option of using bitcoin exchanges that are not based in sanctioned areas and hence are not bound by regulations.
Experts warn that any crypto assets would be difficult to transfer into fiat currencies, making any money that changes hands less disposable. Individuals would have to persuade any services they do business with to accept digital payment in order to avoid banks or even centralised exchanges that abide to sanctions, which could be challenging.
The affluent Russians who will face penalties are "those who have personally benefited from the Kremlin's policies and should share in the pain," according to Biden. "In the days ahead, we will keep up the drumbeat of such designations against corrupt millionaires."
Prior to Thursday, none of the billionaires sanctioned had publicly said whether or not they were crypto investors.
To be sure, governments can still regulate bitcoin holdings on centralised exchanges, according to David Tawil, president of cryptocurrency investing firm ProChain Capital. He was referring to the Canadian government's recent assault on crypto accounts belonging to truckers who were collecting payments to assist their blockades of US-Canada border crossings and a weeks-long protest in Ottawa.
Assuming that money laundering is simpler via cryptocurrency is a misunderstanding, according to Brett Harrison, president of crypto exchange FTX US. He goes on to say that exchanges have access to technology that allows them to trace and screen wallets from sanctioned nations. Individuals would also find it difficult to convert cryptocurrencies to fiat currency through centralised exchanges without being caught, making it more difficult for them to spend.
"What can be stopped is monies leaving an exchange where adequate sanctions are properly enforced," Harrison explained. "Everyone can see it since it's on a public blockchain," says the author. "But even if they could move it, no exchange will let them convert it to a currency, and the second they do, they're detected."
FTX frequently gets contacted by law enforcement agencies from various states and countries with subpoenas to seize funds from certain locations, he said. The recent arrest of two individuals linked to the 2016 Bitfinex breach demonstrates the extent to which cryptocurrencies may be tracked. The US government was able to follow the behaviour of certain wallets and, as a result, the accounts were frozen as soon as they were changed into fiat currencies.
The legal status of cryptocurrencies in Russia is in flux, with the government pushing for their legalisation in order to attract international investment and bring domestic trading out of the shadows, while the central bank claims they are a pyramid scheme and should be banned. Putin instructed them to seek a swift agreement last month, but top government officials have yet to agree on how to regulate cryptocurrency.
However, millions of Russians are already entrenched in the digital world, with cryptocurrencies valued more than 2 trillion rubles ($22.9 billion), according to a recent government study.
More than 17 million Russians, or around 12% of the overall population, own cryptocurrency, according to data from Singapore-based payment gateway TripleA. With additional sanctions on the way, it may be in Russia's best interests to allow wealthy individuals to trade in cryptocurrency regardless of its legal status.
"Having contradicting opinions out there is kind of okay," said ProChain's Tawil, stressing that even the United States has struggled to clarify the legal structure and rules around cryptocurrencies. "I believe the majority of crypto activity in Russia is, to put it bluntly, in lockstep with the government."
Other former Soviet Union countries are also devoting more attention to crypto. The Ukrainian parliament passed a measure legalising cryptocurrencies last week, while Kazakhstan is working to properly control and tax its expanding crypto-mining business.
Following Russia's invasion of Ukraine, U.S. stocks initially fell, with the S&P 500 Index shedding as much as 2.6 percent and the tech-heavy Nasdaq 100 dropping 20 percent from its last record high in November. Stocks have now recovered some of their losses, with the Nasdaq 100 now in the black. Bitcoin fell as much as 8.5 percent to $34,337, increasing the total loss to about 50% since November's all-time high.
