Cryptocurrencies Are Almost Useless for Avoiding Sanctions

In the past two weeks, stories have circulated in the media about how Russia will use cryptocurrencies to circumvent sanctions.

Despite the concerns of Janet Yellen, Hillary Clinton, Christine Lagarde, and other figures, there is currently no sufficiently developed crypto market in the world that Russia can use to bypass the increasingly severe economic sanctions imposed on it.

The transparency of blockchain systems and the increasingly advanced analytical capabilities of forensic firms like Chainalysis make cryptocurrencies almost useless for avoiding sanctions.

Despite Clinton’s concerns that the largest crypto exchanges are not doing enough to close off a potential Russian escape route, it remains completely unclear whether the Russian political and business elite actually wants to seek a possible solution in cryptocurrencies.

Many experts working in legal and regulatory institutions believe that the criticisms are completely unfounded and that the use of cryptocurrencies is overly politicized. The narrative is one thing, and the facts are another.

Matthew Le Merle, co-founder and managing partner of Blockchain Coinvestors, stated that Russia will definitely try to circumvent sanctions, but it will not use crypto for that. It will find other means through the already established global financial system, such as offshore entities and tax havens revealed in the Panama Papers of 2016.

– You would be a fool to use bitcoin if you are trying to avoid sanctions – added Le Merle.

With the increasingly advanced technologies and analytical capabilities that the U.S. government and other law enforcement agencies have today, the likelihood of exposure is very high.

Recent events have raised a series of crypto-related questions. Would the Russian government, along with its financial institutions, high officials, and oligarchs, seek an escape from Western sanctions in cryptocurrencies, and if so, would it work?

If the Russian ruling elites found refuge in decentralized digital currencies, would it undermine the fact that over $55 million has been raised through cryptocurrency donations? In other words, is the real lesson to be drawn that crypto is just a tool, regardless of the side, and that it is politically neutral?

Limitations and Barriers

It would not be surprising if sanctioned Russians turned to cryptocurrencies under these circumstances.

– It is very likely that sanctioned Russian individuals and entities will seek cryptocurrencies as one way to limit restrictions – said David Carlisle, director of political and regulatory affairs at Elliptic.

However, it is even more surprising how ineffective this could prove to be.

– I do not believe that the Russian government can rely on cryptocurrencies to mitigate the impact of sanctions. The economic impact caused by sanctions could amount to hundreds of billions of dollars – stated Max Dilendorf, a partner at the Dilendorf law firm.

There likely are not enough bitcoins or cryptocurrencies in the world to mitigate economic damages of such magnitude, concluded Dilendorf.

– Crypto simply cannot meet Russia’s needs right now. Russia’s total annual imports exceed $200 billion, and the total assets of the banking sector amount to $1.4 trillion. There is simply no chance that crypto can fill the gap that Russia requires – added Carlisle.

Michael Parker, an advisor and head of the anti-money laundering and sanctions practice at Ferrari & Associates, agreed that there essentially are not enough cryptocurrencies in the world to save Russia from sanctions, although crypto could play a certain role on the margins.

Moreover, the idea that Russia could suddenly use cryptocurrencies instead of dollars for international transactions is “strained” for other reasons, Parker said, a former head of the enforcement division at the U.S. Office of Foreign Assets Control (OFAC).

The question of anonymity, or lack thereof, arises, for example. Moving funds and goods on a large global scale will certainly be noticed, Parker said. Then, there is also crypto volatility. Are commodity traders willing to lose 10 percent within a few hours (potentially) in a commodity transaction?

– OFAC has relied on individuals or entities for violations of sanctions rules in the past year, and the moment the U.S. government learns which wallet belongs to the Russian government or its affiliated groups, those blockchain wallets will immediately be added to OFAC’s list of blocked entities – added Dilendorf.

Centralized crypto exchanges also possess identification means, given the rapid advancement in analytical techniques and verification software.

However, one exception may be decentralized exchanges (DEXs).

– The question is how well individual traders are equipped to spot sanctioned wallets in peer-to-peer transactions or to complete the necessary compliance checks. These decentralized protocols have allowed wallets not only in Russia but also in sanctioned countries like Iran and North Korea to trade on their platforms – said Dilendorf.

Ordinary Russians Are Not Sanctioned

In recent discussions, it is sometimes overlooked that the sanctions imposed by Western countries on Russia are not broadly based. They target only the ten largest Russian financial institutions like Sberbank and about 90 other named entities, as well as the Russian elite, but they do not apply to ordinary Russian citizens and most businesses, as Parker explains.

Let’s say an American company employs a Russian programmer. The American company has been paying the programmer through a series of bank transfers that ultimately ended up in Sberbank. Sberbank can no longer be used under the new sanctions regime, but the American company can still hire a Russian programmer and pay that person in cryptocurrency.

– Using cryptocurrencies to conduct business instead of certain Russian banks is not avoiding sanctions; it is complying with sanctions – believes Parker.

That is, crypto provides a legal alternative for continuing to do business with Russian workers, as long as that individual is not on the list of certain companies covered by U.S. sanctions.

From the U.S. Department of the Treasury, they say they are not too concerned that cryptocurrencies “undermine” efforts to choke off the Kremlin’s access to capital.

– Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming, and would likely be visible on the broader crypto market, given the massive investment portfolios of individuals and institutions listed in the sanctions – stated the Treasury Department.

Jake Chervinsky, head of policy at the Blockchain Association, expressed his views on sanctions against Russia and the role of cryptocurrencies in a series of tweets.

– Crypto markets are thin to begin with, and trading pairs for the ruble are rare. Given that Russia is cut off from the global crypto industry, they cannot reach anywhere near enough liquidity that would be significant – wrote Chervinsky.