Crypto wars: Can Russia use blockchain to get around sanctions?

There are currently no measures in place to prevent Russian market participants or economic entities from using cryptocurrencies to circumvent economic sanctions.

Recent reports reveal that Russian separatists and Ukrainian militias have been using social media to recruit volunteers and fund their causes globally through cryptocurrency donations. At the time of writing, cryptocurrency investors have donated more than US$55.7 million (Aus$75.8 million) in digital assets to the Ukrainian government and a non-profit organization that supports the Ukrainian army. country, according data from blockchain tracking firm Elliptic.

However, there is growing concern that Russia could use cryptocurrencies to circumvent sanctions and move money undetected. Russia has one of the highest levels of cryptocurrency adoption and, prior to the Russia-Ukraine conflict, was third among countries sending the most cryptocurrency transfers abroad (after Turkey and Ukraine). Even before the Russian invasion of Ukraine, other countries have circumvented economic sanctions using crypto, with Iran Reportedly Uses Bitcoin Mining to Evade Trade Embargoes. Also, as the New York Times reportsThe Russian government has been developing a digital ruble and other tools to help hide digital transactions.

Can Russia circumvent sanctions using cryptocurrencies?

Some speculate that cryptocurrencies alone will not allow Russia to avoid a barrage of sanctions aimed at punishing Moscow for invading Ukraine, given that Russia's wealth has been deeply embedded in the global financial system for decades. According to the Aljazeera reporting, approximately 80 percent of Russia's daily foreign exchange transactions and half of its international trade are conducted in US dollars. United States, United Kingdom, European Union and Canada announced sanctions targeting the central bank of Russia and the national wealth fund. In addition, the US Treasury Department has said it is limiting Russian President Vladimir Putin's ability to use the country's $630 billion in foreign exchange reserves and has prohibited transactions with the central bank of Russia. Even Switzerland has shown a strong departure from the country's traditional neutrality and agreed to adopt all sanctions imposed by the EU on Russia and freezing assets in response to the invasion of Ukraine.

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But can Russia evade these measures by using cryptocurrencies? “Yes, it can, although it is expensive and requires the active participation of many partners. The volatility of cryptocurrencies also makes their use quite costly from the Russian side,” says Elvira Sojli, associate professor of finance and former Scientia Fellow in the UNSW School of Business School of Banking and Finance. In fact, it could be expensive for Russia, because it could buy $10 billion worth of crypto (for example) and then it could be worth $8 billion (or less) a day later given the volatility of the crypto market.

“Sanctions, specifically SWIFT, stop transactions through certain banks, meaning payments for purchases cannot be cleared. If the seller (Russia) accepts cryptocurrencies and the buyer is willing to use cryptocurrencies to pay for the goods, then the closure of SWIFT will not be as relevant”, explains A/Prof. Sojli. “Then the Russian counterpart keeps the crypto until they can convert it to the currency they need or to pay for other transactions using crypto.”

Ban Russia from the crypto world

Mykhailo Fedorov, Deputy Prime Minister and Minister of Digital Transformation of Ukraine, Calls for Blockchain and Crypto Platforms block addresses of Russian users. The US is also urging crypto exchanges to ensure that targeted and sanctioned individuals and organizations from Russia do not use their platforms. furthermore, the The EU is considering new measures to ensure that digital assets are not used to circumvent sanctions against Russia, as the bloc tightens enforcement of financial sanctions imposed on Moscow last week.

But according to A/Prof. Sojli, “there is nothing to prevent this from happening”, especially since some crypto exchanges have said they will. ban no member of Russia. Doing so would also be incredibly difficult, mainly because not all exchanges confirm the identity of their customers and it is generally difficult to trace the origin of cryptocurrency transactions. “Because it is based on peer-to-peer interaction, where peers are anonymous, it is difficult to enforce rules on who can transact with whom. These are essentially I owe U's passed from one person to another, and the identity can never be clear,” she says.

“However, there are also other ways to move crypto assets off exchanges, and that is more difficult to control,” he says. “They can use the legislation for all listed exchanges, but it is more difficult to manage crypto circulation outside the exchange system on the dark/deep web.”

So what can the EU do? A/Prof. Sojli speculates that short of banning Russia, there is not much governments can do. “It is very difficult to regulate, since it is outside the system. They can legislate that any transaction, including crypto, that is verified ex-post for Russian accounts will be deemed illegal and subject to fines."

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Does all this mean that cryptocurrencies should be illegal?

Whether cryptocurrencies are good, bad or neutral in the context of the Russian invasion of Ukraine is a difficult question to answer. And banning access to crypto, even for people in Russia, would go against the very reasons crypto exists in the first place.

Given its potential role in financing the war and in light of recent events with Russia, should governments ban cryptocurrencies? "This is a difficult question. Illegal is a step too far, but a regulatory framework is needed," says A/Prof. Sojli.

On Thursday, Ukrainian Deputy Prime Minister Mykhailo Fedorov tweeted that the government would launch non-fungible tokens (NFTs) to support the Ukrainian armed forces, suggesting that Ukraine's strategy for donations may now be shifting towards NFTs rather than fungible cryptocurrencies that can be traded or exchanged.

Dr. Elvira Sojli is an associate professor of finance and a former Scientia Fellow in the School of Banking and Finance at the UNSW School of Business. Dr. Sojli's work focuses on empirical industrial organization at the firm and market level, understanding the role and determinants of women's participation in innovation, and the international aspect of differences between countries and disciplines.