Far from the sight of well-coordinated international statecraft, a thriving cryptocurrency market continues to operate in Russia, raising fears that its government, businesses and oligarchs could evade harsh sanctions through bitcoin and other virtual currencies that allow transactions are kept strictly anonymous. Their existence outside the world banking system raises the specter that Russia and other countries may "trial sanction" themselves.
The use of bitcoin as a digital weapon in the Ukraine war will also go a long way in determining the future of cryptocurrencies in the financial system. Some are calling for tougher regulations to crack down on its darker uses by hackers and criminals, while others reject the idea that it is being exploited by bad actors, pointing to how millions of dollars in crypto donations have come in to fund the Ukrainian war. effort in the last few days.
โRight now there are millions of transactions going on that are completely unregulated and no one is checking who gets what,โ Sen. Elizabeth Warren of Massachusetts said at a hearing Thursday as she pressed Federal Reserve Chairman Jerome Powell to for more rules on cryptocurrencies to be implemented. โAnd that means that while the sanctions may make it very difficult for Russian companies, political leaders and billionaires to move money in the traditional financial system, there is another shadowy, unregulated world they can turn to.โ
Warren and three other Senate Democrats wrote to Treasury Secretary Janet Yellen on Wednesday raising those concerns. They pointed to instances in recent years of North Korea and Iran using cryptocurrencies to evade sanctions, as well as the flow of cryptocurrency ransom payments to Russian hackers.
The Biden administration has also been concerned. TO Treasury report last fall it warned that cryptocurrency could be used to "reduce the effectiveness of U.S. sanctions" and a department official said Friday that they were monitoring Russia's use of the digital currency.
But the administration downplayed the potential of crypto investments to allow Russia to meaningfully evade sanctions, such as those that prevent its central bank, certain large corporations, and oligarchs with ties to Russian President Vladimir Putin from accessing vast amounts of dollars, euros, pounds, and yen outside its country.
In effect, cryptocurrency is less a major avenue for evading sanctions than a dead end, according to administration officials and industry experts.
โIs crypto potentially part of your playbook? Certainly. ...but frankly, it's not at the top of their list," Todd Conklin, adviser to the Undersecretary of the Treasury, said of Russia's efforts to circumvent sanctions during a webinar for industry representatives and reporters hosted by TRM Labs, a cryptocurrency analytics company.
Russia is one of the largest economies in the world, a member of the Group of 20 with an economic output in 2020 of around 1.4 trillion dollars. The totality world cryptocurrency market value is approximately 1.8 trillion dollars. The Russian government had built up its reserves of dollars and other currencies in recent years in preparation for sanctions, but it did not focus on cryptocurrencies and doing so now would be difficult, Conklin said.
"You can't flip the switch overnight and run a G20 economy on crypto," Conklin said.
But the ultra-rich elites around Putin, whom the US has personally sanctioned, may benefit more than the Russian government. of technology. "It's still concerning from a much more micro perspective in terms of targeting the assets of oligarchs and Putin's inner circle," Conklin said.
Digital currencies have also been used to help Ukrainians when faced with an invasion. A appeal from the official Twitter account of Ukraine for cryptocurrency donations shortly after the Russian invasion has led to over $56 million value of bitcoin, ether and other virtual assets pouring into the government and an organization that supports its military, according to analytics firm Elliptic.
Otherwise, the money may not have reached the country because Ukraine's declaration of martial law after the invasion limits conventional banking transactions to prevent the flow of money out of the country, and the GoFundMe fundraising platform prohibits raising money for war efforts, such as the purchase of weapons.
Bitcoin and other cryptocurrencies have libertarian roots and surged in popularity after the 2008 global financial crisis shook confidence in the banking system. They are created with randomly generated cryptographic puzzles that require massive amounts of computing power to solve, then reside on a public ledger called a blockchain that runs on a decentralized global network of computers.
It is a stateless form of currency that offers freedom from banks and a privacy shield over electronic transactions. But that shield extends only to a certain point.
Major cryptocurrency exchanges are subject to U.S. and international bank secrecy and anti-money laundering rules that make it difficult to actually use the currency to buy things without leaving digital footprints for regulators or law enforcement to track, said Jim Harper, senior fellow non-resident of the American Enterprise Institute and cryptocurrency and privacy expert.
โIf you transact carefully so that you don't leave traces that relate to your identity in the real world, you can keep that privacy for a while. But it is fragile,โ she said. "You can do all these trades and be careful, but if you do one on a regulated exchange, it all comes crashing down, like hitting a peanut brittle."
The Russians could try to operate entirely off regulated exchanges, but that would require a buyer to agree to make a major purchase, like an oligarch's superyacht, off the books.
"It would be like trying to evade sanctions by trafficking exotic animals," Harper said.
Every cryptocurrency transaction is made up of pieces that exist permanently on the blockchain, making it possible, though difficult, to connect them to a particular person or entity, Harper said. Law enforcement officials have shown they can, as they did last year with the ransomware attack on the Colonial Pipeline in the southeastern United States.
The company reportedly paid a ransom of almost $5 million in bitcoins to the hackers. But the FBI could recover $2.3 million of that bitcoin by tracking transactions and then gaining access to a digital wallet used by Russian hackers. And in September, Treasury officials blacklisted Suexa cryptocurrency exchange with Russian ties involved in processing ransomware transactions for hackers, effectively shutting it down.
โGovernments looking to enforce sanctions and disrupt their evasion can invest in blockchain analytics to get ahead of Russian efforts to hide any sanctions-evading transactions,โ said Salman Banaei, North America public policy chief for Chainalysis, a blockchain data analytics firm.
As with conventional banks, cryptocurrency exchanges can implement measures to identify transactions from Russian companies or people under Ukraine war sanctions, he said.
Cryptocurrency industry leaders said they are complying with the sanctions and collecting information on their customers as needed. by law. But they rejected a request by a senior Ukrainian official to block all Russians from using their platforms.
โFreezing access to digital assets for citizens of an entire country does not necessarily punish those who are actually responsible and who may have prepared for the possibility of blanket sanctions,โ said a spokesperson for Kraken, a major bitcoin and cryptocurrency exchange. based in the US.
The technology behind the cryptocurrency could be a long-term solution for Russia to evade sanctions by allowing it to implement a digital version of the ruble so it can buy and sell products directly with other countries without using the dollar, which is now the standard for global investors. trade. The central bank of Russia is starting a pilot program for such a digital currency, which the Federal Reserve and other central banks are also exploring.
For now, the US is closely monitoring to make sure Russians don't circumvent sanctions via cryptocurrency in countries without strong anti-money laundering regulation, said Carole House, director of cybersecurity and secure digital innovation at the House National Security Council. White.
He agreed that Russia probably wouldn't exploit crypto as the primary way to evade sanctions, but "it's part of a set of options and something we need the crypto sector to guard against." She told industry representatives and reporters on Friday that the Biden administration relies on industry players to detect and report such activity.
But Warren, who has been highly critical of the industry for what she believes is its destabilizing effect on the global financial system and other concerns, said the ability of countries like Russia to use crypto "to protect themselves from sanctions" is another reason. to enact stricter regulations.
โCrashing down on cryptocurrencies is a critical piece of holding Russia accountable for its aggression,โ he told Powell on Thursday. โWe can't mess around any longer. We need to implement new cryptographic rules.โ
Jim Puzzanghera can be contacted at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.
