As the U.S. and its allies aim to cripple Russia through sanctions for invading Ukraine, there has been some speculation around whether Moscow could gain leeway through cryptocurrencies, which are typically based on decentralized networks and don’t rely on any central authorities to maintain.
The sanctions target Russia’s central bank, some state-owned companies and elite families, and include measures that remove some Russian banks from SWIFT, a payments-related messaging service based in Belgium that helps banks world-wide execute financial transactions.
Such restrictions aim to limit Russia’s access to financial markets, as SWIFT plays a dominant role in financing international trade, covering more than 11,000 institutions in over 200 countries around the world. It will be more difficult for Russian individuals to import, export or invest abroad.
The ability to move cash through crypto would “definitely be some level of buffering,” Rance Mashek, president and founder of trading platform iVest+ told MarketWatch in an interview.
“Unless the Russian companies are on the sanctions list, we can’t see anything that would keep a US-based company from paying a Russian company through crypto to just transact,” Mashek said.
Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs, echoed the point, saying that “there is no question in my mind that Russia will attempt to use cryptocurrency to launder funds and evade sanctions.”
However, “it’s very, very hard to do at scale,” said Redbord, who once worked as a senior adviser to the undersecretary for U.S. terrorism and financial intelligence. “The liquidity is just not there,” Redbord said. The war is likely to “require billions of dollars and it is very hard to off ramp billions of dollars of crypto.”
“They will find ways to do it. It just can’t be in the huge amounts that would come anywhere near replacing or getting close to replacing what they’re essentially losing with the sanctions that have been imposed,” Redbord said.
Russia exported $332.2 billion worth of merchandise in 2020, and imported $240.4 billion worth of goods, according to data by the World Trade Organization. Russia’s central bank holds $630 billion reserves made up by deposits and assets in the world’s major currencies.
Bitcoin’s total market capitalization stands at $790 billion on Monday, while the whole crypto market capitalization is $1.85 trillion, according to CoinMarketCap.
“What Russia will likely do is to attempt to use cryptocurrency in much smaller amounts to evade sanctions. And they will need on-ramps and off-ramps from traditional currencies to traditional currencies, and they will need exchanges to do that,” Redbord said.
“The larger cryptocurrency businesses where most of the liquidity exists, have compliance controls in place,” Redbord said.
The Biden administration is reportedly asking crypto exchanges to ensure that Russian individuals and businesses aren’t using cryptocurrencies to avoid U.S. sanctions, according to Bloomberg, citing people with direct knowledge of the matter.
Binance, the world’s largest crypto exchange, is reportedly blocking the accounts of any Russian clients targeted by sanctions, Reuters reported.
Sam Bankman-Fried, chief executive at crypto exchange FTX, wrote on Twitter that “we are already complying with international sanctions to prevent evasion, and will do so whether or not it’s mandated.”
Still, Russia may turn to decentralized exchanges and some exchanges without ties to the West, Redbord noted. Russia has over 340 total virtual asset service providers such as crypto exchanges and over-the-counter brokers, according to TRM’s research.
A wake-up call for regulation?
The European Union should move quickly to pass crypto regulation that prevents Russia from evading sanctions, European Central Bank President Christine Lagarde said on Friday.
Though new regulation might take time to pass and become effective, the Russia-Ukraine war could be “a wake up call for governments globally, to get a better grip on what’s going on with crypto on the regulatory front,” Mashek said.