Crypto Wars: Can Russia Use Blockchain to Evade Sanctions?

Crypto Wars: Can Russia Use Blockchain to Evade Sanctions?

Russian separatists and Ukrainian militias use social media to recruit volunteers and fund their causes globally through cryptocurrency donations. Nowadays, data by blockchain tracking company Elliptic shows that cryptocurrency investors have donated more than $57.7 million ($75.6 million) in digital assets to the Ukrainian government and a nonprofit supporting the country’s military.

As crypto proves to be a necessary lifeline for Ukraine, there are growing fears that Russia is using it to circumvent sanctions and move money undetected. Russia has one of highest levels of crypto adoptionand before the Russian-Ukrainian conflict, he ranked third among the countries that sent the largest share of crypto transfers abroad (after Turkey and Ukraine). Even before Russia invaded Ukraine, other countries circumvented economic sanctions using cryptography, with Iran reportedly used bitcoin mining to evade trade embargoes. Moreover, as New York Times reportsthe Russian government has developed a digital ruble and other tools to conceal digital transactions.

Can Russia Bypass Sanctions Using Crypto?

Some speculate that cryptocurrency alone won’t get Russia around 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 so long. decades. According to Aljazeera reports, about 80% 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 sanctions announced targeting the Russian central bank and national wealth fund. Additionally, the US Treasury Department said it was limiting Russian President Vladimir Putin’s ability to use the country’s $630 billion in foreign exchange reserves and prohibited transactions with the central bank of Russia. Even Switzerland has deviated strongly 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.

See also: What are sanctions, do they ever work – and could they stop Russia’s invasion of Ukraine?

But can Russia escape these measures by using cryptocurrencies?

“Yes, it is possible, even if it is expensive, and it requires the active participation of many counterparties. The volatility of cryptocurrencies also makes their use quite expensive on the Russian side,” says Elvira Sojli, associate professor of finance and former Scientia scholar at the School of Banking and Finance at UNSW Business School. Indeed, it could be costly for Russia, as it could buy $10 billion worth of crypto (for example), then it could be worth $8 billion (or less) a day later given the market volatility of crypto.

“Sanctions, especially SWIFT, stops transactions through some banks, which means that payments for purchases cannot be settled. If the seller (Russia) accepts cryptocurrencies and the buyer is ready to use crypto to pay for the goods, the SWIFT close won’t be as relevant,” says A/Prof. Sojli. “Then the Russian counterparty holds the crypto until they can convert it into the currency they need or to pay for other transactions using crypto.”

The crypto has become a key tool for the Ukrainian government to quickly receive donations, which are expected to reach US$57.7 million (Au$75.6 million). Photo: Shutterstock

Ban Russia from the crypto world

Mykhailo Fedorov, Deputy Prime Minister of Ukraine and Minister of Digital Transformation, Calls for Crypto and Blockchain Platforms block addresses of Russian users. The United States is also urging crypto exchanges to ensure that specific, sanctioned individuals and organizations from Russia do not use their platforms. Moreover, the The EU is now considering further measures to ensure digital assets are not used to dodge sanctions on Russia, as the bloc toughens enforcement of financial sanctions imposed on Moscow last week.

But according to A/Prof. Sojli, “there is nothing in place to prevent this from happening,” especially since some crypto exchanges have said they will do not ban any member from Russia. It 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’s based on peer-to-peer interaction, where peers are anonymous, it’s hard to impose rules on who can transact with whom. They are essentially IOUs passed from person to person, and the identity may never be clear,” she says.

“However, there are also other ways to move crypto assets off exchanges, and that’s harder to govern,” she says. “They can use the legislation for all listed exchanges, but it’s more difficult to manage the flow of crypto outside of the exchange in the dark/deep web.”

So what can the EU do? Teacher. Sojli assumes that, short of banning Russia, there is little governments can do. “It’s very difficult to regulate, because it’s outside the system. They can legislate that all transactions, including crypto that are verified ex post with Russian accounts, will be considered illegal and subject to fines.

See also: What’s the next big blockchain craze?

Does all of this mean that crypto should be illegal?

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

Given its potential role in funding war and in light of recent developments with Russia, should governments ban crypto? “It’s a tough question. Illegal is a step too far, but a regulatory framework is needed,” says A/Prof. Sojli.

See also: Non-Fungible Tokens: A Turning Point for Digital Content Creators and Artists?

On Thursday, Ukrainian Deputy Prime Minister Mykhailo Fedorov tweeted that the government would release non-fungible tokens (NFTs) to support the Ukrainian Armed Forces, suggesting that Ukraine’s donation strategy may now shift to NFTs as opposed to fungible cryptos that can be traded or traded.

The original version of this story was published on Businessthink.

Dr Elvira Sojli is an Associate Professor of Finance and Scientia Fellow Alumni in the School of Banking and Finance at the UNSW Business School. 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.