Cryptocurrencies

Cryptocurrencies do not threaten the effectiveness of international sanctions

Cryptocurrencies do not threaten the effectiveness of international sanctions

The United States, its NATO partners and other allies around the world have imposed unprecedented sanctions on Russia, its leaders, Russian companies and state entities. There is even a long list of companies who have halted their business operations in Russia. As the onslaught of economic sanctions continues, some, including US senators, are concerned about whether cryptocurrencies could help Russia evade sanctions.

Russia’s foreign exchange reserves are estimated at $630 billion. At least 55% of the reserves, or about $350 billion, are held by banks in countries that apply sanctions and are beyond Russia’s reach. The question boils down to whether cryptography could help fill this gap, or at least a significant part of the gap. There is no way for the crypto markets to handle the amount of money needed to move the needle for the Russian state.

But first, it’s a common misconception that cryptocurrencies can help move wealth and assets across borders undetected by interested tax authorities and law enforcement agencies. In the early years of the industry, pioneers of cryptocurrency argued that transactions were anonymous. That largely wasn’t true then, and it certainly isn’t true now. The blockchain technologies on which cryptocurrencies are based lend themselves well to tracking and tracing.

In recent years, the US government has built end-to-end capabilities to monitor illicit activity, seize illegal cryptocurrencies, and prosecute nefarious actors. Blockchain forensics is quite a discipline and the US government has arguably the best capabilities in the world. the recent entry bitcoins stolen from Bitfinex, recovery in 2021 of ransomware paid to Colonial Pipeline hackers, and a seizure of 185,000 Bitcoins over the years are examples. Working alongside multiple agencies and in multiple global jurisdictions, the US government also has the ability to shut down darknet markets and prosecute cybercriminals.

Office of Foreign Assets Control of the United States Department of the Treasury keeps a list Specially Designated Nationals and Blocked Persons to prohibit transactions with sanctioned entities and individuals, and this also applies to cryptocurrencies. US sanctions have teeth, providing a powerful deterrent to any counterparty wishing to deal with sanctioned entities and individuals. With growing transparency around blockchain technology, wary counterparties, more jurisdictions enforcing bans, longstanding embargoes and other economic weapons against Russia and Belarus, cryptocurrencies are simply not attractive for evading sanctions.

Also, what can a sanctioned entity buy using cryptocurrencies? Not much, frankly. The primary use cases for cryptocurrencies remain speculative investments. Crypto markets suffer from high volatility. A 10% price movement in a single day is normal for the course, not a black swan event. This unpredictability is something buyers and sellers don’t like, and for good reason. Cryptocurrencies generally act as stores of value, not payment mechanisms. This is why there is no large-scale business activity in which cryptocurrency is used as a payment mechanism.

Bitcoin and Ethereum make up about two-thirds of the total cryptocurrency market, and together they have a realized market capitalization of $688 billion. That’s certainly huge, but consider that Russian imports are over $304 billion. There aren’t many goods and services that can be purchased using crypto – at least not anything that would be useful to sovereign states.

Additionally, the inability to regulate global cryptocurrency trade and the relative lack of depth in crypto markets makes cryptocurrencies unviable for evading sanctions. Let’s examine each of them. There must be a complete ecosystem based on cryptocurrencies to facilitate trade. Think of financial service providers, payment processors, interbank communication messaging infrastructure (such as SWIFT) and correspondent banks. Decentralized finance (DeFi), or blockchain-based financial services, and Central Bank Digital Currencies (CBDC) are in the early stages of development and these alternative mechanisms cannot yet facilitate global trade flows.

Despite growing rapidly over a relatively short period of time, crypto markets are very small. Global currency markets have daily trading volumes of $6.6 trillion, and crypto market volumes are only a tiny fraction of that. It would be extremely difficult to use cryptocurrencies to launder Russian assets without detection.

But what about reports that other sanctioned countries such as Iran and North Korea are using crypto to successfully evade sanctions imposed on them? Although disturbing, the scale is much smaller. For example, North Korean hackers are accused of stealing $400 million worth of Bitcoin. It is estimated that Iran Earns About $1 Billion From Bitcoin through mining. Small states and small criminal actors may succeed in staying under the radar, but big actors will not be able to do the same.

In practice, the circumvention of sanctions is likely to be obtained through bilateral agreements with atypical countries and settled in local currencies. Cryptocurrencies are certainly not a safe haven to escape sanctions from major sovereign states, nor a place to hide ill-gotten gains. And it’s a good thing.

Kashyap KompellaCFA, a technology industry analyst, is CEO of RPA2AIa global artificial intelligence consulting company.

James Cooper is Professor of Law and Director of International Legal Studies at Western California School of Law in San Diego and researcher at the Singapore University of Social Sciences.