Cryptocurrencies won’t help Russia evade sanctions

Cryptocurrencies won't help Russia evade sanctions

About the Author

Miller Whitehouse-Levine is director of policy at the DeFi Education Fund, a nonpartisan advocacy group that works to educate policymakers about DeFi.

In response to Russia’s continued invasion of Ukraine, the United States enacted a series of harsh economic sanctions targeting the Russian government (including President Vladimir Putin himself), the wealthy, and Russian businesses closely associated with the Kremlin.

But shortly after the sanctions were announced, Sen. Elizabeth Warren (D-MA) retweeted a sensational New York Times article suggesting that cryptocurrencies could be used to evade US sanctions. Then, in a March 2 letter to the Treasury Secretary, Warren called for increased “control” of digital assets — adding his voice to those who claim crypto and decentralized finance offer Putin a way around US sanctions. .

It’s a story that grabs attention. There’s just one problem: it’s not true.

The sanctions impose legal restrictions on the ability of U.S. nationals to transact with sanctioned individuals or companies. Circumvention of sanctions do not refer to a sanctioned individual’s ability to own an asset, but rather to U.S. Persons who evade their obligation not to transact with, or facilitate transactions with, sanctioned individuals and entities. For digital assets to serve as a sanctions evasion tool, they should allow US persons to transact with sanctioned entities without incurring consequences or exposing their activity to law enforcement.

And that is precisely what digital assets do not do. In fact, digital assets are particularly ill-suited for sanctions evasion because of all the ways digital assets can improve sanctions compliance compared to traditional financial markets.

Despite continued efforts and scrutiny, the mainstream financial system has never succeeded in completely preventing the use of financial services by illicit actors. Assessments by the US government and others have estimated the illicit economy to be massive – amounting to over a trillion dollars and dwarfing the amount of illicit financial activity actually disrupted by law enforcement.

Yes, cryptocurrencies can also be used for illicit financial activities, including sanction evasion. But the reality is that digital assets are more difficult to exploit for large-scale illicit purposes than the traditional ecosystem.

Why is that? The answer has to do with how transaction information is stored in peer-to-peer digital asset transactions. Specifically, transparent blockchains create a permanent, immutable record of transactions.

Examples of how this transparency is tripping up criminals abound. In the past few weeks alone, two of the biggest cryptocurrency hacks in history, the Bitfinex hack and the DAO hack, have been solved by analyzing on-chain data. These hacks happened years ago; the data needed to track the hackers has remained publicly available to law enforcement — and anyone else with an internet connection — ever since.

Moreover, the software tools to analyze this extensive on-chain information are only becoming more sophisticated. Crypto firms are already using these tools, as is the Department of Justice, which recently announced the creation of a Cryptocurrency Enforcement Unit.

The government is already looking for illicit crypto-based financial activity, including sanctions evasion, and is becoming very adept at finding it. In short, sanctions compliance is alive and well in the cryptocurrency world.

If Senator Warren and other congressional leaders are genuinely concerned that crypto is making large-scale sanctions busts easier, there are steps they can take to prevent that from ever becoming a reality. Chief among them is ensuring that crypto networks and decentralized finance can thrive here in the United States.

This will give the U.S. government and law enforcement agencies the best chance to develop and implement the most effective sanctions compliance tools in digital asset markets, and it will help foster collaboration among market players. digital assets and US law enforcement.

Congressional leaders should stop speculating without evidence on how criminals might leverage cryptocurrencies to evade US sanctions; instead, they should voice their support for and help improve the crypto industry’s already extensive sanctions compliance efforts.

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