In response to the economic sanctions being imposed by a number of countries on various Russian entities, these entities reportedly are looking to mitigate their impacts by making deals with anyone eager to work with them. In turn, these Russian entities can use cryptocurrencies to bypass the controls that the governments imposing sanctions are relying upon, particularly transfers of money through the traditional banking system.
"Russia has had a lot of time to think about this specific consequence," observes Michael Parker, a former U.S. federal prosecutor who now heads the anti-money laundering (AML) and sanctions practice at the Washington law firm Ferrari & Associates. “It would be naïve to think that they haven't gamed out exactly this scenario," he adds.
- Russia may be preparing to skirt economic sanctions by using crypotocurrencies.
- This would allow Russian entities to circumvent monitoring by the banking system.
- It also would avoid use of the U.S. dollar.
- Iran and North Korea already have used crypto to evade sanctions.
Circumventing the U.S. Dollar
Sanctions are an especially powerful diplomatic tool for the U.S. because the U.S. dollar is the world's reserve currency and is the most widely used medium of exchange and medium for cross-border payments across the globe. However, U.S. government officials have become increasingly aware that cryptocurrencies can be used instead to lessen the impact of sanctions. As a result, these officials are increasing their scrutiny of digital assets.
Skirting the Banking System
An effective sanctions program relies on the global financial system, particularly banks, to provide enforcement. These institutions track the movement of money, and anti-money laundering laws require them to block transactions involving entities that have been sanctioned and to report what they observe to authorities. The explosion of digital currencies, however, allows sanctioned entities to skirt the banking system and thus to complete transactions unseen by the monitoring apparatus that banks provide.
Banks legally must adhere to "know your customer" (KYC) rules that include verifying clients' identities. But exchanges and other platforms utilized in the trading of cryptocurrencies and other digital assets rarely follow these rules with the same rigor as banks, even though they are supposed to do so. In October 2021, the U.S. Treasury Department warned that cryptocurrencies represent a growing threat to U.S. sanctions programs and advised that U.S. authorities must become more educated about these emerging technologies.
What Russia May Do
To evade sanctions, Russia can utilize multiple cryptocurrency-related tools. The key is establishing ways to conduct trade without ever using the U.S. dollar.
Russia is developing its own central bank digital currency (CBDC), a "digital ruble" designed for use by trade partners without first converting it into U.S. dollars. Hacking techniques such as ransomware can facilitate the theft of digital currencies by Russia and thus recoup revenue lost to sanctions.
Cryptocurrency transactions are recorded on the underlying blockchain, thus making them transparent, but new tools developed in Russia can help to hide the origin of these transactions. That would allow other parties to trade with Russian entities without being detected.
Indeed, in October 2020, representatives of Russia's central bank indicated that the new "digital ruble" would make that country less dependent on the U.S. and better equipped to evade sanctions. It would allow Russian entities to engage in transactions outside the international banking system with any country or other counterparty willing to trade in that digital currency.
Iran and North Korea are among the countries that have used digital currencies to mitigate the effects of Western sanctions. North Korea, for example, has used ransomware to steal cryptocurrency to fund its nuclear program, according to a United Nations report. Additionally, Russia can seek to evade sanctions by working closely with other nations, such as Iran, that are both the targets of U.S. sanctions and developing CBDCs of their own.
Meanwhile, Russia's largest trading partner is China, which already has launched its own CBDC. Chinese leader Xi Jinping recently described his country's relationship with Russia as having "no limits."