As Russia looks to evade sanctions, could crypto be used?
Russia is facing sweeping financial sanctions and stringent export controls for its military invasion of Ukraine.
The country ranks second in cryptocurrency ownership by percentage of population after Ukraine. Russia has 17 million cryptocurrency owners, making up 11.91% of the population; Ukraine has 6 million owners or 12.73%, according to crypto payments company TripleA.
Russia is also the world's third largest crypto mining country, with 11.23% of the world’s monthly hash rate, a map from the University of Cambridge showed.
“It is certainly no coincidence that the Russian government has tabled a bill to legalise and regulate the use of crypto as punishing sanctions mount. Russia will be looking for any means it can to evade these restrictions, and crypto will unquestionably be one of the avenues it's considering,” says David Carlisle, director of policy and external affairs at Elliptic.
No hiding from SWIFT isolation
The EU, UK, US and Canada all introduced sanctions against Russia. But the measures stopped short of cutting off the Russia Federation from SWIFT, the international payment system of the Belgium-based Society for Worldwide Interbank Financial Telecommunications. SWIFT is network of 11,000 member financial institutions overseen by central banks in the US, Japan and Europe.
Could Russia use cryptocurrency and its technologies to replace some SWIFT functions?
“SWIFT transactions take one-four days to process, a staggering amount of time for 2022 and the evolution of the internet and cryptocurrencies. Even though the functions of SWIFT could, and should, be replaced by cryptocurrency transactions, other countries still process payments and major trade agreements using the banking system which would cut Russia out,” says Daniel Yurcho, a blockchain entrepreneur and NFT Marketplace chief executive.
“Until other nations adopted crypto payments as well, Russia would be unable to complete secure transactions without international banking support.”
Moreover, cryptocurrencies lack SWIFT's security properties, Yurcho adds: “The lengthy process time is due to processing transactions in different currencies, time zones, and banking procedures of separate nations. While crypto payments are instant and transparent, they do leave room for error if security measures aren't in place from each party in a transaction.”
“Without the necessary infrastructure and safety precautions in place, crypto payments become risky for such large transactions to take place.”
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Frozen fiat, frozen crypto?
Although UK Prime Minister Boris Johnson announced the freeze of assets of 100 Russian oligarchs and companies, it “is unlikely that designated persons and entities would move around large quantities of crypto now,” says Caroline Malcolm, head of international public policy at Chainalysis. “The institutions and persons affected probably knew this was coming and would have moved large quantities of fiat or crypto prior to this week’s events,” she adds.
“Wealthy individuals could use cryptocurrencies to circumvent sanctions against them in a variety of ways. They can remove funds from traditional fiat banking systems and park them in secure cold storage crypto wallets to prevent the freezing of their assets,” Yurcho says. The problem is they need exchanges in the countries where they are attempting to avoid sanctions to process these transactions.
“Usually in developed nations, cryptocurrency exchanges are subject to the same procedures and oversight from government entities and would likely be able to shut out these individuals and freeze their wallets used for transactions.
"I see cryptocurrencies as more of a tool for these individuals to quickly remove funds from traditional banks if they fear their funds could be frozen or subject to sanctions in the future.
"It would be rather difficult for them to conduct payments and transactions in the same manner they use fiat currencies at this time due to how targeted they currently are by governments.”