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Russia’s ability to sidestep sanctions via crypto is limited

By Paul Golden

Edited by Aaron Woolner

23:56, 16 March 2022

Bitcoin on a cracked Russian flag
Concerns that Russia may sidestep sanctions via crypto have been overstated – Photo: Shutterstock

As the Russian invasion of Ukraine unfolded, crypto trade volumes for rouble and Ukrainian hryvnia trading pairs spiked.

Kaiko’s latest monthly market report notes that Russia’s invasion of Ukraine placed the cryptocurrency industry in a precarious position, needing to balance sanctions enforcement while lacking the power to restrict transactions on decentralised networks.

The major exchanges have taken a cautious approach to Russian crypto traders, holding back from freezing the accounts of all people in Russia and Belarus.“It seems the consensus is that exchanges are not looking to harm innocent users as it goes against the reason why crypto exists,” says Bendik Norheim Schei, head of research at Arcane Crypto.

“However, we saw Coinbase block 25,000 Russian-linked crypto addresses that it believes are tied to illicit activity, so some precautionary measures are being implemented,” Schei said.

Global exchanges with operations in Russia need to be vigilant to ensure they do not allow crypto to fiat currency conversion or vice versa, other than roubles.

Crypto market is being monitored

“This means that money from outside Russia in other currencies cannot flow into Russia via conversion to cryptocurrencies,” says Ronak Doshi, partner at research firm Everest Group. “This is being monitored via enforcement agencies and there might be heavy fines for non-compliance.”

Doshi says that the potential for crypto to circumvent international financial sanctions on Russia has been massively overstated, especially in light of outright hostility from the central bank.

Rouble crypto trade volumeRouble crypto trade volume – Credit: Kaiko

In October 2021, Russian news agency Interfax reported deputy finance minister Alexey Moiseev as saying that Russia had no plans to impose a ban on the purchase of cryptocurrencies by citizens on foreign exchanges. 

Moiseev also confirmed that cryptocurrency would not be allowed to be used as a means of payment within the country. However, this appears to be the only area of agreement between the Bank of Russia and the Ministry of Finance.

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Central bank not convinced by crypto 

In January, the Bank of Russia published a consultation paper, which described the potential of using cryptocurrencies for settlements as ‘limited’ and stated that the growth of cryptocurrencies seriously jeopardises Russians’ well-being and the stability of the financial system.

The bank proposed the following amendments to domestic legislation:

  • Stipulating liability for violating the statutory ban on using cryptocurrencies as means of payment for goods, works and services sold and bought by Russian residents, whether legal entities or individuals

  • Prohibiting the organisation of the issue and/or the issue and the organisation of the circulation of cryptocurrencies (including by cryptocurrency exchanges, cryptocurrency exchange offices, and P2P platforms) in the Russian Federation

  • Prohibiting financial institutions’ investment in cryptocurrencies and related financial instruments, as well as the use of Russian financial intermediaries and infrastructure to conduct cryptocurrency transactions

According to Bloomberg, Finance Minister Anton Siluanov wrote to Prime Minister Mikhail Mishustin in early February to say that legalising crypto would reduce the informal economy and help the government monitor the industry.

Russia looks to tax crypto

The federal government was clearly in favour of legalising rather than banning crypto activity. It recently confirmed that the protection of a citizen’s rights (as well as dividing investors into qualified and unqualified) would be ensured through licensing requirements for cryptocurrency platforms that would be required to meet liquidity and capital adequacy requirements.

With the central bank’s planned ban on cryptocurrencies having fallen through, the tax authorities would have no doubt noticed Russians’ enthusiasm for cryptocurrency and the potential revenues to be gained from taxing such activity. 

The Chainalysis 2021 Geography of Cryptocurrency report ranks the country 17th for cryptocurrency adoption with high transaction volumes on centralised cryptocurrency platforms, albeit down from second in 2020 on the back of a decline in peer-to-peer platform transaction volume.

Bitcoin is easy to track

On paper, cryptocurrency might also seem to represent an escape from international sanctions for Russia, but not in practice. “Companies are in general sanctioned from doing business with Russia and it doesn’t matter if that is through the banking system, crypto or CBDCs (central bank digital currencies),” says Arcane Crypto research head Schei.


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“A second – and very important – point is that we have major international companies working specifically to track blockchains,” he adds. “It is a myth that Bitcoin is 100% anonymous and the perfect tool for criminals. 

“Even if Russia as a state or Russian companies wanted to avoid sanctions through crypto, it would be very difficult to do that without getting noticed. The crypto market is still relatively small and it would definitely raise some eyebrows if we suddenly saw a large spike in transaction volumes.”

Liquidity is also a problem

Liquidity is another issue. Asheesh Birla, general manager of RippleNet took to Twitter to point out that there simply is not enough global liquidity to support Russia’s needs, referring to the US Department of the Treasury’s observation that Russia typically conducts nearly $50bn in foreign exchange transactions every day.

“Even if you were sending approximately $200,000 every minute and assuming the BTC/RUB market was resilient enough to immediately replenish the liquidity (very doubtful), you are nowhere near $50 billion a day,” said Birla.

Russia is a G20 economy and frankly, there is not a large enough market capitalisation for the entire crypto industry to fund a costly war effort, let alone prop up an economy at that scale observes Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs.

KYC and AML protocols are robust

“One of the biggest challenges for malicious actors on blockchains is off-ramping the funds to usable fiat,” he adds. “Most of the liquidity in crypto exists in compliant exchanges that are treated like any money service business and are required to have compliance officials and programs, KYC and AML protocols, and monitoring tools to screen wallets and flag potential risks,” adds Redboard.

Redbord also acknowledges the existence of non-compliant exchanges. Last September, the US Department of the Treasury designated virtual currency exchange SUEX for its part in facilitating financial transactions for ransomware actors.

“While SUEX has been shut down there are many other non-compliant exchanges,” he adds. “We have identified over 340 Russia-related exchanges, the overwhelming majority of which are high risk.”

Sanctions could hasten Russian CBDC

Caroline MalcolmCaroline Malcolm, head of international public policy & research at Chainalysis – Photo: Chainalysis

It has been suggested that the imposition of financial sanctions might encourage Russia to accelerate the development of its CBDC. 

Last month, the Bank of Russia stated that it had begun testing the digital rouble platform. It says three banks from the pilot group have already connected to the platform and that two have successfully completed a full cycle of digital rouble transfers between clients using banking mobile applications.

“But whether it creates a digital ruble or not, the sanctions that have been applied to the Bank of Russia remain, in much the same way that sanctions on individuals and entities apply equally to assets held in fiat and in crypto,” observes Caroline Malcolm, head of international public policy and research at Chainalysis.

Redbord says Russia could try to turn to a CBDC to evade sanctions, but cautions that there would have to be a market for a CBDC to work and that widespread global adoption of a digital rouble is unlikely.

Ransomeware attacks

Doshi agrees, suggesting that the testing, integration and technology changes by banks required to scale CBDC adoption will take another three to five years. 

A more sinister potential development is an increase in ransomware attacks that demand payments in cryptocurrency. 

Chainalysis notes that ransomware strains that took the most from North American victims between July 2020 and June 2021 included NetWalker, Egregor, Phoenix Cryptolocker, and Doppelpaymer – all of which are associated with Russia-based cybercriminal groups including Evil Corp, which has been previously linked to the Russian government by the US Department of the Treasury.

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