Cryptocurrencies VS Economic Sanctions: Round One Part 1

Over the past few years, I have heard about various countries across the world planning to use cryptocurrencies to circumvent economic sanctions. In most cases, it remained just an idea or turned into a farce, like with Venezuela and its Petro token. However, now we are seeing an entire country trying to salvage its economy by using the blockchain.

We all witnessed Russia start a new war in Europe. It’s clear who the aggressor and the victim are, and who has justice on their side. For a moment, though, I suggest we find the strength in ourselves to ignore the moral aspect of the conflict and focus on the fact that for the first ever actual state-wide attempt to use cryptocurrencies to circumvent large-scale economic sanctions.

Of course, the process has only just begun, but take it as a positive: instead of studying the events after the fact, we get the opportunity to analyze them in real time.

The collapse of the Russian financial system that followed the military incursion was, pardon the pun, swift. First, the Central Bank of the Russian Federation banned banks from selling foreign currency to people. Their statement said that from March 9 to September 9, 2022, a client of a Russian bank could take out up to $10,000 in cash from his deposit, with the rest of the sum only available in rubles at the rate on the day. Citizens will be able to open new foreign currency accounts and deposits, but those funds will also only be available for withdrawal in rubles.

At almost the same time, the country introduced restrictions on transferring foreign currency abroad. By Vladimir Putin’s decree, Russian residents can no longer send money to their accounts in banks or exchanges outside the country. The directive affects not only transfers to one’s own account but also the withdrawal of money without opening an account made through foreign service providers.

These measures taken by the authorities coincided with the actions of financial companies. Both MasterCard and Visa announced that they were leaving the Russian market, so their clients from the country had to withdraw their funds in a matter of days. At the end of the transition period, cards issued in Russia stopped working abroad, and vice versa.

And it is far from the end. PayPal Holdings Inc. payment company also announced ceasing operations in Russia due to the invasion of Ukraine. PayPal President said in a statement: “Under the current circumstances, we are suspending PayPal services in Russia.” Ironically, at the same time, PayPal became fully operational in Ukraine, something they couldn’t agree on with the country’s National Bank for years.

The final notable entries in the long list of companies leaving Russia we’ll mention are two of the world’s largest international banks, Goldman Sachs and JPMorgan. Goldman Sachs declared they would terminate the bank’s operations “immediately” and that the losses would be “immaterial.” JPMorgan stated: “In compliance with directives by governments around the world, we have been actively unwinding Russian business and have not been pursuing any new business in Russia.”

As a result, the Russian financial system was almost completely cut off from the outside world in just a month. It made the managing director of the International Monetary Fund conclude: “Sanctions are having a severe effect on the Russian economy. We expect a deep recession and no longer consider a default in the Russian Federation impossible.”

For its part, the Russian government denies this possibility and claims it is ready to make payments on foreign obligations in rubles with a murky registration process in local banks. However, the terms of the contracts state that costs are to be paid in dollars or euros, and violating the conditions of payment would still be grounds for default. In other words, the option put forward by Russians does nothing to solve the problem facing it.

All that is to say, the background for finding cryptocurrency solutions to bypass the country’s financial blockade is set. This path also has its complications, considering that from the first days of the war, numerous crypto exchanges announced that they would not serve clients from the aggressor country, which led to Russian accounts, IP addresses, bank accounts, and cards being blocked. Although, of course, there are still plenty of anonymous intermediaries. Crypto, like water, always slips through the cracks.

The most interesting part was watching the Binance crypto exchange maneuver its way through the situation. First, on March 9, it stopped supporting Mastercard and Visa cards issued in Russia. Then, the exchange disconnected Russian banks under sanctions from its P2P service. But after that, Binance suddenly announced that it wouldn’t block user accounts from Russia. Their representatives said: “Crypto is meant to provide greater financial freedom for people across the globe. To unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists.”

Putting the morality of the actions aside for now, let’s just appreciate the fact that even centralized crypto exchanges heavily dependent on the state refuse to fully comply with the sanctions.

This, of course, doesn’t stop the US authorities from hunting down the crypto wallets of Russian oligarchs. A London-based blockchain analysis provider Elliptic has recently handed them over information about a digital wallet allegedly linked to sanctioned Russian officials and oligarchs. The wallet stores millions of dollars worth of cryptocurrency assets, co-founder Tom Robinson said.

“Crypto can be used for sanctions evasion. What’s in question is on what kind of scale. It’s not proving out realistic that oligarchs can completely bypass sanctions by moving all their wealth into crypto. Crypto is highly traceable. Crypto can and will be used for sanctions evasion, but it’s not the silver bullet,” Robinson explained in an interview.

Shortly thereafter, Elliptic released a report outlining how Russia is using cryptocurrencies to circumvent economic restrictions. Elliptic analysed the data and looked into Russia’s actions, including to possibly find assets owned by the country’s citizens on the banned list. The firm’s specialists have identified over 400 virtual asset service providers where users can buy cryptocurrencies for rubles (these platforms’ turnover has tripled in a week).

According to the report, “millions of crypto accounts” were tied to these companies, whose services were almost entirely anonymous and unregulated. Elliptic has also linked more than 15 million accounts to Russia-related criminal activity and identified thousands of addresses associated with Russian entities subject to sanctions.

The company has vowed to closely examine cryptocurrency wallets supposedly connected to Russian officials and sanctioned oligarchs. Elliptic experts see their task as working with government agencies and other organizations to ensure that these Russians cannot use cryptocurrency assets to hide their income.

To be continued…