With growing worldwide sanctions against Russia over its invasion of Ukraine, the country has been struggling. But one tool may have been the key for Russia’s economy to stay afloat — or could have been the key if appropriately used: cryptocurrency.
Cryptocurrencies such as Bitcoin, Ethereum, and other digital tokens offer an alternative currency system outside of the typical financial institutions that help keep business alive. However, some federal agencies are working hard to enforce sanctions in the cryptocurrency industry.
“The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others,” FBI Director Christopher Wray said Thursday during a hearing before the Senate Intelligence Committee. “We are, as a community and with our partners overseas, far more effective on that than I think sometimes they appreciate.”
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While Wray did not elaborate on the exact details of those sanctions efforts so far, other experts in the cryptocurrency industry see his comments as indicative of how regulatory agencies are coming together. The Treasury Department’s Office of Foreign Assets Control issued guidance on Saturday stating that U.S. citizens and digital asset firms like cryptocurrency exchanges must comply with sanctions against Russia.
“The governments and regulatory bodies of the world have been working diligently to create forensic analytics of popular blockchains,” said Nick Saponaro, CEO of cryptocurrency company Divi Labs, “which makes it less difficult to track the movement of funds.”
Saponaro told the Washington Examiner that if, say, a Russian oligarch invested their real-life money into crypto, they would likely have to do so through a centralized cryptocurrency exchange such as Binance, BitFinex, or Cointrade. The companies convert real money into cryptocurrency for a fee and help customers manage and trade cryptocurrencies as they see fit.
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While cryptocurrency exchanges may not sound like banks, they operate as banks in most circumstances. “These are companies that create and store digital currency on behalf of their customers,” said Stan Sater, a technology and data privacy attorney at Founders Legal. “So the role they play in the transaction process is similar to a bank or a PayPal since the user does not have custody of their digital asset and is, in reality, sending an instruction to the wallet provider to transfer the digital assets they own to another wallet.” This also puts cryptocurrency exchanges at risk of being sanctioned, mainly because each transaction is recorded and potentially identified.
It is possible that the users could hide the nature of the transactions with some data manipulation. “Very sophisticated crypto holders are capable of covering up their tracks,” said Kiran Nasir Gore, a lecturer at George Washington University Law School. “And it is common for blockchain users to ‘mix’ and ‘peel’ transactions to render their transactions less traceable.” This is not unique to cryptocurrency, however. “Authorities can still use traditional methods to trace assets to find them and seize them,” Gore told the Washington Examiner.
Users could also store their digital assets outside of an exchange, such as in an external hard drive. However, their wallet would be extremely limited. If a digital wallet is identified as being connected to a criminal or a sanctioned entity, law enforcement can issue a mandate to the exchange to blacklist deposits from that address. Should that address attempt to deposit cash funds through an exchange, the funds are immediately frozen and seized. Blacklisting addresses would also make it impossible for the sanctioned party to perform peer-to-peer transactions because the receiving party will also be blacklisted due to proximity to the sanctioned individual.
“In other words, they are cutting off the criminals’ access to off-ramps at every turn,” Saponaro concluded.
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While some experts fear that the Russian government could use cryptocurrency to circumvent U.S. sanctions, it’s unclear to what extent it is attempting to do so. There are no known records on the blockchain of the Kremlin using cryptocurrency to evade sanctions as of March 14.
The Kremlin estimates that Russians owned $200 billion in cryptocurrency as of Feb. 1, 2022. This mass amount of cryptocurrency acted as a “lifeline” for the average citizen as the Russian ruble’s value collapsed, claims Coinbase CEO Brian Armstrong. That’s why several cryptocurrency exchanges said that they would not restrict access for nonsanctioned Russian citizens.
While U.S. regulatory agencies have taken major steps toward improving their regulations of cryptocurrency, Biden’s decision to file an executive order on cryptocurrency shows that the federal government has a significant interest in regulating the technology more — a decision that may have a significant impact on the industry, including the creation of a U.S. government “coin” in the cryptocurrency ecosystem.
