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Western sanctions against Russia are drawing blood.
Russians are looking for places to move their money while wealthier individuals are considering how best to dodge the tightening stranglehold on their finances.
Naturally, everyone’s looking at crypto as a likely culprit. Especially EU policymakers, who are determined to ensure their sanctions against Russia for invading Ukraine are iron-clad.
The escape hatch through the crypto market, however, is littered with booby traps.
At first glance, cryptocurrencies seem like a good tool for evading sanctions. Transactions can be obscured in anonymity, offering a possible conduit to safety for billions of rubles. And sitting tight isn’t an option, especially for oligarchs whose vast riches face a devastating prospect of deteriorating into worthless paper.
Meanwhile, the country’s stock market has been closed amid fears of a total collapse, and the ruble is losing value against all major currencies. Domestic prices are rising, eating away at the ruble’s purchasing power for everyday goods, such as food.
So few were surprised when talk of sanctions in late February led to an uptick in the crypto market, which had been in decline since its all-time high in early November. For example, data from Coin Metric points to a slight increase in people moving funds to new digital wallets that hold cryptocurrencies.
And it’s this recent crypto recovery that has got decision-makers concerned, even though it’s still far off its peak total market value of $3 trillion in the fall.
This uptick “hints at crypto assets being used to circumvent Western sanctions targeted at the traditional financial system,” German conservative MEP Markus Ferber wrote Friday. “The European Commission must come up with specific proposals on how to close any loopholes in the sanctions regime relating to crypto assets.”
The Commission, from its side, is assessing whether more action is needed, according to Executive Vice President Valdis Dombrovskis, speaking Wednesday after a video call among EU finance ministers. Treasuries agreed that new measures are needed to stop Russians from dodging international sanctions after European Central Bank President Christine Lagarde raised concerns.
But many analysts, EU and U.S. officials are questioning the size of the risk and see the recent uptick in activity more as a sign of volatility in financial markets as a whole. In other words, correlation doesn’t always equate to causation.
“Trying to use crypto to evade sanctions has significant drawbacks,” said Caroline Malcolm, head of international policy at Chainalysis, a blockchain data platform that helps government agencies and companies in the financial sector with risk management and compliance, and with identifying criminal activity. “For very large transactions of the size needed to support a large country’s economy, other difficulties arise, from liquidity limitations, to difficulty accessing off-ramps into fiat currency.”
Here are some drawbacks to using crypto to evade sanctions.
Financial supervisors across the world are scrutinizing any dodgy activity that might suggest the sanctions are being evaded. U.S. authorities are particularly effective at catching crooks moving money around. It was the U.S. Treasury, after all, that detected dirty money flowing through Latvia’s third biggest lender in 2018, leading to the bank’s demise.
With that scrutiny over their heads, crypto exchanges have already promised they’ll adhere to the sanctions list and will be mindful of the reputational risk that comes with handling money for Russian clients.
Not only are cryptocurrencies included in sanctioned assets, but watchdogs have full access to online exchanges’ records. They can also see the transactions as they’re recorded on public ledgers that are distributed online. These features make these movements very difficult to manipulate and give supervisors an effective means of tracking suspicious activity.
“We adhere to all sanctions and work with all regulators to ensure that that we’re operating at a bank grade level on anti-money laundering checks, and know-your-customer and know-your-transaction controls,” the chief executive of crypto exchange Bitstamp, Julian Sawyer, told POLITICO. “We‘re not seeing any increased activity from Russia, either.”
The market’s digital nature also means data can used to “identify crypto wallets controlled by sanctioned entities, as well as other wallets which have significant previous exposure to those identified wallets,” Chainalysis’ Malcolm said.
Assuming oligarchs want to move billions of rubles, they would have to make many smaller transactions to avoid rousing too much suspicion. But two big hurdles would await them, assuming they can operate under the radar.
First, cryptocurrencies such as Bitcoin have a finite amount of assets for sale. So the more an oligarch buys of a particular crypto, the more expensive that digital asset class becomes. And buying into a self-inflated bubble is risky, especially in crypto’s volatile market.
Second, the processing of cryptocurrencies also isn’t free. So-called gas fees are attached to the blockchain technology that underpins crypto, and they climb quickly where there’s a spike in activity.
Large sums could be lost in these gas fees alone if a lot of wealthy sanctioned individuals want to get money out of the country quickly. A spike in these fees would also attract attention and flag a possible breach in the sanctions regime.
Cashing out is hard
Unless you live in El Salvador, it’s not easy to use cryptocurrencies to pay for everyday goods and services. A Russian dodging sanctions would want to convert crypto into hard cash at some point. You could transfer funds to a digital wallet somewhere in the world for safe keeping — but then face the risk of losing everything in a market dip. Bitcoin’s value on November 9 last year of €67,617 almost halved in value by late January, for example.
“You cannot live forever in the crypto world — at some point you have to convert crypto in FIAT,” said one EU official speaking of the sanctions. As he explained, Russians will either need a broker in the shape of a crypto exchange or a bank to make that conversion, and that, too, would attract attention.
“We are monitoring what is happening on the crypto asset market in close cooperation with EU agencies,” he added.
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