Russia’s Recent Cryptocurrency Operations
The Russian government has an ambivalent attitude toward cryptocurrencies. Last month, the country’s central bank proposed outlawing cryptocurrency operations, calling for a ban on cryptocurrency issuance and operation.
The Bank of Russia issued a strong warning, claiming that cryptocurrency mining poses “serious threats to the economy and financial stability.” Putin appeared to be less certain a week later, claiming that Russia had an advantage in bitcoin mining due to its vast energy reserves and competence in the industry. Putin’s skepticism about a full crypto-embargo may have become stronger after the west imposed further restrictions on Russia’s banking system.
Recent Sanctions on Russia’s Banking System
Following Vladimir Putin’s invasion of Ukraine, countries all over the world imposed unprecedented economic and other sanctions on Russia, targeting its finance, energy, and military-industrial sectors, as well as individuals and sporting events.
On Tuesday, Biden imposed new sanctions on Russia in response to the Ukrainian conflict, aimed at limiting its access to foreign capital. However, Russian entities are preparing to mitigate some of the worst effects by striking deals with anyone anywhere in the world willing to work with them, according to experts.
And, they claim, those entities can then use digital currencies to circumvent the control points that governments rely on to stymie deal execution — primarily money transfers by banks.
Sanctions are a particularly effective diplomatic tool for the United States because the US dollar is the world’s reserve currency and the most widely used medium of exchange and medium for cross-border payments worldwide.
However, officials in the United States are increasingly aware that cryptocurrencies can be used to mitigate the impact of sanctions. As a result, these officials are scrutinizing digital assets more closely.
Can Russia Use Cryptocurrency As Alternative Currency Exchange?
This video by CNBC News will help you understand more about how Russia is turningto crypto to evade sanctions.
Due to distrust in Russia’s banking system, cryptocurrency accounts for a larger pottion of the Russian financial system than in most other countries, according to Marlon Pinto, director of investigations at London-based risk advisory firm AnotherDay. According to a Russian government report, there are more than 12 million cryptocurrency wallets open by Russian citizens, with a total value of about 2 trillion rubles, or $23.9 billion.
According to data from the University of Cambridge from August 2021, Russia is the third-largest country for bitcoin mining, the energy-intensive and mathematically complex process by which new bitcoins are obtained.
When the United States prohibited Americans from doing business with Russian banks, oil and gas developers, and other companies in 2014, following the country’s invasion of Crimea, the economic impact on Russia was immediate and massive. According to economists, Western sanctions cost Russia $50 billion per year.
Can Russia Evade the Global Banking
A global financial system, especially banks, must be involved for sanctions to be effective. A money laundering law requires these institutions to block transactions involving sanctioned entities and to report what they see to authorities.
They track the movement of money, and they report to authorities what they observe. However, as a result of the explosion of digital currencies, sanctioned entities can circumvent the banking system and complete transactions without being seen by banks’ monitoring apparatus.
Banks must follow “know your customer” regulations, which include verifying the identities of their customers. However, despite the fact that they are supposed to follow the same rules as banks, exchanges and other platforms that facilitate the buying and selling of cryptocurrencies, digital assets are rarely as good at tracking their customers.
The United States Treasury Department warned in October that cryptocurrencies posed an increasingly serious threat to the American sanctions program and that US authorities needed to educate themselves on the technology.
What Russia Could Do with Cryptocurrency
Experts say that if Russia chooses to avoid sanctions, it has a plethora of cryptocurrency-related tools at its disposal. It only needs to find ways to trade without using the dollar.
Russia is developing its own central bank digital currency (CBDC), a “digital ruble” that trade partners can use without first converting it into US dollars. Hacking techniques such as ransomware can help Russia steal digital currencies and recoup revenue lost due to sanctions.
Cryptocurrency transactions are transparent because they are recorded on the underlying blockchain, but new tools developed in Russia can help to conceal the origin of these transactions. This would enable other parties to conduct business with Russian entities without being detected.
Indeed, representatives of Russia’s central bank stated in October 2020 that the new “digital ruble” would make the country less reliant on the US and better able to evade sanctions. It would allow Russian entities to conduct transactions with any country or other counterparty willing to trade in that digital currency outside of the international banking system.
Steps taken by regulators in recent years to increase oversight of crypto transactions may give governments leverage, such as the ability to request that crypto exchanges and brokerages block transactions in specific countries or with specific government-issued currencies, such as the ruble.
According to Ari Redbord, a former senior Treasury Department official now at the blockchain analytics firm TRM Labs, the Office of Foreign Assets Control will likely go after crypto exchanges and other digital currency platforms that violate bans on transactions with blacklisted Russian banks such as the country’s two largest, VTB and Sberbank.
Can US Sanction Russia’s Access to Cryptocurrency?
Sanctioning the country’s access to cryptocurrencies such as bitcoin and ether would be unprecedented in sanctions policy. Blocking transactions would be difficult because, by definition, private digital currencies exist without borders and, for the most part, outside of the government-regulated financial system.
According to The Wall Street Journal, citing an administration official, the Biden administration is in the early stages of investigating the area with the goal of disrupting economic activity in the country. Sanctions on Russia’s crypto activities would have to be designed in such a way that they did not devastate the broader crypto market, which could make enforcing them difficult, according to the official.
Despite Ukraine’s vice prime minister’s request that cryptocurrency exchanges block all Russian user accounts, trading is likely to continue as usual. Binance, the world’s largest cryptocurrency exchange, says it has no plans for a unilateral freeze, but it will block the accounts of specific individuals affected by the sanctions.
“We will not unilaterally freeze the accounts of millions of innocent users,” the company said in a statement to Fortune. “Crypto is intended to provide greater financial freedom for people all over the world.” To unilaterally decide to restrict people’s access to their crypto would be contrary to the very reason crypto exists.
Binance has over 113,000 members in its Russian Telegram channel, which is a major market for the company. The company did say that if international sanctions were expanded further, it would “apply those aggressively as well.” Binance was not the only cryptocurrency exchange to reject the call for a total ban on Russian traders. Jesse Powell, CEO of the Kraken exchange, said he understood the request but would decline it.
“Our mission at [Kraken] is to bring individual humans out of the legacy financial system and into the world of crypto, where arbitrary lines on maps no longer matter and they don’t have to worry about being caught up in broad, indiscriminate wealth confiscation,” he wrote. “Our mission is better served by putting individual needs ahead of the needs of any government or political faction. In practice, that is not a viable business option for us,” Jesse said. It is unlikely that cryptocurrency transaction will be restricted for Russians.
Other Steps Russia Is Taking On Financing With Cryptocurrency
Russia’s Finance Ministry has submitted to the government draft regulations that would allow residents to invest in cryptocurrencies through licensed entities while limiting the amount of rubles they could invest. Mr. Putin publicly called for a compromise last month as a result of the ongoing dispute.
One reason for targeting cryptocurrencies is that they could be used to circumvent other sanctions aimed at the traditional banking and payment systems.
While cryptocurrency transactions are transparent because they are recorded on the underlying blockchain, new tools developed in Russia can help mask the origin of such transactions. This would allow businesses to conduct transactions with Russian entities without being detected.
Russia may find willing partners in other countries targeted by US sanctions, such as Iran, which is developing government-backed digital currencies. According to the World Bank, China, Russia’s largest trading partner in both imports and exports, has already launched its own central bank digital currency. China’s leader, Xi Jinping, recently stated that the country’s relationship with Russia has “no bounds.”
This may change as the industry matures. Chainalysis provides a “know your transaction” tool that notifies businesses when blacklisted entities use their services. Last year, the company’s private-sector customer base more than doubled, with many of them using the compliance tool.
Conclusion
Crypto enthusiasts have speculated on whether Bitcoin can save Russia. According to what happened in Canada some days ago, the decentralization aspect of Bitcoin has been severely harmed by the centralization powers of the government.
Although the sanctions against Russia are intended to put pressure on Moscow, Sanctions imposed on Russian banks on Saturday, as well as a ban on the Russian central bank (RCB) from conducting dollar transactions with its reserves, will necessitate some deft maneuvering.
Bitcoin is unlikely to save them, not only because the RCB is not BTC-friendly, but also because recent examples of centralized powers tearing into Bitcoin make it unlikely.