Crypto adoption is expected to rise among regular individuals in both countries, however it will not aid Russia’s elite in evading economic limitations.
Despite Janet Yellen’s and Hillary Clinton’s concerns, there isn’t enough cryptocurrency in the world to bail out Russia from its current economic quagmire. Even if there was a sufficient supply, the state would almost certainly be unable to avoid the scourge of a Western embargo.
“It’s critical to keep in mind that even where nefarious actors attempt to use crypto, law enforcement can trace this activity owing to its transparency, and crypto businesses can use solutions like blockchain analytics to comply with sanctions requirements,” said David Carlisle, director of policy and regulatory affairs at Elliptic.
Despite Clinton’s concerns that the top cryptocurrency exchanges aren’t doing enough to close Russia’s hypothetical escape hatch, it’s unclear whether Russia’s political and business elite are seeking for a bitcoin solution at all.
“Will Russia attempt to circumvent sanctions?” Yes,” said Matthew Le Merle, co-founder and managing partner of Blockchain Coinvestors, “but not with crypto.” They’ll find other ways, such as the offshore entities and tax havens exposed in the 2016 Panama Papers, through the previously established (incumbent) global financial system.
For Russian oligarchs and sanction-evading institutions, digital currencies are just not a good means to move money. “If you were a bad actor, you’d be a fool to use Bitcoin,” Le Merle remarked. “They know how to come after you” now that the US government and other enforcement agencies have clustering technologies and analytical capacity.
Recent events have prompted a slew of crypto-related questions, however they have been eclipsed by the massive human catastrophe engulfing Europe, the worst since the Bosnian War, if not WWII. Would the Russian government, its financial institutions, high officials, and oligarchs seek respite from Western sanctions via crypto, and if so, would it be successful?
Could the fact that crypto monies were streaming into Ukraine from individual (non-government) supporters abroad counterbalance the fact that Russia’s ruling elites found refuge in decentralized digital currencies another black eye for crypto’s already-tarnished reputation in some quarters? According to Elliptic, donations have totaled roughly $55 million since the crisis began. Was the true takeaway that crypto is just a tool that can help both victims and perpetrators while remaining politically “neutral?”
Finally, what about the billions of people who are watching the war? What conclusions may be drawn from the devastation and refugee flight of one million people, as reported by the UN? Perhaps something about the general frailty of human society and institutions? Would they turn to decentralized digital currencies as part of an offshore wealth diversification strategy, if that’s the case?
Russia may try to open the hatch, but…
It’s understandable that sanctioned Russians would turn to crypto in these conditions. “It’s quite likely that sanctioned Russian individuals and businesses would look to crypto as a way to circumvent prohibitions,” Carlisle said, echoing a view shared by the US Treasury and others.
What’s more startling is how ineffectual this could be. “I don’t believe the Russian government can rely on cryptocurrencies to mitigate the impact of sanctions,” Max Dilendorf, a partner at the Dilendorf Law Firm, said in an interview, adding that “the economic impact of sanctions might run into hundreds of billions of dollars.” He believes there isn’t enough Bitcoin (BTC) or cryptocurrency in the world to alleviate such economic devastation. “Crypto alone can’t fulfil Russia’s needs right now,” Carlisle noted. Russia’s overall yearly imports exceed $200 billion, while its banking sector has $1.4 trillion in assets. Crypto can’t possibly fill the void that Russia requires.”
Michael Parker, counsel and head of Ferrari & Associates’ Anti-Money Laundering and Sanctions practise, agreed that there isn’t enough crypto in the globe to free Russia from sanctions — though crypto might play a role at the margins by filling holes.
Furthermore, according to Parker, a former enforcement section chief at the US Office of Foreign Assets Control (OFAC), the concept that Russia might abruptly switch from USD to crypto for international transactions is “far-fetched” for a variety of reasons.
For example, there’s the issue of anonymity, or the lack thereof. According to Parker, moving commodities on a massive global scale is sure to attract attention. Then there’s the issue of cryptocurrency’s volatility. Are commodities traders willing to lose 10% in a commodities transaction within hours (possibly) due to crypto’s market gyrations? The United States Dollar (USD) is the world’s de facto reserve currency for a reason: it is extremely stable.
Meanwhile, over the last year, OFAC has been focusing on individuals or entities that have broken its sanctions rules, and “the minute the US government learns which wallet belongs to the Russian government or its supporting groups, these blockchain wallets will be immediately added to OFAC’s SDN list,” Dilendorf added.
Given the quick advancements in analytics techniques and screening software, centralized crypto exchanges now have the ability to identify malefactors as well. It’s more of a question of “would they go after them,” according to Parker. “They now have the tools,” if they do.
However, decentralized exchanges (DEXs) may be an exception. “The concern is how well individual decentralized finance traders are equipped in recognizing sanctioned wallets in peer-to-peer transactions” or performing required compliance checks, according to Dilendorf. According to Dilendorf, these decentralized protocols have allowed wallets from sanctioned countries like Iran and North Korea to trade on their platforms. “US regulators must work with the international community and private actors to increase AML/CFT controls of DeFi networks to ensure that nefarious actors are not using these platforms to evade regulations and sanctions,” he said.
What about Bitcoin mining, for example? Couldn’t Russia, as the world’s third-largest BTC mining country, use this to circumvent sanctions, as Iran has done to some extent? Dilendorf responded, “Bitcoin mining might theoretically only help micro oligarchs and small firms.” “There isn’t enough muscle to counter the sanctions.”
No sanctions have been imposed on ordinary Russians.
In recent conversations, it’s been forgotten that the sanctions imposed on Russia by the US and its Western allies are not broad-based. According to the US Treasury, they only target Russia’s 10 largest financial institutions, such as Sberbank, and approximately 90 other specified companies, as well as “Russian elites and their family members.” As Parker points out, they aren’t being applied to regular Russian residents or most enterprises.
Let’s say a U.S. company has been hiring a Russian software developer. The developer had been paid by the American firm through a sequence of bank transfers that ended with Sberbank. Under the new sanctions, Sberbank can no longer be used, but the US company can still hire the Russian developer and pay him in cryptocurrency. “Using crypto to transact in place of sanctioned Russian banks is not sanctions evasion — it’s sanctions compliance,” Parker added in an interview.
That is, if the individual is not on the list of designated firms subject to US sanctions or otherwise subject to US penalties, crypto gives a legal option to continue doing business with Russian labour. Not all sanctions systems, such as those in place against Iran or North Korea, are as detailed as this one. “No sanctions have been imposed on Russian citizens,” Parker stated emphatically.
Decentralized technology’s potential
Cryptocurrencies have already played a tiny supporting role in the Ukrainian resistance drama on the other side of the border.
As of March 2, the Ukrainian government and NGOs supporting the military had raised $55 million from more than 102,000 crypto-asset donations. “This includes a $5.8 million gift from Polkadot founder Gavin Wood, as well as a CryptoPunk NFT valued at over $200,000.”
In an interview, Carlisle noted, “The ability of the Ukrainian government to crowdfund with crypto in a time of need highlights the potential of this open decentralized technology.”
Crypto adoption is expected to rise among the general public in both countries, according to some experts. “Russian and Ukrainian citizens need to find a solid store of value right now,” Le Merle said in a press release, “and it appears that bitcoin is an option outside of their respective governments’ oversight – the price has been rising up this week in light of this.”
However, the millions (possibly) of Ukrainians and Russians fleeing their country, carrying all they own, including their diamonds and gold, may be a bigger story. Many people can expect to lose their belongings on the way to their destinations.
“A gunman will seize it,” Le Merle predicted. That is the history of refugees, whether they were fleeing France during WWII or Syria more recently. “Ukrainians are already purchasing Bitcoin,” a solution to the problem. “But you can’t use it in Ukraine right now,” Le Merle continued, “since it requires electricity and internet access, which are no longer guaranteed.”
In an interview, Le Merle explained that what they really needed to do was acquire crypto and send their seed codes to extended families or trusted people outside the country, securing at least a portion of their fortune.
This lesson will not go unnoticed by the four billion people who, according to Le Merle, live in countries where they can’t trust their governments not to seize their riches, either directly or indirectly, by mismanaging and hyperinflating their economies. “Don’t put off getting your wealth offshore until the last minute,” Le Merle said.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.