No, Crypto Won't 'Fix This' for Russia

Cryptocurrency is an unlikely workaround for expanded U.S. sanctions against Putin's government following the Ukraine Invasion, according to legal and blockchain experts.

AccessTimeIconFeb 24, 2022 at 6:20 p.m. UTC
Updated May 11, 2023 at 3:48 p.m. UTC

UPDATE (Feb. 24, 2022 21:00 UTC): Shortly after this article was published Biden indeed announced expanded sanctions.

The U.S. is moving to cut Russian oligarchs and officials off from their offshore funds and their ability to transact within the global financial system after Russian forces invaded Ukraine late Wednesday.

Unlike previous sanctions, the new measures may go as far as expelling Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international messaging service used by banks to send money around the world. While cryptocurrency conceivably may offer an alternative way for individuals or organizations to transact, the Russian government’s lukewarm stance on the technology and other factors may limit its use for this purpose.

U.S. President Joe Biden will announce new sanctions against Russia on Thursday, he said in public statements, in hopes that financial penalties will convince Russian President Vladimir Putin to withdraw from Ukraine and cease war efforts.

In doing so, the U.S. and European Union are effectively trying to cut these officials and oligarchs off from being able to transact with parties anywhere in the world. The move came hours after Russian military forces launched attacks on various cities and military bases in Ukraine, including in the nation’s capital of Kiev.

Russia first announced it would send “peacekeepers” into Donetsk and Luhansk, two regions in eastern Ukraine that Putin recognized as independent entities on Monday. The U.S., Canada, Japan, EU and a number of other nations announced an initial slate of sanctions after this initial incursion, targeting specific people or entities.

However, Wednesday’s attack dwarfed Monday’s incursion in scale, prompting Biden to announce further sanctions would be coming.

The initial sanctions package was “designed to impose overwhelming and immediate costs to the largest financial institutions and state-owned enterprises in Russia,” Deputy National Security Advisor for International Economics Daleep Singh told reporters.

This initial package could be modified as needed, Singh said.

“We’re also prepared to impose powerful export controls as part of our response package,” he said at a White House press briefing. “Both financial sanctions and export controls deny something to Russia that it needs and can’t get from anywhere other than the United States or our Allies and partners. Financial sanctions deny foreign capital to Russia, and export controls deny critical technological inputs that Russia needs to diversify its economy and to deliver on Putin’s strategic ambitions in aerospace, defense and high-tech.”

Andrew Jacobson, an associate with law firm Seward & Kissel, told CoinDesk that he expects further sanctions to target Russia’s largest banks: VTB Bank, SberBank and Gazprombank. Other sanctions could target Russia’s energy sector and oligarchs, particularly those who have assets overseas such as yachts.

The Treasury Department’s Office of Foreign Assets Control (OFAC), which oversees U.S. sanctions, has the ability to put vessels and entities as well as people on its list, he said.

Sanctions targeting oligarchs could include actions against their adult children and all assets located outside Russia. These oligarchs constitute a key source of Putin’s power base.

“I think the biggest thing is really how U.S. companies are going to implement the sanctions into their compliance programs,” Jacobson said. “I think there's going to be some really tremendous challenges over the coming months, deciphering the new rules that come out, understanding really complex ownership structures and how the restrictions apply to those ownership structures.”

SWIFT access

The U.S. has not yet gone so far as to try and cut Russia off from SWIFT, the messaging network underpinning global financial transactions.

Expelling Russia from SWIFT would mean the country would have difficulty transacting with any non-Russian financial institution.

There is precedent: SWIFT cut a number of Iranian banks off from its services in 2012, blocking the country from participating in financial transactions with the rest of the world. At the time, local business operators said the move would “make life even more difficult for us,” Reuters reported.

White House officials said expelling Russia from SWIFT was still “on the table” after announcing the earlier sanctions. Singh said that it would not be in the initial package.

“We have other severe measures we can take that our allies and partners are ready to take in lockstep with us, and that don’t have the same spillover effects,” he said. “But we always will monitor these options, and we’ll revise our judgments as time goes on.”

U.K. Prime Minister Boris Johnson called for SWIFT to eject Russia during a speech before the G-7 on Thursday.

Jacobson sees a cutoff from SWIFT as unlikely at this time.

“I don't know that cutting them off from SWIFT is really going to do much more. SWIFT is just a messaging system. It'd be an inconvenience in the short term, but ultimately in the long term, countries that have been cut off of SWIFT have still found ways to operate within the global financial system and operate domestically as well,” he said.

Crypto’s role

While headlines suggest crypto might be used to bypass Russian sanctions, Jacobson does not see this as a likely workaround.

Autocratic regimes would find it difficult to adopt decentralized assets, he said, and Russia, in particular, is no fan of bitcoin, although Putin once met Ethereum creator Vitalik Buterin. The country’s central bank tried to ban cryptocurrencies just weeks ago.

“I think Russia probably is thinking about using bitcoin or other cryptocurrencies to evade sanctions, but on the other hand, is probably concerned about those cryptocurrencies getting too much popularity within their own country, because that impacts their own control of their own monetary system, and therefore impacts their power,” he said.

Caroline Malcolm, Chainalysis’ head of international policy, told CoinDesk that the blockchain analytics firm had not yet seen any unusual activity from Russian crypto exchanges over the last few days.

Even if some individuals do choose to turn to crypto, it’s unclear whether they would be able to effectively bypass sanctions using decentralized assets. Companies might monitor sanctioned wallets for any transactions or refuse to transact with these addresses entirely.

“We've seen that in the past with sanctions, you've got examples where wallet addresses have been named as sanctioned entities, and that allows Chainalysis to put in place alerts for our customers, whether they be government or from industry,” Malcolm said. “So that if they have transactions, which you know, intersecting with sanctioned entities, they'll be able to see those and get an alert on those immediately.”

Governments increasingly have the tools they need to “rein in crypto,” Solidus Labs’ Chen Arad said.

It is a sign of crypto’s maturation that it is being discussed as a tool to bypass sanctions, but the industry has also evolved to the point where financial regulators can monitor this sector, he said.

“Regulators have developed the ability, I think, to recognize already that there are ways to rein it in, and the industry has recognized that it will be reined in one way or another,” he said.

Update (Feb. 24. 2022, 21:00 UTC): Updated headline and subheading.


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Nikhilesh De

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.