TO THEIR champions, cryptocurrencies are supposed to be a libertarian utopia. Because tokens are created and moved by loose, decentralized networks of individual computers based in dozens of countries, they are in theory free from control by intermediaries, such as banks, which can be regulated by governments. Critics of crypto-finance have long looked askance at the same system. To statists, it represents the tyranny of techno-anarchy.
Russia’s invasion of Ukraine and the West’s subsequent sanctions on Russian banks, companies and elites have intensified this debate. Warnings from politicians and regulators in America and Europe suggest fears are high that people and entities hit with sanctions, and those wanting to keep doing business with them, will use cryptocurrencies and the exchanges on which they are traded to dodge the restrictions. Were they able to move money around without governments snooping, it would partly disable the West’s main weapon against Vladimir Putin.
Those attempting to evade any sanctions imposed on them will typically be trying to preserve their wealth. This requires holding assets that cannot be clearly linked to a person or institution, as opposed to those—such as property, yachts or cash in foreign bank accounts and securities—which can be (at least with a bit of detective work). One appeal of crypto’s decentralized network is that it functions on a supranational basis, at least in theory. Another is that it is believed by many to offer stronger privacy protection than the traditional financial system. Public blockchains, like bitcoin and ethereum, announce their transaction information to the world, but keep the participants anonymous. In the banking system privacy is ensured by keeping transaction information private but the people involved are identifiable. In reality, the lines between these two are fuzzier than would-be sanctions-busters might hope.
Certainly, there is evidence that Russian people have been buying more crypto. Trading volumes in the ruble-bitcoin currency pair on Binance, the biggest crypto-exchange by volume, have climbed to about ten times their normal level, from around 50 bitcoins-worth ($20m) per day to 500. But this may stem primarily from a desire to hold an asset which is not plunging in value. Bitcoin is worth roughly what it was in dollars on February 24th, whereas the ruble has tumbled by around 40% against the greenback.
For an oligarch looking to dodge American sanctions, converting wealth into crypto would ideally be a means, not an end. It is not possible to buy most everyday items or financial assets directly with cryptocurrencies. “Ultimately what they really need to do is get access to some form of fiat currency, which becomes more challenging,” said Christopher Wray, the director of the FBI, in a United States Senate hearing on the Russian invasion on March 10th.
To convert back into fiat currency requires interacting with an exchange, which would act as the interface between traditional banks which operate in sovereign money, like the dollar, and crypto. As crypto-exchanges have grown bigger and more important, many have become regulated. Some of the biggest are publicly listed. Most have a presence in America and Europe. This poses two problems for would-be sanctions-dodgers.
First, crypto-exchanges know their customers’ identities. Early iterations of some exchanges resisted the need to implement “know your customer” (KYC) anti-money-laundering measures, but as governments have begun to take crypto more seriously they have put pressure on the industry to tighten its procedures. Binance implemented a KYC policy in 2021, requiring those using it to identify themselves to the firm (Binance has said that 3% of its customers left as a result).
Second, governments have begun to go further than merely arm-twisting exchanges to implement existing anti-laundering guidelines—a crackdown that the Russian invasion has only accelerated. The crypto-industry had long been awaiting an executive order from President Joe Biden which would lay out some regulatory principles. This arrived unexpectedly on March 9th. It empowers regulators to, among other goals, minimizes illicit use of crypto. Just two days later the White House issued a joint statement with the leaders of other G7 countries and the European Union, stating a commitment to “taking measures to better detect and prohibit any illicit activity” using crypto-assets, and vowing to “impose costs on illicit Russian actors using digital assets to enhance and transfer their wealth, consistent with our national processes”. The United States Treasury has made a point of stressing that its sanctions apply “regardless of whether a transaction is denominated in traditional fiat currency or virtual currency”. Both Binance and Coinbase, another large crypto-exchange, have said they will freeze the assets of any individuals who have been targeted with sanctions (though both have resisted pulling out of Russia altogether).
For such individuals, converting wealth to crypto comes with a serious downside, too. Although public blockchains are still widely seen as impervious to pleading eyes, they are far from it. The transparency of the data on the ledger of transactions offers lots of clues that could help a determined investigator who is hoping to sniff out sanctions-dodgers. Government sleuths have invested significant time and energy in trying to link supposedly anonymous wallets with real people, with some success. In December, for instance, the FBI managed to sixteen $3.6bn-worth of crypto-assets related to a theft from an exchange in 2016. “There have been very significant seizures and other efforts that I think have exposed the vulnerability of cryptocurrency as a way to get around sanctions,” said Mr Wray. “The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated.”
Crypto may turn out to be far more useful to those looking to move in the open, rather than in the shadows. On February 26th the official Ukrainian Twitter account published digital-wallet addresses through which it is accepting bitcoin, ethereum and other tokens. Nearly $100m-worth of tokens has since been donated. Much of this is being spent on things like bulletproof vests and night-vision goggles, according to Alex Bornyakov, Ukraine’s deputy minister for digital transformation. In extreme events, where it is helpful to shrink the time that elapses between someone deciding to make a donation and that money being put to work, crypto has an obvious advantage. Tokens can be sent to another wallet in seconds, whereas international bank transfers can take days.
All this makes for an interesting transition for crypto. The conflict in Ukraine has brought into focus the financial-crime risks it poses, but also the advantages of speed and ease of transfer it offers over fiat currency—which could help during or after other types of extreme, time-sensitive events too, such as natural disasters. The war makes it clear that there are serious uses for crypto, but that it can expect to be policed more seriously, too.
Our recent coverage of the Ukraine crisis can be found here