When the United States banned Americans from trading with Russian banks, oil and gas developers and other companies in 2014, Russia’s economy suffered a sharp and severe blow after the country’s invasion of Crimea. Economists estimate that sanctions imposed by Western nations cost Russia $ 50 billion a year.
Since then, the global market for cryptocurrencies and other digital assets has become a balloon. That is bad news for sanctions and good news for Russia.
On Tuesday, the Biden administration imposed new sanctions on Russia over its involvement in the conflict in Ukraine, with the aim of thwarting its access to foreign capital. But Russian institutions are preparing to deal with any of the ill effects by dealing with anyone around the world willing to work with them, experts said. And, he says, those institutions could then use digital currency to bypass control points on which governments rely – primarily on money transfers through banks – to prevent deal execution.
“Russia has a lot of time to think about this specific outcome,” said Michael Parker, a former federal prosecutor who now heads anti-money laundering and sanctions practice at Washington law firm Ferrari & Associates. “It would be naive to think that they did not play this scenario well.”
Sanctions are one of the most powerful tools the United States and European countries have to influence the behavior of nations they do not consider allies. The United States is particularly capable of using sanctions as a diplomatic tool because the dollar is the world’s reserve currency and is used in payments worldwide. But American government officials are increasingly aware of the potential of cryptocurrencies to mitigate the effects of sanctions and are stepping up investigations into their digital assets.
To enforce sanctions, the government makes a list of people and businesses that its citizens should avoid. Anyone associated with a member of the list faces heavy fines. But the real key to any effective sanctions program is the global financial system. Banks around the world play a key role in enforcement: they see where the money comes from and where it is bound, and for anti-money laundering legislation they need to block transactions with approved units and report to authorities what they see. But if banks are the eyes and ears of governments in this space, the explosion of digital currency is blinding them.
Banks must adhere to the “Know Your Customer” rules, which include verifying the identities of their customers. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are rarely as good as banks at tracking their customers, even though they follow the same rules. In October, the U.S. Treasury Department warned that cryptocurrencies pose an increasingly serious threat to the U.S. sanctions program and that U.S. authorities need to educate themselves about the technology.
If it chooses to avoid sanctions, Russia has multiple cryptocurrency-related tools at its disposal, experts said. We need to find ways to trade without touching the dollar.
The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without converting it into dollars. Hacking techniques such as ransomware can help Russian artists steal digital currency and offset lost revenue due to sanctions.
And while cryptocurrency transactions are recorded on the internal blockchain, making it transparent, new tools developed in Russia can help hide the origins of such transactions. It will allow businesses to trade with Russian institutions without inventions.
There is an example for such remedies. Iran and North Korea are among the countries that have used the digital currency to mitigate the effects of Western sanctions, a trend recently observed by US and UN officials. For example, North Korea has used ransomware to steal cryptocurrencies to fund its nuclear program, according to a UN report.
In October 2020, representatives of Russia’s central bank told a Moscow newspaper that the new “digital ruble” would make the country less dependent on the United States and more capable of resisting sanctions. It will allow Russian companies to conduct transactions outside the international banking system with any country wishing to trade in digital currency.
Russia could find interested partners in other nations targeted by US sanctions, including Iran, which is also developing a government-backed digital currency. China, Russia’s largest trading partner in both imports and exports, has already launched its own central bank digital currency, according to the World Bank. The country’s leader, Xi Jinping, recently described China’s relations with Russia as “no limits.”
The evolving system of direct exchange of digital currency by central banks poses new risks, said Yaya Fanusi, a colleague at the Center for a New American Security who has studied the effects of cryptocurrency on sanctions. “The reduction in the power of US sanctions comes from a system where the states of this nation are able to transact without going through the global banking system.”
In early February, independent sanctions monitors told the UN Security Council that North Korea was using cryptocurrency to fund its nuclear and ballistic missile programs, according to Reuters. (The firm concerned for Norway’s permanent mission to the UN confirmed the existence of the report, which has not yet been released.) Last May, consulting firm Elliptic described how Iran was using proceeds from bitcoin mining to meet limitations. Its ability to sell oil due to sanctions.
Approved Russian organizations can set up their own theft strategies using ransomware attacks. Playbook is straightforward: a hacker breaks into a computer network and locks digital information, usually in cryptocurrency, until the victim pays for its release.
Impact of the Ukraine Crisis on the Global Economy
Growing anxiety. Russia’s attack on Ukraine could cause sharp spikes in energy and food prices and scare investors. The economic damage caused by supply disruptions and economic sanctions will be severe in some countries and industries and unnoticed in others.
Russia is at the heart of the growing ransomware industry. Last year, about 74 percent of global ransomware revenue, or more than $ 400 million worth of cryptocurrency, went to organizations that may have somehow linked to Russia, according to a February report. 14 reports by blockchain-tracking firm Chainalysis.
According to ChannelLease, illicit funding has also arrived in Russia through a dark web marketplace called Hydra, which operates cryptocurrencies and handles over $ 1 billion in sales in 2020. Stricter platform rules – vendors are only allowed to liquidate cryptocurrencies through certain regional exchanges – have made it difficult for researchers to comply with the money.
“We know there have been no questions asked, and we know that Hydra operates not only in Eastern Europe but in the whole of Europe in the West,” said Kim Greer, director of research at ChainLease. “There’s definitely a cross-border business going on.”
Digital currency uses all blockchain technology, a form of computer code that can be viewed publicly by anyone, anywhere. This public ledger monitors the movement of individual digital coins from one “wallet” – called online repositories for digital assets – to another. In principle, this should allow the authorities to track all crypto transactions and prevent approved entities from completing them.
But the technology behind Hydra masks the source of the transactions, providing Russian users with the potential means to move money outside the country’s borders. On its own, Hydra is not yet large enough to handle the volume of transactions that Russia will need to successfully avoid sanctions. But other money-laundering techniques – including “nesting” in which illegal marketplaces bury themselves in large, legal structures to hide their activities – can also help.
There are indications that the United States is increasing its surveillance of cryptocurrency activity. On Feb. 17, the Department of Justice announced that it has formed a new national cryptocurrency enforcement team, a move that emphasizes that federal prosecutors are paying more attention to misconduct among cryptocurrency users.
Mr. Parker, a former prosecutor, said Feb. The 8 arrests of the Manhattan couple for stealing $ 3.6 billion bitcoin from the Hong Kong cryptocurrency exchange Bitfinex are “a tangible example of how the government is getting better and faster and what they need to do to be able to find out.”
Administrative officials are urging the cryptocurrency industry to impose internal restrictions that prevent bad artists from using their services. In October, the Treasury Department published a 30-page approval-compliance guideline recommending that cryptocurrency companies use geolocation tools to exclude customers in approved jurisdictions. In many cases, the report says, it took months or years for crypto companies to implement such compliance procedures.
That may change as the industry begins to mature. Chainlysis offers a “Know Your Transaction” tool that alerts companies when a blacklisted entity uses their services. Last year, the company doubled the number of its private-sector customers, many of whom use compliance tools.
But discerning cryptocurrency users can find their way around the blacklist.
“The treasury designation of the crypto wallet address is not foolproof,” Mr. said. Fanucci of the Center for New American Security. “That nominated actor can still open a new wallet somewhere else. You can do that very easily.”