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WHY CRYPTO ISN’T RUSSIA’S SAFEST HAVEN

Cryptocurrencies may seem like a good tool for evading sanctions, but it’s a
workaround littered with booby traps.

Russia's stock market has been closed amid fears of total collapse | Natalia
Kolesnikova/AFP via Getty Images
By Bjarke Smith-Meyer
March 4, 2022 3:33 pm
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Western sanctions against Russia are drawing blood.

Russians are looking for places to move their money while wealthier individuals
are considering how best to dodge the tightening stranglehold on their finances.

Naturally, everyone’s looking at crypto as a likely culprit. Especially EU
policymakers, who are determined to ensure their sanctions against Russia for
invading Ukraine are iron-clad.



The escape hatch through the crypto market, however, is littered with booby
traps.

At first glance, cryptocurrencies seem like a good tool for evading sanctions.
Transactions can be obscured in anonymity, offering a possible conduit to safety
for billions of rubles. And sitting tight isn’t an option, especially for
oligarchs whose vast riches face a devastating prospect of deteriorating into
worthless paper.

Meanwhile, the country’s stock market has been closed amid fears of a total
collapse, and the ruble is losing value against all major currencies. Domestic
prices are rising, eating away at the ruble's purchasing power for everyday
goods, such as food.

So few were surprised when talk of sanctions in late February led to an uptick
in the crypto market, which had been in decline since its all-time high in early
November. For example, data from Coin Metric points to a slight increase in
people moving funds to new digital wallets that hold cryptocurrencies.



And it's this recent crypto recovery that has got decision-makers concerned,
even though it's still far off its peak total market value of $3 trillion in the
fall.

This uptick "hints at crypto assets being used to circumvent Western sanctions
targeted at the traditional financial system," German conservative MEP Markus
Ferber wrote Friday. "The European Commission must come up with specific
proposals on how to close any loopholes in the sanctions regime relating to
crypto assets."



The Commission, from its side, is assessing whether more action is needed,
according to Executive Vice President Valdis Dombrovskis, speaking Wednesday
after a video call among EU finance ministers. Treasuries agreed that new
measures are needed to stop Russians from dodging international sanctions after
European Central Bank President Christine Lagarde raised concerns.

But many analysts, EU and U.S. officials are questioning the size of the risk
and see the recent uptick in activity more as a sign of volatility in financial
markets as a whole. In other words, correlation doesn't always equate to
causation.

“Trying to use crypto to evade sanctions has significant drawbacks,” said
Caroline Malcolm, head of international policy at Chainalysis, a blockchain data
platform that helps government agencies and companies in the financial sector
with risk management and compliance, and with identifying criminal activity.
“For very large transactions of the size needed to support a large country’s
economy, other difficulties arise, from liquidity limitations, to difficulty
accessing off-ramps into fiat currency.”

Here are some drawbacks to using crypto to evade sanctions.


EVERYONE’S WATCHING

Financial supervisors across the world are scrutinizing any dodgy activity that
might suggest the sanctions are being evaded. U.S. authorities are particularly
effective at catching crooks moving money around. It was the U.S. Treasury,
after all, that detected dirty money flowing through Latvia’s third biggest
lender in 2018, leading to the bank’s demise.

With that scrutiny over their heads, crypto exchanges have already promised
they’ll adhere to the sanctions list and will be mindful of the reputational
risk that comes with handling money for Russian clients.



Not only are cryptocurrencies included in sanctioned assets, but watchdogs have
full access to online exchanges’ records. They can also see the transactions as
they're recorded on public ledgers that are distributed online. These features
make these movements very difficult to manipulate and give supervisors an
effective means of tracking suspicious activity.

“We adhere to all sanctions and work with all regulators to ensure that that
we’re operating at a bank grade level on anti-money laundering checks, and
know-your-customer and know-your-transaction controls,” the chief executive of
crypto exchange Bitstamp, Julian Sawyer, told POLITICO. “We‘re not seeing any
increased activity from Russia, either.”

The market's digital nature also means data can used to “identify crypto wallets
controlled by sanctioned entities, as well as other wallets which have
significant previous exposure to those identified wallets,” Chainalysis' Malcolm
said.


IT’S EXPENSIVE

Assuming oligarchs want to move billions of rubles, they would have to make many
smaller transactions to avoid rousing too much suspicion. But two big hurdles
would await them, assuming they can operate under the radar.

First, cryptocurrencies such as Bitcoin have a finite amount of assets for sale.
So the more an oligarch buys of a particular crypto, the more expensive that
digital asset class becomes. And buying into a self-inflated bubble is risky,
especially in crypto’s volatile market.

Second, the processing of cryptocurrencies also isn’t free. So-called gas fees
are attached to the blockchain technology that underpins crypto, and they climb
quickly where there’s a spike in activity.



Large sums could be lost in these gas fees alone if a lot of wealthy sanctioned
individuals want to get money out of the country quickly. A spike in these fees
would also attract attention and flag a possible breach in the sanctions regime.


CASHING OUT IS HARD

Unless you live in El Salvador, it’s not easy to use cryptocurrencies to pay for
everyday goods and services. A Russian dodging sanctions would want to convert
crypto into hard cash at some point. You could transfer funds to a digital
wallet somewhere in the world for safe keeping — but then face the risk of
losing everything in a market dip. Bitcoin’s value on November 9 last year of
€67,617 almost halved in value by late January, for example.

“You cannot live forever in the crypto world — at some point you have to convert
crypto in FIAT,” said one EU official speaking of the sanctions. As he
explained, Russians will either need a broker in the shape of a crypto exchange
or a bank to make that conversion, and that, too, would attract attention.

“We are monitoring what is happening on the crypto asset market in close
cooperation with EU agencies,” he added.

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More from ... Bjarke Smith-Meyer



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