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Finance & Tax


RUSSIA’S HIDDEN TOOL TO UNDERMINE SANCTIONS

Rapidly evolving digital markets have created new ways to subvert heavy-duty
penalties that were designed to cut off wealthy Russians and state-backed
institutions from the U.S. financial system in the aftermath of the invasion of
Ukraine.



With Moscow now a hotbed for high-risk exchanges and mixing services — which
scramble the ability to track the flow of transactions on public blockchains —
crypto marketplaces could blunt attempts to freeze Russian assets. | Kin
Cheung/AP Photo

By Sam Sutton

02/25/2022 06:35 PM EST

 * 
 * 

 * * Link Copied
 * * 
   * 
   * 

There’s a crypto-sized hole in U.S. sanctions targeting Russian financial
institutions and oligarchs.

Rapidly evolving digital markets have created new ways to subvert heavy-duty
penalties that were designed to cut off wealthy Russians and state-backed
institutions from the U.S. financial system in the aftermath of the invasion of
Ukraine. With Moscow now a hotbed for high-risk exchanges and mixing services —
which scramble the ability to track the flow of transactions on public
blockchains — crypto marketplaces could blunt attempts to freeze Russian assets.



“I don’t think that we’re where we need to be in terms of preventing individuals
who are subject to sanctions from moving value and operating using the
pseudonymity of cryptocurrency,” said Stuart Levey, who was Treasury’s sanctions
czar under Presidents George W. Bush and Barack Obama. “I don’t think that we in
the U.S. have fully grappled with that risk.”



Offshore exchanges for buying and selling digital assets often don’t require
identifying information that could assist financial regulators and law
enforcement, said Levey, who’s also the CEO of Facebook’s now-scuttled
cryptocurrency project Diem. The rise of decentralized finance platforms —
peer-to-peer networks that allow parties to transfer assets without having to go
through intermediaries like banks or credit services — also plays a role.

“If somebody can bypass all of those intermediaries and bypass the fact that
they have to reveal their true identity to enter the system and to conduct a
transaction,” he said, “then that leads to the potential for sanctions evasion.”

Treasury officials say they aren’t overly worried about crypto undermining the
effort to choke off the Kremlin’s access to capital. Laundering large amounts of
money through a dizzying array of digital wallets and exchanges is expensive,
time-consuming and would likely be visible in the broader crypto market, given
the massive investment portfolios of individuals and institutions named in the
sanctions.

“The scale of what they have to move, and where they have to move things from,
[crypto’s] not necessarily going to be that concerning,” said Todd Conklin,
counselor to the deputy Treasury secretary. Any attempt to move that much money
through exchanges would contribute to “a bit more of a spike in the crypto
market, in my view, than has been observed lately.”

As Russian forces advanced toward Kyiv, President Joe Biden on Thursday unveiled
another round of sanctions that would freeze assets held by Russia’s largest
banks and members of Vladimir Putin’s inner circle. The U.S. has also moved to
block the Russian government’s access to sovereign debt markets and high-tech
industries in an attempt to force a suspension of the conflict.

The latest restrictions arrive amid Moscow’s emergence as a hub for washing
digital assets collected through ransomware attacks, darknet marketplaces and
other scams. The data firm Chainalysis, which specializes in tracking activity
on blockchain networks, identified several Moscow-based crypto businesses whose
services help facilitate schemes that have generated hundreds of millions of
dollars for cybercriminals.

Prior to the invasion of Ukraine, Treasury sanctioned two Russian crypto
exchanges that were found to have processed transactions that had been tied to
ransomware attacks and other illegal activities. The exchanges, Suex and Chatex,
were both tied to Russian investor Egor Petukhovsky — who denied participating
in illegal activity via his Facebook page last year.




U.S. exchanges require customers to submit information that could help agencies
trace assets to a specific user, but decentralized services and certain
off-shore exchanges can be used to move assets without identifying information.

“While the U.S. government can always do more, they’re not doing nothing. They
are aware that this is an issue, and they are using multiple tools at their
disposal to make sure that they have this area covered,” said Inca Digital CEO
Adam Zarazinski, whose firm helps federal regulators track activity in crypto
markets. “The Russian government is absolutely aware that cryptocurrency is a
major option for them.”

Other authoritarian regimes under sanction have already started to lean on
crypto markets to finance government projects. United Nations security experts
have linked North Korea to attacks that netted hundreds of millions of dollars,
some of which were laundered through peer-to-peer decentralized finance
platforms. Analysts have also found that Iran’s Bitcoin mining industry is
aiding its ability to duck sanctions that block its institutions from accessing
financial markets.

The Treasury Department previously identified crypto as a major threat to
sanctions programs in a report released last fall, noting that federal
authorities would need to bulk up institutional knowledge of digital assets and
associated services or risk diminishing their effectiveness. Mixing services,
particularly if coupled with anonymity-enhanced tokens like Monero, are a potent
mix for those looking to move large amounts without leaving fingerprints.

That isn’t to say there aren’t drawbacks to the strategy. Most crypto assets are
traded on publicly visible blockchains that make it easier for law enforcement
agencies or third-party agencies to track the flow of payments from wallet to
wallet. And while mixing services can be useful, they can also be costly for
those trying to launder large quantities.

“We have never had more visibility of financial flows and money laundering than
we do today in cryptocurrency,” said Ari Redbord, a former Treasury official who
now heads legal and government affairs for the blockchain intelligence company
TRM Labs. While obfuscation tools can be useful for smaller criminal
organizations and hackers, “it is hard to offramp crypto in large amounts.”


MOST READ


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 * Filed under:
 * Sanctions,
 * Russia,
 * Treasury Department,
 * Finance & Tax,
 * Cryptocurrency,
 * Ukraine,
 * Russia’s War on Ukraine




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   to limit the number of times a video or an article is presented to you).
   
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USE PRECISE GEOLOCATION DATA 260 PARTNERS CAN USE THIS PURPOSE

Use precise geolocation data


With your acceptance, your precise location (within a radius of less than 500
metres) may be used in support of the purposes explained in this notice.

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ACTIVELY SCAN DEVICE CHARACTERISTICS FOR IDENTIFICATION 125 PARTNERS CAN USE
THIS PURPOSE

Actively scan device characteristics for identification


With your acceptance, certain characteristics specific to your device might be
requested and used to distinguish it from other devices (such as the installed
fonts or plugins, the resolution of your screen) in support of the purposes
explained in this notice.

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ENSURE SECURITY, PREVENT AND DETECT FRAUD, AND FIX ERRORS 518 PARTNERS CAN USE
THIS PURPOSE

Always Active

Your data can be used to monitor for and prevent unusual and possibly fraudulent
activity (for example, regarding advertising, ad clicks by bots), and ensure
systems and processes work properly and securely. It can also be used to correct
any problems you, the publisher or the advertiser may encounter in the delivery
of content and ads and in your interaction with them.

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DELIVER AND PRESENT ADVERTISING AND CONTENT 520 PARTNERS CAN USE THIS PURPOSE

Always Active

Certain information (like an IP address or device capabilities) is used to
ensure the technical compatibility of the content or advertising, and to
facilitate the transmission of the content or ad to your device.

List of IAB Vendors‎ | View Illustrations 

MATCH AND COMBINE DATA FROM OTHER DATA SOURCES 366 PARTNERS CAN USE THIS PURPOSE

Always Active

Information about your activity on this service may be matched and combined with
other information relating to you and originating from various sources (for
instance your activity on a separate online service, your use of a loyalty card
in-store, or your answers to a survey), in support of the purposes explained in
this notice.

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LINK DIFFERENT DEVICES 331 PARTNERS CAN USE THIS PURPOSE

Always Active

In support of the purposes explained in this notice, your device might be
considered as likely linked to other devices that belong to you or your
household (for instance because you are logged in to the same service on both
your phone and your computer, or because you may use the same Internet
connection on both devices).

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IDENTIFY DEVICES BASED ON INFORMATION TRANSMITTED AUTOMATICALLY 498 PARTNERS CAN
USE THIS PURPOSE

Always Active

Your device might be distinguished from other devices based on information it
automatically sends when accessing the Internet (for instance, the IP address of
your Internet connection or the type of browser you are using) in support of the
purposes exposed in this notice.

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