Russian Financiers Could Turn To Crypto To Sidestep Sanctions


  • Current sanctions target Russian banks, tech companies and aerospace operators.
  • Russia has recently moved to regulate cryptocurrencies, which industry participants say is no coincidence.

Following a new round of sanctions aimed at isolating Russian banks from the global financial system, experts are looking at cryptocurrencies as a means of circumventing the blacklist.

The measures imposed by the United States and Europe target Russian banks, technology companies and aerospace operators, a wide swath of the country’s economy, following an escalation of Russian President Vladimir Putin’s unprovoked invasion of Ukraine. Putin.

Leah Wald, CEO of crypto asset manager Valkyrie Investments, said it is unclear whether Russia would use crypto to circumvent sanctions, but “the likelihood that they could make such a pivot is very high.”

It’s worth keeping in mind that using digital assets instead of US dollars is likely a sanctions violation, legal experts say.

The top sanctions watchdog in the US, the Office of Foreign Assets Control (OFAC), “considers its sanctions to apply to activity conducted in cryptocurrencies,” according to Evan Abrams, an attorney at Steptoe & Johnson who specializes in sanctions.

“Typically, they would view a transaction made in bitcoin or another asset the same way they would view a transaction made in dollars,” Abrams said.

US-based cryptocurrency exchanges and wallet providers must follow the same know-your-customer (KYC) and reporting standards as banks, but decentralized exchanges and marketplaces in other countries may offer a alternative solution.

“As long as they don’t use a US regulated entity to buy and move crypto, I don’t think it’s going to be difficult [to avoid sanctions]said David Tawil, president of cryptocurrency hedge fund firm ProChain Capital.

Employing several different exchanges would also make it easier for Russian financiers to cover their tracks, according to Wald, a former World Bank analyst.

“Russian companies could quite easily use Russia-based exchanges or brokers as fiat on-ramps, and then transact in crypto through multiple decentralized exchanges or through other tools intended to hide the source of funds,” Wald said. “Then entities willing to engage with them could potentially transact without facing any real consequences.”

The punitive measures come shortly after the Russian Finance Ministry advanced with its cryptocurrency regulatory plans, which duplicate the country’s ongoing policy of banning cryptocurrencies as a form of payment, a potential challenge for companies seeking to circumvent sanctions.

Russia’s central bank’s digital currency, the developing digital ruble, could allow businesses to trade legally without the dollar in a state-sanctioned workaround.

“It is probably no coincidence that Russia has recently moved to legalize cryptocurrencies in a bid to standardize their regulation and use, perhaps as a proactive measure to combat any potential sanctions arising from an invasion of Ukraine,” Wald said.

In October, OFAC published new guide on cryptocurrencies and sanctions compliance, highlighting, in the eyes of the agency, the growing threat that blockchain technology poses to the central control points of governments.

Penalties for violating OFAC sanctions without permission can result in a fine of up to $20 million and a prison sentence of up to 30 years.

The severity, Abrams said, depends on whether the violations are against primary or secondary US sanctions. The former requires a US citizen or resident in the mix.

When it comes to secondary sanctions, where non-US citizens operate in other countries, OFAC has little legal ability to pursue civil or criminal sanctions, according to Abrams.

“But what they can do is essentially impose sanctions on those actors,” he said. “If a person is interacting with the sanctioned person, the first person may be sanctioned similarly to the person he is interacting with.”


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  • Casey Wagner

    blocks

    senior reporter

    Casey Wagner is a New York-based business journalist who covers regulation, legislation, digital asset investment firms, market structure, central banks and governments, and CBDCs. Before joining Blockworks, she reported on markets at Bloomberg News. She graduated from the University of Virginia with a bachelor’s degree in Media Studies. Contact Casey by email at [email protected]