On Thursday, March 24, Pavel Zavalny, Chairman of the Energy Committee of the Russian State Duma, announced payment terms for countries seeking to buy oil and gas from Russia. It is an extension of the Russian government previous statement to “hostile countries” (addressed to most member states of the European Union) saying that they should pay for their energy with rubles or gold.
US sanctions
Both announcements from Moscow are part of a response to the politics of the Biden administration White House Fact Sheet saying that the United States will impose sanctions on Russia. Primarily, the US sanctions were designed to impose export controls designed to hinder imports from Russia, block Russian banks from completing transactions with Western companies, and prevent access to Russian financial assets in Western financial institutions. .
This latest news has raised the question of whether cryptocurrencies, as a whole, can become instruments for sanctions evasion. The US sanctions, as stated in their fact sheet, did not mention the use of cryptocurrencies. However the Treasury Department stated in early March that the sanctions would apply to US citizens and digital asset companies that deal in cryptocurrencies, i.e. exchanges. The European Central Bank has also expressed such concerns on the use of cryptocurrencies to circumvent sanctions. For example, if an exchange like Binance helped the Russian government with payments, Binance could be held liable for violating sanctions.
All exchanges can now be pressured to shut down their Russian operations. And, in fact, some of them have. The Ukrainian deputy prime minister called for cryptocurrency exchanges to block all russian users. Up to this point, Bitwell and Coinbase Global have said that they will not block ordinary Russian users. Having said that, Coinbase blocked those accounts belonging to individuals and corporations that were already on the sanctions list. Binance has been accused to continue working with the Russian government. Recent trading volume on Binance’s USDT/RUB pair supported the allegation, as had reached its peak from a norm of around $10 million to $34 million on February 28, 2022, and then to $37 million on March 6. However the volume it has since declined, to an even lower level than it had originally been.
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Would Russia use Bitcoin to evade sanctions?
No one is suggesting that the sanctions will prevent ordinary Russians from using bitcoin. It’s just that Western exchanges may refuse to trade with them for fear of being shut down for being involved with a sanctioned entity.
US sanctions legally restrict Americans from trading with Russians, but the sanctions may cause problems for Russian attempts to use other forms of cryptocurrencies and platforms. Sanctioned Russians can use stablecoins such as USDT, over-the-counter (OTC) desks, or cross-border exchanges (perhaps via peer-to-peer or fiat exchanges domiciled in a country friendly to Russia). Sooner or later, the money will have to be collected, which means it will have reached that end point where law enforcement agencies can see where the illicit funds have landed and then step in to seize them.
The sanctions move comes too soon for the Russian government to deploy its digital ruble, the Bank of Russia’s central bank digital currency (CBDC). In fact, the Ministry of Finance admitted in October 2020 that the digital ruble would be subject to the Financial Action Task Force’s strict anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations and suspicious activity reporting that other CBDCs will suffer. That closes any chance of the digital ruble being used to circumvent sanctions.
Meanwhile, there are some skepticism that the Russian government could use bitcoin as a payment solution. Bitcoin may be pseudonymous (you can see the identifiers on the blockchain, but the real identities remain obscure), but there’s enough information for an open source intelligence analyst (OSINT) to connect the dots and show that Russia is using bitcoin wrongly. a manner that violates sanctions.
Cooperation with US sanctions meets with a BRICS Wall?
But what makes this new sanctions initiative for the US government difficult is that we are not just dealing with wandering Americans and digital asset companies looking to transact bitcoin with Russia. We are dealing with entire states, one of which has just offered to set up bitcoin exchange facilities to organize oil and gas payments. The actual scope of US sanctions depends on how much authority the country has over other countries like China, Turkey, and indeed any other country that seems closer to Russia’s sphere of influence than the US’s. Recent actions by big economies like China, India, Brazil, and now South Africa suggest that the US does not have as much global influence as it might have twenty years ago.
What might surprise people is that Russia is offering bitcoin as a form of payment to two countries who have so far shown hostility towards Bitcoin. Porcelain banned cryptocurrency mining and trading to take place in the fall of 2021. Turkey has a partial ban on bitcoin, significantly it has banned its
citizens use it for payments as part of an effort to protect the troubled turkish lira. It is possible that Russia is taking advantage of a currency swap agreement that China had signed with Turkey in june 2021. Perhaps a bitcoin retrofit could be in play.
Would countries really use Bitcoin for oil payments?
It will be interesting to see exactly if these bitcoin/oil/gas trades take place. There is no mention of this in Russian news sources, such as Russian news agency either russia today. I’ve thought of three reasons why this might just be bragging:
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Even if Zavalny’s offer is genuine, it may be difficult for anyone to judge whether oil transactions have taken place for bitcoin if all three governments wish to hide the fact that they used bitcoin. If they do not want a record of their transactions denominated in bitcoin, they will denote their bitcoin trade in rubles or the associated currency. There is probably a record of the transaction on the blockchain anyway but as I said earlier Bitcoin is pseudonymous and there are ways and means to split a purchase into multiple mini-transactions to hide the scale of the exchanges and to mistreat any Unwanted blockchain audit by third parties. This kind of Bitcoin transparency has revealed North Korean activity on one occasion.
2. We don’t know if Russia, China, or Turkey have enough bitcoin-tradable rubles, yuan, or lira to make regular payments for the amounts of oil or gas these big economies will demand. In other words, the Bitcoin market is still too small to accommodate the financial demands of three large G20 countries to use it to hide their tracks from the US government.
3. The US can only impose sanctions for violations if the US dollar has been used. Both Russia and China have been looking for ways to sideline the US dollar from their trade payments. since at least 2014. It seems to me much more likely that China and Turkey will use a gold exchange than a bitcoin exchange, simply because they already have practice executing such exchanges. In 2013, Turkey organized a Three way gold swap with India and Iran for Iranian oil as part of Iran’s defiance of the Obama administration’s sanctions on Iran at the time. In 2017, China had established a bank backed by gold RMB-oil futures contract as a mechanism to bypass the US dollar for oil trade settlement. The gold reserves of these countries are huge and they have a long-standing strategy to circumvent the US dollar payment architecture. Bitcoin will leave an immutable, time-stamped “paper” trail that allows for real-time auditing. Records of a gold transaction will be easier for these countries to control.
final thoughts
The strength of these US sanctions is unprecedented because the entire Russian economy is in the crosshairs. This means that ordinary Russians have been caught up in the sanctions program that has so far only affected the Russian government, Russian companies and high-profile Russian individuals. Time will tell if the US sanctions will work as intended but, on the Bitcoin side, it presents a dilemma for the community because bitcoiners have often boasted that Bitcoin doesn’t care who you are as long as when you are who you say you are. are and you don’t spend double your bitcoin.
This is a guest post by Stephen Thompson. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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