The US appears to be using a new method to increase pressure on Putin. Sanctions now target cryptocurrencies like Bitcoin and Ethereum.
Early Wednesday, the Department of Justice announced the formation of a new task force tasked with enforcing sanctions. It will focus on efforts to exploit cryptocurrencies to dodge US sanctions. It will launder revenues of overseas corruption. Or it will evade US reactions to Russian military aggression as part of this. Russia’s access to digital money becomes a target as the US and its allies. It includes the usually neutral Switzerland, impose harsh sanctions on Moscow.
The fear is that the Kremlin, as well as other auxiliary actors backing Ukraine’s onslaught, would circumvent the sanctions’ framework by using digital tokens. Which are neither owned or issued by a central authority like a bank. Bitcoin, like most cryptocurrencies, is decentralized and borderless, meaning it is not constrained by national borders. Digital currencies are also resistant to transaction blockage because there is no central authority to do so.
Statistics from crypto data provider Kaiko show that since Russia invaded Ukraine on February 24. Transactions on centralized bitcoin exchanges in both the Russian ruble and the Ukrainian hryvnia have increased to their highest levels in months. This is most likely one of the reasons why Ukraine asked all of the top cryptocurrency exchanges to block Russian users. This was a request that many major players denied. They believe that such a step would contradict the whole reason why cryptocurrencies exist.
Crypto is not an Alternative
Despite rising crypto acceptance and increased rhetoric from international leaders about blocking Russians from digital currency exchanges, crypto as a means of circumventing sanctions isn’t really a realistic alternative at scale. To begin with, crypto markets have limited liquidity. Additionally, token transactions’ design is to be traceable via the blockchain, a public record.
Diversifying away from US treasuries and the dollar was an important part of Putin’s strategy. As he cultivated a new debt structure based primarily on euros and gold. Putin’s war fund includes $630 billion in foreign reserves, which operate as a financial buffer against the impact of broad sanctions. The underlying financial fundamentals of the country have also aided in the shock’s absorption.
Russians is Not New to This
Sanctions are nothing new to Russia, and its political class has spent years devising innovative workarounds. After Russia annexed the Crimean Peninsula in Ukraine in 2014, it met with international outrage. A Russian-made surface-to-air missile launched over a pro-Russian separatist-held area shot down a passenger airliner flying from the Netherlands to Malaysia in eastern Ukraine in the same year. Since then, President Vladimir Putin has devised buffers to protect Russia from the repercussions of Western sanctions. Which experts say cost Russia $50 billion each year.
Sanctions are Good as KYC
However, according to Sarah Beth Felix, an expert on anti-money laundering and sanctions compliance, sanctions are only as good as the KYC (Know Your Customer) onboarding requirements. “The data defines whether or not the sanctions are genuinely effective based on how rigorous that is,” Felix explains. “Whether it’s crypto, fiat, wires, payable-through accounts, or anything else, the underlying data that’s gathered and confirmed on the ownership of the company, the individual, and all that stuff lives or dies on the underlying data that’s gathered and confirmed on the ownership of the company, the individual, and all that stuff.”
Bitcoin is Not an Option
Even if Russia decided to utilize cryptocurrency to circumvent sanctions, its economy is too large, the cryptocurrency market is too small, and any large transactions would almost certainly be identified. “The magnitude of the crypto markets is insignificant in comparison to what’s going on in the financial sector,” Fanusie remarked.
The US imposed new financial and equity limits on some of Russia’s most important state-owned firms. Which have assets worth about $1.4 trillion. These companies will be unable to raise funds in the United States, which is a vital source of funding. The overall market capitalization of cryptocurrency is approximately $1.9 trillion.
Because cryptocurrencies trade thinly, purchasing significant amounts of digital tokens such as bitcoin can be challenging. On Binance, the bitcoin-ruble pair has a maximum market order of roughly $250,000. Compared to the bitcoin-USD pair, which has a maximum market order of around $2.6 million.
Cryptocurrencies aren’t the Haven of Anonymity
The amount of work that the Russian government would have to accomplish would be several times that of what ordinary Russian individuals are already undertaking. This would not only be problematic due to liquidity constraints, but it would also raise red flags about the transaction.
While privacy tokens such as Monero, Dash, and Zcash provide additional anonymity, they are less liquid than other tokens. Because many regulated exchanges refuse to offer them due to legal concerns. Crypto exchange compliance with the global sanction framework, however, hasn’t always been stellar. Fanusie claims it’s improving as these platforms expand their internal compliance teams. Federal prosecutors are also beefing up their crypto-policing efforts. The US Justice Department announced a new cryptocurrency enforcement unit in February.
Why not Use Digital Ruble?
The Bank of Russia issued a consultation document for a “digital ruble” in October 2020. Central Bank Governor Elvira Nabiullina stated that the country intends to develop and launch it this year.
The digital ruble would be a virtual version of Russia’s national currency. The Bank of Russia centrally regulates it and is based on distributed ledger technology, similar to China’s digital yuan. A Moscow publication reported at the time, quoting officials, that a digital ruble would minimize reliance on the currency while also reducing exposure to sanctions.
Former US Treasury official Michael Greenwald argued that a digital currency would be difficult for the US far before Russia’s invasion of Ukraine. “If Russia, China, and Iran each develop central bank digital currencies that operate outside the dollar, and other countries follow suit,” he said. “That’d be concerning.”
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