Russia Could Use Cryptocurrency to Ease US Sanctions
When the United States barred Americans from doing business with Russian banks, oil and gas developers and other companies in 2014, following the country’s invasion of Crimea, the hit to Russia’s economy was swift and heavy. Economists estimate that sanctions imposed by Western countries cost Russia $50 billion annually.
Since then, the global market for cryptocurrencies and other digital assets has boomed. This is bad news for sanctions enforcers and good news for Russia.
The Biden administration on Tuesday imposed new sanctions on Russia over the conflict in Ukraine, aimed at curtailing its access to foreign capital. But Russian entities are preparing to blunt some of the ill effects by making deals with people around the world willing to work with anyone, experts said. And, he says, those entities could use digital currencies to bypass control points that governments rely on – primarily the transfer of funds by banks – to block deal execution.
“Russia has a lot of time to think about this specific outcome,” said Michael Parker, a former federal prosecutor who now heads the money-laundering and sanctions practice at Washington law firm Ferrari & Associates. “It would be naive to think that they didn’t fix this scenario at all.”
Sanctions are some of the most powerful tools the United States and European countries have to influence the behavior of nations they do not consider allies. The United States in particular has been able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and is used in payments around the world. But US government officials are becoming increasingly aware of the potential of cryptocurrencies to cushion the impact of sanctions and are stepping up their investigation of the digital asset.
To enforce restrictions, the government makes a list of people and businesses that its citizens should avoid. Anyone caught engaging with a member of the list faces hefty fines. But the real key to any effective sanctions program is the global financial system. Banks around the world play a major role in enforcement: they watch where money comes from and where it’s tied, and anti-money laundering laws require them to block transactions with those entities. who are subject to sanctions and report what they observe to the authorities. But if banks are the eyes and ears of governments in this area, the explosion of digital currencies is blinding them.
Banks will have to comply with “Know Your Customer” rules, which include verifying the identity of their customers. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are rarely as good at tracking their customers as banks, even though they must comply with similar regulations. In October, the US Treasury Department warned that cryptocurrencies posed a serious threat to the US sanctions program and that US officials needed to educate themselves about the technology.
Experts said that should it choose to evade sanctions, Russia has several cryptocurrency-related tools at its disposal. It just requires finding ways to trade without touching the dollar.
The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without converting it to dollars first. Hacking techniques such as ransomware could help Russians steal digital currencies and recover revenues caused by sanctions.
And while cryptocurrency transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia could help hide the origins of such transactions. This would allow businesses to do business with Russian entities without being traced.
There is a precedent for this type of workaround. Iran and North Korea are among countries that have used digital currencies to mitigate the effects of Western sanctions, a trend that US and UN officials have recently noticed. For example, North Korea has used ransomware to steal cryptocurrency to fund its nuclear program, according to a United Nations report.
In October 2020, representatives of Russia’s central bank told a Moscow newspaper that the new “digital ruble” would make the country less dependent on the United States and better able to resist sanctions. It would allow Russian entities to transact outside the international banking system with any country wishing to trade in the digital currency.
Russia could find interested partners in other countries targeted by US sanctions, including Iran, which is also developing government-backed digital currencies. According to the World Bank, China, Russia’s largest trading partner in both imports and exports, has already launched its own central bank digital currency. The country’s leader Xi Jinping recently described China’s ties with Russia as “no boundaries”.
Developing systems in which central banks directly exchange digital currencies pose new risks, said Yaya Fanusi, a fellow at the Center for a New American Security, who has studied the effects of cryptocurrencies on sanctions. “The reduction in the power of US sanctions comes from a system where these nation-states are able to transact without going through the global banking system.”
In early February, independent sanctions watchers told the UN Security Council that North Korea was using cryptocurrencies to fund its nuclear and ballistic missile program, according to Reuters. (A spokesman for Norway’s Permanent Mission to the United Nations confirmed the existence of the report, which has yet to be made public.) In May, consulting firm Elliptic described how Iran is using revenue from bitcoin mining to finance its borders. was doing. Ability to sell oil due to sanctions.
Russian entities that are subject to sanctions can deploy their own piracy tactics using ransomware attacks. The playbook is straightforward: A hacker breaks into a computer network and locks up digital information until the victim pays to release it, usually in cryptocurrency.
Russia’s attack on Ukraine and the global economy
A growing concern. Russia’s attack on Ukraine could cause a huge jump in energy and food prices and could scare off investors. The economic damage from supply disruptions and economic sanctions will be severe in some countries and industries and go unnoticed in others.
Russia is at the center of a growing ransomware industry. Last year, nearly 74 percent of global ransomware revenue, or more than $400 million worth of cryptocurrency, went to entities affiliated with Russia in some way, according to a February 14 report by blockchain-tracking firm Chainalysis.
According to Chainalysis, illicit money has also flown into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency and generated over $1 billion in sales in 2020. The platform’s strict rules – sellers are only allowed to liquidate cryptocurrency through certain regional exchanges – have made it difficult for the researchers to follow the money.
“We know that no questions have been asked, and we know that Hydra operates not only across Eastern Europe but throughout Western Europe,” said Chainalysis research director Kim Grauer. “Certainly there is cross-border trade happening.”
Digital currencies all use blockchain technology, which is a form of computer code that can be publicly viewed by anyone, anywhere. This public ledger monitors the movements of individual digital coins from one “wallet” – called an online repository for digital assets – to another. In theory, this should let the authorities track all crypto transactions and prevent banned entities from completing them.
But the technology behind Hydra hides the source of the transaction, offering a potential tool for Russian users to transfer money outside the country’s borders. On its own, Hydra is not yet large enough to handle the transaction volume that Russia would need to successfully evade sanctions. But other money-laundering techniques — including “nests,” in which an illegal market buries itself within a larger, legitimate framework to hide its activities — can also help.
There are signs that the United States is increasing surveillance of cryptocurrency activity. On February 17, the Justice Department announced that it had created a new national cryptocurrency enforcement team, a move that emphasized that federal prosecutors were paying extra attention to bad behavior among cryptocurrency users.
The former prosecutor, Mr. Parker, said that the February 8 arrests of a Manhattan couple on charges of stealing $3.6 billion in bitcoin from Hong Kong cryptocurrency exchange Bitfinex were “a concrete example of the very good of the government and the speed they need to address it.” To be able to put.”
Administration officials are also urging the cryptocurrency industry to put in place internal controls that prevent bad actors from using their services. In October, the Treasury Department published a 30-page sanctions-compliance manual recommending that cryptocurrency companies use geolocation tools to weed out customers in restricted jurisdictions. The report states that in many cases, crypto companies have taken months or even years to complete such compliance processes.
As the industry begins to mature, this may change. Chainalysis provides a “Know Your Transaction” tool that alerts companies when blacklisted entities are using their services. Last year, the company more than doubled the number of its private sector customers, many of whom use compliance tools.
But knowledgeable cryptocurrency users can find ways around the blacklist.
“A Treasury designation of a crypto wallet address is not foolproof,” said Mr. Fanucci of the Center for a New American Security. “That designated actor can still open a new wallet somewhere else. You can do that fairly easily.”
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