Days after Russia launched a large-scale invasion of Ukraine in February, Western states, led by the US and the European Union, imposed massive sanctions on the Russian economy, hoping to drive Moscow into an economic crisis that would lead to a military withdrawal. .
But within days, US officials and top financial analysts warned that Moscow could use cryptocurrency to evade Western sanctions, fearing that blockchain-based platforms could allow Russians to circumvent US anti-money laundering (AML) regulations and avoid an economic collapse. to prevent .
Mark Lurie is the CEO and co-founder of Shipyard software. He is a serial entrepreneur and investor who previously founded two venture-backed startups.
One possible scenario is that Russian miners use the country’s abundant energy reserves to mine bitcoin (BTC), then use unhosted wallets to move those bitcoins through a series of shady crypto transactions — likely involving chain hopping, tumblers, and peers. to-peer (P2P) marketplaces – to convert them into US dollars to pay for goods. The well-known mixer Tornado Cash, which was approved by the US Treasury Department in August, has already been used to launder about $9 billion, so it may seem like a viable option.
But nearly seven months later, Russia has not gone down this road. In fact, very little Russian money has been funneled through crypto. In April, the Wall Street Journal reported that daily trading of cryptocurrencies in rubles rose to $6.6 billion ($46 million) in the days following Russia’s invasion, before falling rapidly to 1 billion rubles ($7 million). .
Read more: US Treasury Sanctions Russian Paramilitary Group Crowdfunding Ukraine War With Crypto
As of August, Russian crypto trading volume continues to decline, with 24-hour ruble-to-tether (USDT) trading volume currently ranging between 10s and 100s of millions of rubles per day, below the peak of 4.3 billion rubles in early March.
The words of Todd Conklin, head of the Treasury’s cybersecurity portfolio, appear to be true. “You can’t flip a switch overnight and run a G-20 economy on cryptocurrency,” he said in March. “There just isn’t enough liquidity.”
If crypto offered a potential loophole, we could expect Russia to do its utmost to drive through it. But so far we have seen no signs of a concerted Russian effort – governmental or non-governmental – to increase crypto liquidity.
Instead, Russian President Vladimir Putin seems to be making all his efforts to build alternative financial rails to counter the dollar-based SWIFT financial communications system. This includes Russian SWIFT competitor SPFS (System for Transfer of Financial Messages) and its Visa/Mastercard competitor, MIR payments.
Moscow has strongly promoted SPFS to key trading partners that are also Western allies, such as India, Israel and the United Arab Emirates. About two dozen banks from nearly a dozen countries have joined SPFS, including India, Turkey, Iran, China, Germany, Armenia and Switzerland.
Meanwhile, five Turkish banks adopted MIR in July and Iran is in advanced talks to join the network. India, Cuba and Sri Lanka have also expressed interest in joining Mir.
Putin’s response to sanctions indicates that he and his cronies view traditional financial instruments as more porous than crypto. The Russian president seems to believe that building a traditional, albeit non-Western, financial network is a better way to evade sanctions than crypto.
And he’s probably right.
The first reason is that transaction data in the traditional financial system is insurmountable and likely full of errors. For example, U.S. regulations require that if a bank sees a series of transactions of $9,999, ($10,000 is often the reporting threshold), it must send a Suspicious Activity Report (SAR) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
In 2019, US banks filed 2.7 million SARs, or about 10,000 per business day. And these are not short, simple documents, leaving room for error.
Read more: Crypto Miners From US, EU Remain In Russia Despite War, Sanctions
Peter Dittus, former secretary general of the Bank for International Settlements, the international bank for the world’s central banks, acknowledged this in a recent conversation, after highlighting the advantages of the traditional financial system.
“[The western banking system] However, it has two major flaws: the inability to simultaneously check all transactions in the world for dubious origins and an over-reliance on self-centered banks and compliant states,” explains Dittus.
“The main limitation of the traditional financial system is that transaction data is nearly impossible to verify,” he added. In 2019, after a FinCEN employee leaked 2,100 SARs, it took 400 journalists 16 months to investigate them.
This brings us to the second reason, which is that the blockchain transaction data is error-free and publicly accessible. All on-chain actions are tracked through a permanent, immutable, and publicly viewable record. Of course, cryptocurrencies are anonymous to the extent that other users and exchanges may not know your identity, but all users leave breadcrumbs behind.
Whenever a cryptocurrency user makes a transaction, their wallet or digital address communicates with a crypto exchange or another user, leaving digital fingerprints for authorities to track. This may not quite fit into the traditional know-your-customer (KYC) framework of current AML standards, but it has the potential to create effective new tools such as know-your-transaction (KYT) – another means for the same purpose.
The success of dictators, traffickers, terrorists and drug cartels often depends on their ability to launder money through the traditional financial system. Instead of giving them a lifeline as some suggest, cryptocurrency gives us a chance to bankrupt them – and now we may have proof.
The world knows all too well that no route is too distasteful for Putin to get what he wants, from committing wartime atrocities to highly sophisticated digital meddling in electoral democracy. That his efforts to evade Western sanctions have not yet included crypto speaks volumes about its usefulness as a money laundering agent.