Why AML experts say blockchains won’t help Russia evade sanctions

As the US and other governments around the world levy heavy sanctions against Russia in an attempt to cut the nation off from money it needs to continue its assault on Ukraine, lawmakers and regulators alike have expressed their intent to make sure that the Russian government and other sanctioned individuals can’t use cryptocurrency to evade those sanctions. 

But experts say that policymakers should rest assured that the crypto ecosystem can’t be much of a life raft — at least at its current scale.

Most crypto firms are compliant with sanctions laws and have expressed their intention to continue to follow related guidance from the Treasury Department. Meanwhile, scant evidence has emerged that crypto is actually being used for sanctions evasion. 

Still, politicians are rallying around the issue. 

Senator Elizabeth Warren has introduced a bill that would empower the Treasury to compel crypto firms to block all Russian users and sanction those who are found to have provided any aid to a questionable Russian actor. Representative Brad Sherman has stated his intention to introduce a companion bill in the House of Representatives.

In response to claims that crypto can be used for illicit activity, crypto advocates often point to the transparency and traceability of blockchain transactions, claiming on-chain analytics make it easier to identify bad actors than if they used fiat currency.

But in recent weeks, another argument has emerged: that there simply isn’t enough accessible cash in the crypto space for it to serve as a meaningful avenue for evading sanctions related to the invasion of Ukraine. 

Liquidity, liquidity, liquidity

Experts do seem to agree that Russia will turn to crypto for some relief. The question is if Russia will find it.

On-chain data has shown a small rise in the volume of ruble-denominated crypto trading pairs after the invasion began, with increases in the tens of millions in US dollar terms. But professionals who study and track crypto money laundering say this isn’t nearly enough to meaningfully evade sanctions. 

The Treasury Department seems to agree with this. On March 2, Reuters reported that the National Security Council's director of cybersecurity Carole House said the scale of Russia’s needs “would almost certainly render cryptocurrency as an ineffective primary tool for the state.”

Russia has a history of money laundering and sanctions evasion, and it will likely look to cyber-attacks and other strategies to evade the penalties levied against it, according to Caroline Brown, a partner at Crowell & Moring who focuses on white-collar crime and international trade.

Russia is likely to search for additional ways that it can access the US dollar, said Brown, who previously worked at the Department of Justice and the Treasury. “One of the ways that it's going to look to evade sanctions is likely to be through using cryptocurrency.”

But Russia would have to come up with a massive pile of cash to evade sanctions in a way that would make a meaningful difference. According to Brown, there simply isn’t enough crypto-money available to do that. 

“That's going to require a lot of liquidity, and the amount of liquidity in crypto is still actually quite small when you compare it with the global currency market,” she said. “So getting the amount of crypto necessary to mitigate the effect of sanctions is going to be quite difficult.”

Kim Grauer, head of research at blockchain analytics firm Chainalysis, agrees. 

In an interview with The Block, Grauer addressed a question that Senator Warren asked during a recent Senate hearing: could a sanctioned Russian oligarch who already has “a billion in crypto” use blockchains to launder it? 

During the hearing, Chainalysis founder Jonathan Levin gave a fairly definitive answer: no, because there isn’t enough liquidity in the system for this kind of movement to go unnoticed.

Liquidity usually refers to funds that can be easily accessed, as opposed to locked-in activities that don’t allow simple withdrawals. In traditional finance, it can be easier to distinguish between liquid assets and illiquid assets like property. But in crypto, it’s less clear. Some of the supply is being held by people who are effectively permanently holding their funds. A lot is locked up in smart contracts. 

Chainalysis tracks these types of metrics closely. According to Grauer, the hypothetical oligarch in Warren’s question would not be able to sell off much of their money without it being noticed — even if they tried to move small amounts over an extended period of time. 

“So the counterargument to Elizabeth Warren is there's not actually even enough liquid supply of cryptocurrency to even be able to manage a small portion of the oligarchs wealth that they would need to liquidate, in an instance,” she said.

The firm is currently monitoring the movements of wallets it has determined belong to Russian “whales” — individuals holding more than $1 million in crypto. Since the start of the invasion, they’ve tracked just over $62 million transferred from these wallets, mostly to addresses associated with OTC desks and exchanges — including some that have been identified as high-risk, according to a recent blog post. Still, this doesn’t necessarily mean these transfers were to evade sanctions since it’s not known if these wallets are controlled by sanctioned entities.

Grauer argued that real sanctions evasion would likely look like more common money laundering activity, which may involve crypto but not rely completely on it. Sanctioned individuals may deploy a variety of illicit finance activities, spreading their funds around, rather than laundering all funds through crypto.

“I think far more likely is that there's a broad swath of approaches used and cryptocurrency is going to be one of them, which is why we are looking at it in smaller amounts rather than huge, large amounts,” said Grauer.

Chainalysis is also monitoring the recent foray into crypto by Russia’s biggest bank, Sberbank, which itself is a target of sanctions. In the days following the invasion, the Russian central bank gave Sberbank a license to facilitate crypto activities. It’s since issued its own crypto-token, called Sbercoin. 

“While Sbercoin’s performance and transaction volumes remain quite low right now, any trading of the coin by users in the United States and other countries that have sanctioned Sberbank could create exposure to sanctions risk,” Chainalysis said in its post.