Governments are on high alert for crypto in Russian sanctions evasion that nobody has seen yet

Public figures in the US and Europe have spoken with growing alarm about the threat of Russian sanctions evasion via crypto. As it stands, those fears remain unsubstantiated. 

The US, EU, UK, and the rest of the G7 nations have imposed crushing sanctions on Russia in response to the invasion of Ukraine. Amid the activity, a flurry of reports as to the risk of Russia using cryptocurrencies to evade those sanctions has emerged from major news outlets. The New York Times, Wall Street Journal, Bloomberg and Politico were among many to join the chorus, with sensational titles like “Russia's hidden tool to undermine sanctions.”

The past several days have seen that reporting translated into political discourse presenting a tough front on crypto. 

On February 28, Senators Elizabeth Warren retweeted the NYT report, saying “U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets.” Two days later, Warren’s office published a letter co-signed by three other democrats of the Senate Banking Committee asking the Treasury to account for OFACs work on sanction

The threat has picked up globally. “We are taking measures in particular on cryptocurrencies and crypto assets, which should not be used to circumvent sanctions,” said French finance minister Bruno Le Maire on March 2. 

But while everyone is on high alert for crypto in sanctions evasion, it remains speculation at this point, seemingly a product of immediate media attention. 

Jerome Powell, chair of the Federal Reserve, made this clear in response to questions on crypto’s role in sanctions evasion on March 2, noted in his testimony before Congress: “I don't really know the extent to which it's happening, but you read about it in the paper."

The prevalence of alarms over crypto instead emphasizes that crypto has become a hot-button issue, one that can command even more attention when combined with the war in Ukraine, which has dominated the news for the past two weeks. That attention then translates into standing political objectives.

Evidence of crypto use

To be fair, there are limited signs that crypto use is on the rise in Eastern Europe, including Russia. Some have been remarkably positive for the industry, especially Ukraine’s implementation of crypto wallets to gather global donations.  

As far as broader use, The Block recently reported that Binance had seen a factor of three increase in ruble volume. Chainalysis data across a broader set of centralized exchanges suggested an 8x rise in ruble/BTC volume, with hryvnia, the currency of Ukraine, seeing smaller increases. 

While those figures are meaningful, the actual numbers in question are in the tens of millions in USD terms. Relative to the needs of the Russian government and oligarchy in the crosshairs of Western sanctions, this represents just a slice. 

Coin Dance’s data from peer-to-peer Bitcoin marketplace LocalBitcoins showed that ruble-to-BTC trading went from 34 to 41 BTC between the weeks of February 19 and February 26. This factor that was slightly higher when measured in rubles because the value of the ruble has tanked over the same timeframe. 

Source: Coin Dance

Again, this increase is meaningful, but 41 BTC is worth roughly $1.75 million as of publication time. That is, again, insignificant for a sovereign Russian economy or even for the purposes of an individual member of Russia’s ruling class. 

…but evasion? 

Even the executive branch itself seems fairly hesitant to spotlight crypto in sanctions. 

On March 2, Hannah Lang of Reuters quoted National Security Council's director of cybersecurity Carole House as saying that the scale of Russia’s needs “would almost certainly render cryptocurrency as an ineffective primary tool for the state."

The Politico report likewise quoted a Treasury official saying that the scale at which Russia needs to operate renders crypto relatively unconcerning.

“Obviously, Russia’s going to try anything and everything they can to avoid sanctions. Digital assets will likely be one way, but it’s not going to be material,” Jorge Pesok, general counsel for Tacen, told The Block. 

Crypto was front and center in a batch of sanctions targeting ransomware last year. That move has, more recently, become legal grounds for the Treasury’s Office of Foreign Asset Control, or OFAC, to fill out its own sanctions policy. 

In some sense, those tools have become useful in the present moment. For example, they left the door open to sanction Russian actors interfering with democratic processes, which at the time meant hacks like SolarWinds but now applies to a full invasion that appears intent on removing the democratically elected Ukrainian president, Volodymyr Zelensky. 

However, ransomware gangs can operate via crypto in a way that a multi-trillion-dollar economy cannot. Russia has been subject to various sanctions for years, and has done a lot to build up its sanctions resistance.

Despite those efforts, the recent sanctions are proving effective. But leaks remain, albeit in more traditional finance. On February 27, the Central Bank of Russia announced its commitment to making CPFS, the local equivalent to SWIFT, work for Russian banks. It is also trying to get foreign banks to use it, a fairly doomed prospect. 

As far as sanctioned individuals, they are more likely to turn to the means of capital flight that Russia’s oligarchs have used for decades: shell companies, offshore accounts and real estate purchased anonymously. 

Research published in 2018 found that the top 0.01% of Russia’s wealthiest held over 12% of the country’s household wealth and stored a majority of that wealth overseas. The Biden administration is busy targeting those assets. The Treasury, for example, published a new set of sanctions on relatives of known oligarchs on March 3. . But despite its relative insignificance in scale, crypto is relatively eye-catching when it comes to news.

So, for the time being, everyone – including industry experts – remains on the lookout. 

One of those watching intently is Adam Zarazinsky. Inca Digital, Zarazinski’s company, both monitors blockchain activity and applies natural language processing to open sources like social media to identify intelligence for government agencies. Clients include the Commodity Futures Trading Commission and the US Special Operations Command.  

While Zarazinski is among many looking for crypto coming out of Russia, he similarly says that any allegation remains uncertain. “We’re still in this kind of fog of war, where we don’t necessarily know everything yet,” he told The Block.

“Is the opportunity there? Yeah, I think it is,” Zarazinski continued. “I think it’s possible, I do not think it’s like, ‘alarm bells, we need to shut down crypto right now.’”