Will Sanctions Drive Russia into the Arms of Cryptocurrencies?

From the removal of many Russian banks from SWIFT to a seemingly constant flow of new sanctions, Russia’s invasion of Ukraine has left many to wonder: Is the country likely to lurch towards cryptocurrencies? And if so, what does this mean for businesses that are holding and/or using crypto?

Crypto and sanctions evasion

Although crypto transfers are traceable, there is a possibility that designated Russian persons and entities could turn to cryptocurrencies to try to evade sanctions.  This is particularly true for decentralized exchanges (DEX) and decentralized finance (DeFi) platforms, which use smart contracts to execute transactions. DEX and DeFi are not currently regulated for anti-money laundering or counter-terrorist financing (AML/CFT), meaning that no customer due diligence, sanctions screening, monitoring of transactions or any other related measures are carried out. Crypto transactions are pseudonymous and without identity verification, so it is difficult to know who the actual holder of a crypto wallet is. The use of virtual private networks (VPNs) further complicates this, as does the existence of privacy coins. 

There is precedent for using crypto to evade sanctions in Iran, where a study by Elliptic shows that approximately 4.5% of Bitcoin mining takes place. A report by a think tank attached to the Iranian presidency has highlighted how Bitcoin can be used to circumvent sanctions. Reports indicate that Russia has the world’s third largest crypto mining industry, and there is the possibility that, as with Iran, Bitcoin and other cryptocurrencies could be used to pay for imports.  Additionally, both Chainalysis and Solidus Labs have indicated that Russia could turn to cyberwarfare and ransomware to raise funds in cryptocurrencies. However, experts from TRM Labs have flagged that there is not enough liquidity in the crypto market to process the size and value of transactions required to prop up the Russian government.  

Crypto for the citizenry 

There is a much higher possibility that ordinary Russian citizens will turn to crypto to try to safeguard their wealth in the face of massive inflation, extreme currency fluctuations and an inability to access cash, make payments, or move funds in and out of Russia. There is currently a ban on the use of cryptocurrencies to make payments in Russia and earlier this year, the Central Bank of Russia proposed an all-out ban on cryptocurrencies and mining. That, however, has not stopped Russian citizens from holding cryptoassets: “According to the Russian government, $5 billion in transactions are conducted using cryptocurrencies every year in the country, and its population of 144 million owns about $26.5 billion worth of crypto in over 12 million cryptocurrency accounts.”  

However, converting crypto to fiat currency remains a challenge due to the sanctions in place and banks’ wider reluctance to risk processing payments originating from Russia. This may all make it challenging to pay for real world goods and services from vendors that do not accept crypto.  

What does this mean for firms holding and/or using crypto?   

For businesses that are holding/using crypto, it is essential that transactions are made with known counterparts via centralized exchanges that are subject to AML/CFT regulations. Firms should also make an effort to check the public wallet addresses of incoming/outgoing payments where possible, so that they do not fall foul of sanctions themselves. In the coming weeks there will be a need to strike the right balance between legitimate, non-sanctioned businesses and access to funds by civilians not involved in the conflict.

Firms can explore more measures they should consider taking in our blog.

Dive into the latest sanctions on Russia in our interactive dashboard.

This post is commissioned by ComplyAdvantage and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.