(Bloomberg) — Cryptocurrencies could help Russia and its billionaires blunt the effects of Western sanctions.
US President Joe Biden said on Thursday that he has authorized “strong sanctions” in response to Russia’s invasion of Ukraine. These are intended to limit its ability to trade in the dollar and other major international currencies, and include penalties on five Russian banks that represent an estimated $1 trillion in assets. A broad swath of the Russian elite and their family members will also be targeted. This is in addition to the fine imposed earlier this week.
But those restrictions may have less weight in a country that is taking steps to legalize cryptocurrencies and where the digital asset is already widely owned. Typically, nations use physical solutions to evade sanctions, such as the use of ship-to-ship transfers of fuel by Venezuela and North Korea, but digital assets such as crypto and decentralized exchanges become the most effective way to circumvent penalties. can.
“Neither dictators nor human rights activists will face any censorship on the bitcoin network,” said Matthew Siegel, head of digital asset research at investment manager VanEck.
Sanctions imposed by the US and its allies on companies and individuals could essentially drive them out of the West. Billionaires, some of whom have already been directly targeted, potentially stand to face penalties if they choose to use crypto, which uses blockchain technology to keep transactions anonymous. Digital currencies could help them buy goods and services and invest in assets outside Russia – all while avoiding banks or institutions that comply with sanctions and trace their transactions.
,If two people or organizations want to do business with each other and are not able to do so through banks, they can do it with bitcoin,” said Mati Greenspan, founder and CEO of financial advisory firm Quantum Economics. he said. “If a wealthy person is concerned that sanctions may result in their account being frozen, they can simply keep their funds in bitcoin to be safe from such actions.”
Unlike fiat currencies, which need to be transferred through third-party institutions that have the ability to track, freeze or block them, cryptocurrencies can potentially be used by an individual regardless of any government sanctions or other restrictions. can be sent directly to another person.
Crypto holders can also set up a web of wallets with different addresses across multiple exchanges, which makes it extremely difficult to track any activity and trace transactions back to a particular individual. Additionally, they can choose cryptocurrency exchanges that are not based in jurisdictions that are imposing restrictions and therefore do not necessarily have to comply with regulations.
But any assets held in crypto will not be easily converted into fiat currencies, experts say, making any money less spendable. And in order to bypass banks or even centralized exchanges adhering to the restrictions, individuals would have to be persuaded to do business with any service to accept digital payments, which can be difficult.
Biden said on Thursday that the wealthy Russians who would be targeted by sanctions were “people gained personally by the Kremlin’s policies and should share in the pain.” “We will continue this intoxication of those designations against corrupt billionaires in the days to come.”
None of the billionaires approved before Thursday have publicly disclosed whether they are crypto holders.
To be sure, governments can still impose regulations on cryptocurrency holdings that exist on centralized exchanges, said David Tavil, president of cryptocurrency investment firm ProChain Capital. He referred to the recent crackdown by the Canadian government on crypto accounts owned by truck drivers who were receiving money to support their blockade of the US-Canada border crossing and a week-long protest in the capital city of Ottawa. used to support.
Brett Harrison, president of crypto exchange FTX US, said that the belief that money laundering through cryptocurrencies is easy is a misconception. He points out that exchanges have access to some technology that allows tracking and screening of wallets coming from approved countries. It would also be difficult for individuals to convert cryptocurrencies into fiat currencies via centralized exchanges without holding – essentially making it harder for them to spend.
“What can be stopped is that the fund forever leaves an exchange where the appropriate restrictions are properly maintained,” Harrison said. “As soon as it moves anywhere, everyone can see it because it is on a public blockchain, but if they can transfer it, no exchange will allow them to convert it into one currency and the other they are in.” They do get caught.”
FTX is frequently contacted by law enforcement agencies in multiple states and countries for sixteen funds from certain addresses, he said. The extent to which the cryptocurrency can be traced is visible from the recent arrests of two individuals related to the 2016 Bitfinex hack. The US government was able to track the activity of some wallets and as a result the accounts were frozen as soon as they were converted into fiat currencies.
The legal status of cryptocurrencies in Russia is in flux, with the government insisting on allowing them to attract foreign investment and bringing domestic business out of the shadows, while the central bank says they identify a pyramid scheme And they should be banned. , Putin last month ordered them a quick settlement, but top government officials have so far failed to agree on how to regulate crypto.
But millions of Russians are already immersed in this digital world – they own more than 2 trillion rubles ($22.9 billion) of cryptocurrency, according to a recent government paper.
According to data from Singapore-based payment gateway TripleA, more than 17 million Russians, or about 12% of the total population, own cryptocurrencies. And with more sanctions pending, it may be in Russia’s interest to let wealthy individuals deal in crypto regardless of its legal status.
ProChain’s Tawil said, “It is okay to have conflicting views and they will get to the point when they get to the point.” “I think most crypto activity in Russia is clearly in sync with the government.”
Other countries around the former Soviet Union are also paying more attention to crypto. Last week, the Ukrainian parliament endorsed a bill to legalize cryptocurrencies, while Kazakhstan is pushing to better regulate and tax its rapidly growing crypto-mining industry.
US equities fell on Thursday after Russia invaded Ukraine, with the S&P 500 index down 2.6% and the tech-heavy Nasdaq 100 down as much as 20% from its previous record high in November. The shares have since pared their losses, with the Nasdaq 100 turning positive. Bitcoin fell as much as 8.5% to $34,337, marking a nearly 50% drop since its all-time high in November.
(Update with Biden’s comments in second paragraph.)
-With assistance from Jake Rudnitsky.
To contact the author of this story:
Miserlena Egkolfopolu in New York [email protected]