Much has been written and spoken in the past weeks about Russia’s potentially using cryptocurrency to evade the raft of international sanctions imposed on the country due to its ongoing actions in Ukraine. U.S. Department of the Treasury sanctions restrictions apply broadly to U.S. persons, including both legacy financial institutions and cryptocurrency platforms. Federal Reserve Chairman Jerome Powell made headlines by adding his voice to the sanctions-evasion discussion in congressional testimony on March 9, 2022, saying this risk “underscores the need for congressional action on … cryptocurrencies” (though he was non-specific on precisely what was needed). While the topic may be good fodder for news items and political rhetoric, as we explain below, the near-term risk of cryptocurrency’s being used to skirt sanctions seems relatively low for several reasons.
First, Russia’s tenuous relationship with cryptocurrency would not appear to bespeak a nation with the ability to rapidly pivot its finances into the cryptoverse. The Russian government’s singular focus on building foreign fiat currency reserves, and hostility toward decentralized digital currencies like bitcoin to the point of discussing banning them, seemingly indicate a lack of capability for the government to rapidly become active in the global cryptocurrency market at scale. On the domestic front, a prototype digital Ruble issued by the country’s central bank, the Bank of Russia, is reportedly undergoing testing by several Russian banks as of early 2022. However, as explained below, a central-bank digital currency is unlikely to provide Russia access to any material amounts of funding.
Second, assuming that the digital Ruble were to successfully launch, the cryptocurrency’s issuance by the Russian government would present its own obstacles. Major international crypto exchanges are wary of financial crime mandates and they have largely implemented the sanctions restrictions, including FinCEN’s March 7, 2022 Alert listing potential red flags indicative of possible evasion attempts by, or on behalf of, sanctioned parties. Even if the digital Ruble was available for purchase, the SWIFT cross-border payment system, Visa and MasterCard networks, and correspondent banking arrangements would be largely unavailable to transmit any funds to back to the Russian government. (The need to transfer any such funds would also depend on substantial international appetite developing for the digital Ruble, currently a dubious proposition). The KYC procedures in place at most exchanges would further frustrate these illicit actors from realizing their ultimate aim of converting any variety of cryptoassets back to fiat currency. Unavailability of crypto exchanges and most other potential funds transfer modalities would be substantial obstacles to Russia’s using the major decentralized cryptocurrencies to evade sanctions.
Last, assuming that the digital Ruble was a success or that Russia was able to access crypto exchanges or funds transfer rails, the country’s needs are substantial (estimated at US$ 400 bn to offset sanctions’ impact on its foreign reserves). For reference, the total market capitalization of all cryptocurrencies currently totals approximately $1.8 trillion, with the two largest components being Bitcoin (approx. 804 bn) and Ethereum (approx. $330 bn). The laws of supply and demand would suggest a substantial resulting price impact from a mass acquisition of these assets that could quickly make it cost-prohibitive for Russia to effectively execute any cryptocurrency-based workaround to the sanctions. And cryptocurrency transactions largely occur on public blockchain ledgers, so even if several one-off transactions escaped controls imposed by the exchanges, the sizable transaction volume needed to satisfy Russia’s requirements would almost certainly be detected.
Chairman Powell’s voice is not often heard in the debate over crypto regulation, and it may spur others to join his call for non-specific “regulation” in the space. While we appreciate the spirit of his comments, our above analysis would suggest that the sanctions-circumvention risk may not be as grave as he (and others) suggested. Regardless, some specifics may come from the White House’s March 9, 2022 Executive Order introducing a holistic federal regulatory approach to digital assets, soon followed by a joint statement with the EU and other G7 leaders threatening to “impose costs on illicit Russian actors using digital assets to enhance and transfer their wealth.” Whatever comes of any Russian attempts at evading sanctions, a government-wide effort pursuant to the Executive Order will provide the future framework for cryptoasset regulation in this context and all others. The impact of any resulting regulatory measures – on both the cryptoasset industry and beyond – will depend on the degree to which their reach exceeds that of the current regulatory regime.
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