Cryptocurrency alone will not allow Russia to skirt a barrage of sanctions aimed at punishing Moscow for invading Ukraine, cryptocurrency analysts told Al Jazeera.
The United States, United Kingdom, European Union and Canada announced new sanctions on Monday, this time targeting Russia’s central bank and national wealth fund. The US Treasury Department said that it was limiting Russian President Vladimir Putin’s ability to use the country’s $630bn in foreign reserves.
The move came just a day after the US and its allies cut off some Russian banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication), a secure messaging network used for trillions of dollars worth of transactions.
Russia’s economy was already reeling on Monday. The ruble plunged to an all-time low, the central bank raised its key interest rate to 20 percent, and the stock exchange stayed closed.
Enforcing sanctions requires the ability to track transactions – typically through the banking system. Iran and North Korea have both used cryptocurrencies, which operate outside the confines of the financial system, to get around sanctions.
“Crypto can be used to evade sanctions and hide wealth,” Roman Bieda, the head of fraud investigations at Coinfirm, a blockchain risk management platform, told Al Jazeera.
But crypto experts told Al Jazeera Russia’s case is different, with the country having less wiggle room due to the scale of the economic blow and its limited adoption of digital currencies.
Replacing hundreds of billions of dollars
Unlike North Korea, Venezuela and Iran, Russia has been deeply ingrained in the global financial system for decades, Ari Redbord of TRM labs, a blockchain intelligence company, told Al Jazeera. Eighty percent of its daily foreign exchange transactions and half of its international trade are conducted in dollars.
“It is very difficult to move large amounts of crypto and convert it to usable currency,” Redbord said. “Russia cannot use crypto to replace the hundreds of billions of dollars that could be potentially blocked or frozen.”
Measures are also in place to stop the evasion of sanctions via crypto. On a blockchain ledger – where cryptocurrency exchanges are posted – every transaction and the address associated with it are viewable to the public.
Coinfirm’s Bieda told Al Jazeera that while sanctioning governments cannot know who the owner of the address sending crypto is, they can see the flow volume — in other words, the amount of money that is moved. Once a suspicious address is flagged, those funds can be monitored.
Mining crypto with surplus energy is an option but not enough
Oil and gas are one sector of Russia’s economy that has not been targeted by the sanctions, though companies including Shell and BP have announced they are pulling their business out of the country.
Russia is one of the world’s largest oil exporters – 25 percent of European oil comes from Russia, according to Rystad Energy, an Oslo-based research firm. The country also supplies about 40 percent of Europe’s natural gas.
If future sanctions do target the energy sector, Moscow could emulate Tehran by using surplus energy or computing power to generate cryptocurrency, Tom Robinson, co-founder of Elliptic, a London-based blockchain analysis provider, told Al Jazeera.
“Cryptocurrency mining allows them to monetize their energy reserves on the global market, without having to actually move them outside the country,” said Robinson.
But that would likely be just a drop in the bucket for a major crude and gas exporting power like Russia.
For the moment, sanctions on oil and gas appear unlikely, Rystad Oil analyst Louise Dickson told Al Jazeera.
“A supply disruption of up to 5 million barrels per day of Russian oil would not only deepen the already fragile energy crisis globally, it may be interpreted by Russia as an act of war,” she said.
Diminishing the dollar’s global role
The US Treasury Department recently warned that digital currencies and alternative payment platforms could undermine the effectiveness of US sanctions.
According to blockchain data platform Chainalysis, roughly 74 percent of ransomware revenue in 2021 — more than $400m worth in cryptocurrency — went to entities “highly likely to be affiliated with Russia in some way”.
New technologies have enabled malicious actors to hold and transfer money outside the traditional dollar-based financial system, according to the Treasury Department, while empowering “adversaries seeking to build new financial and payments systems intended to diminish the dollar’s global role”.
Although the sanctions against Russia are designed to put pressure on Moscow, they may hasten the arrival of the new financial order the US has warned about, Ryan Selkis, founder of crypto research firm Messari, told Al Jazeera
“Russia getting kicked out of SWIFT and losing access to its reserves will accelerate the de-dollarization of trade,” said Selkis. “I don’t think the West believes the dollar will ever be displaced.”