On February 28, American senator Elizabeth Warren had warned that “cryptocurrencies risk undermining sanctions against Russia…” Former U.S. Secretary of State and Presidential candidate Hillary Clinton was among the voices who raised concern about the Russia’s capacity of circumventing sanctions packages via cryptocurrencies.
Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain.
U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets. https://t.co/4lCUNcUC29
— Elizabeth Warren (@SenWarren) February 28, 2022
The discussion of the capacity of virtual assets to be put into use to evade economic sanctions did not start with the Senator’s warning. Nevertheless, with the unprovoked Russian invasion of Ukraine going in full scale, and examples of sanctions-evasion by North Korea, and Iran still in memories, the discussion of the instrumentalization of crypto currencies for sanctions circumvention gained depth, and we have been exposed to multiple perspectives on the subject.
Before being contested by some experts, the warnings voiced have proven to reflect the growing concerns of governments in regulating the sphere of virtual currencies and block any means that can be utilised by Russia.
U.S. Financial Crimes Enforcement Network (FinCen) was the first, in the aftermath of the invasion of Ukraine to release an alert pointing at increased risk of sanctions evasion via CVCs (Convertible virtual currency). The alert released on March 7 included a section elaborating on the red flags regarding CVC transactions, in addition to advising vigilance in other categories that allow evasion attempts.
Four days later, on March 11, the White House published the “Executive Order on Ensuring Responsible Development of Digital Assets”. The EO highlighted the “continued availability of service providers in jurisdictions where international AML/CFT standards are not effectively implemented”. In addition to ordering the Treasury to write a report, The EO heralded the intensification of efforts to give birth to a U.S. Central Bank digital currency, or CBDC.
The Executive Orders, alerts and guidelines that included sections and warnings addressing virtual assets industry released one after the other prescribing vigilance against sanction evasion through virtual transactions, signalled that the governments are taking the virtual assets seriously, and ramping up efforts for its regulation.
An issue of depth and breadth.
Certain experts reassured that the crypto market is unable to cater to what Russia might aim at attempting to skirt sanctions – namely, a gigantic potential for liquidity to replace its billions frozen by Western governments.
They hinted the shallowness of the market, Russia’s lack of crypto infrastructure, its perceived disinterest, and the transparency of crypto transactions. Instrumentalising virtual assets cannot be a significant weapon in their tactical arsenal, as Russia would be in need to liquidate tens of billions of dollars. All in all, investing in Chinese Yuan or diverting the trade routes to Asia can weigh as a more rational course of action to take.
FBI Director Christopher Wray was among the experts stating an opposing opinion on Russia’s capability and (possible willingness) to instrumentalise crypto assets, boasting of the “significant expertise” the Bureau and its allies have built up, viewing the concerns to be “highly overestimated”.
Meanwhile, as circles of experts discussed the capacity of virtual assets being used for evasion, a migration of capital had already started, according to the news.
The alarming tips came from the firms in United Arab Emirates that they are receiving requests from Russians seeking to liquidate their – reportedly massive – crypto assets in Dubai.
The Emirati Kingdom has been consolidating its regulation against exploitation of crypto currencies. However, with its rather fragmented financial system porous with multiple free trade zones, it might have been viewed as a country with enough grey areas that are attractive to the Russian rich seeking to relocate their wealth in crypto, to transfer it into tangible assets such as real estate.
Conclusion
Sanctions-skirting efforts on part of the Russian government can ignore the potential of cryptocurrencies, unlike what North Korea and Iran did proportionate to their needs and capabilities. There simply is no feasible way to make cryptocurrencies a lifeline for such a big economy.
However, on the level of individuals (which very well concerns the Western governments as sanctions imposed on Russian oligarchs, Putin’s close circle and PEPs made the most headlines and evidently diverted the flow of illicit capital away from Western democracies), taking the crypto route to liquidate assets and transfer wealth to third countries can work, at least for now.
