Cryptocurrencies are no threat to the efficacy of international sanctions

The United States, its NATO partners, and other allies around the world have imposed unprecedented sanctions on Russia, its leaders, Russian business and state entities. There is even a long list of companies that have halted their Russian business operations. As the onslaught of economic sanctions continues, there are concerns in some quarters, including among U.S. senators, whether cryptocurrencies could help Russia circumvent the sanctions.

Russia’s foreign exchanges reserves are an estimated $630 billion. At least 55 percent of the reserves, equal to about $350 billion, are with banks in countries that are implementing sanctions and are out of reach for Russia. The question comes down to whether crypto could assist in filling this gap, or at least a significant portion of the gap. There is no way the crypto markets can handle the amount of money to move the needle for the Russian state.

But first, it is a common misperception that cryptocurrencies can help move wealth and assets across borders without being detected by taxing authorities and interested law enforcement agencies. In the early years of the industry, cryptocurrency pioneers maintained that transactions were anonymous. That was largely not true then, and it is certainly not true now. The blockchain technologies on which cryptocurrencies are based do lend themselves well to tracking and tracing.

In recent years, the U.S. government has built end-to-end capabilities to monitor illicit activities, seize illegal cryptocurrencies, and prosecute nefarious actors. Blockchain forensics is a quite advanced discipline and the U.S. government arguably has the best capabilities in the world. The recent seizure of bitcoins stolen from Bitfinex, the recovery in 2021 of ransomware paid to Colonial pipeline hackers, and a seizure of 185,000 Bitcoins over the years are cases in point. Working alongside multiple agencies and across global jurisdictions, the U.S. government also has the capability to shut down darknet markets and prosecute cyber criminals. 

The U.S. Treasury Department Office of Foreign Assets Control maintains a list of Specially Designated Nationals and Blocked Persons to prohibit transactions with sanctioned entities and individuals, and this applies to cryptocurrencies as well. U.S. sanctions have teeth, providing a strong deterrent to any counter-parties who want to deal with sanctioned entities and individuals. With increasing transparency concerning blockchain technology, wary counter-parties, more jurisdictions enforcing bans, longstanding embargoes and other economic weapons against Russia and Belarus, cryptocurrencies are simply unattractive for evading sanctions. 

Moreover, what can a sanctioned entity buy using cryptocurrencies? Not much, frankly. Cryptocurrencies’ main-use cases remain speculative investments. Crypto markets suffer from high volatility. A price movement of 10 percent in a single day is par for the course, not a black swan event. This unpredictability is something that both buyers and sellers dislike, and for good reason. Cryptocurrencies generally act as stores of value, not as payment mechanisms. That is why there is not any large-scale trading activity in which cryptocurrency is used as a payment mechanism.

Bitcoin and Ethereum constitute about two-thirds of the total cryptocurrency market, and together they have a realized market capitalization of $688 billion. That is definitely huge, but consider that Russian imports are upwards of $304 billion. There are not a lot of goods and services that can be bought using crypto — at least anything that would be of utility to sovereign states.

Further, the inability to settle global trade in cryptocurrencies, and the relative lack of depth of crypto markets, make cryptocurrencies unviable for evading sanctions. Let us look at each of these. There needs to be a full ecosystem based on cryptocurrencies for facilitating trade. Think financial services providers, payment processors, interbank communication messaging infrastructure (such as SWIFT), and correspondent banks. Decentralized Finance (DeFi), or blockchain-based financial services, and Central Bank Digital Currencies (CBDC) are in early stages of development and such alternate mechanisms cannot yet facilitate global trade flows.

Despite fast growth in a relatively short period of time, crypto markets are very small. The global currency markets have daily trading volumes of $6.6 trillion, and crypto market volumes are a tiny fraction of that. It would be extremely difficult to use cryptocurrencies to launder Russian assets without detection. 

But what about reports that other sanctioned countries such as Iran and North Korea are using crypto to successfully evade sanctions leveled at them? While that is worrisome, the scale is much smaller. For example, North Korean hackers are alleged to have stolen $400 million worth of Bitcoin. It is estimated that Iran earns about $ 1 billion worth of Bitcoin via mining. Smaller states and small-time criminal actors may manage to stay under the radar, but larger players will not be able to do the same.

In practice, evading sanctions is likely to be achieved via bilateral arrangements with outlier countries and settled in local currencies. Cryptocurrencies are certainly not a safe haven for evading sanctions by large sovereign states, nor a place to obfuscate ill-gotten gains. And that is a good thing.

Kashyap Kompella, CFA, a technology industry analyst, is CEO of RPA2AI, a global artificial intelligence advisory firm.

James Cooper is professor of law and director of International Legal Studies at California Western School of Law in San Diego and a research fellow at Singapore University of Social Sciences.