Experts Say Russia Can Not Effectively Evade Sanctions With Crypto

Russia Evade Sanctions

Welcome back to the Tribe! In this post we dive into the idea that Russia might try to evade sanctions with crypto.

Nothing should be considered investment or financial advice. Enjoy the ride!

Evade Sanctions With Crypto

With the sanctions biting the Russian economy hard, authorities fear that Russia will move to crypto to evade sanctions.

Russia Sanctions

In an informal meeting of ministers for the economy and finance on Friday, 25 February. The president of the European Commission Bank (ECB), Christine Lagarde, pushed for the implementation of the Markets in Crypto Assets (MiCA), a regulatory framework for digital assets. According to her;

“Whenever there is a ban or prohibition or a mechanism in place to boycott or prohibit, there are always criminal ways that will try to circumvent the prohibition or the ban,” said Lagarde. “It’s so critically important that MiCA is pushed through as quickly as possible, so we have a regulatory framework within which crypto assets can actually be caught.”

This move was supposed to stop Russia from using cryptocurrency as a vehicle to circumvent the sanctions. But the vote to implement MiCA, which was first introduced to the European Commission (EC) in September 2020 and adopted in November 2021, was postponed. This was due to concerns that the move will be misinterpreted as a ban on Proof-of-Work crypto mining.

Now the question remains, is there any basis for this fear? Can Russia actually circumvent the sanctions with cryptocurrency?

Experts React

In a Twitter thread, Jake Chervinsky, head of policy at the Blockchain Association in the U.S. gave his opinion.

1/ Russia can't & won't use crypto to evade sanctions.

Concerns about crypto's use for sanctions evasion are totally unfounded. They fundamentally misunderstand:

– how sanctions work
– how crypto markets work
– how Putin is actually trying to mitigate sanctions

I'll explain 🧵

— Jake Chervinsky (@jchervinsky) March 1, 2022

Chervinsky tweeted that

“Russia can’t and won’t use crypto to evade sanctions”.

He continued that the concerns were unfounded due to the misunderstanding of three things; how sanctions work, how crypto markets work, and how Putin is trying to mitigate sanctions.

Answering the question “can crypto mitigate sanctions by offering an alternative to SWIFT?” he said, “not really”. His reason is that the Chinese CIPS is a far more likely option than a crypto network they cannot control.

He also believes the crypto market to be too small, costly, and transparent to be useful for the Russian economy. According to him, “Crypto markets are thin to start with, & ruble trading pairs are rare. With Russia cut off from the world’s crypto industry, they can’t source nearly enough liquidity to matter.”

He further said that

“Russia also can’t hide its tracks with crypto. Setting aside valid privacy concerns, the transparency of public ledgers

+ the analytics capabilities of US forensics firms

= crypto is useless for sanctions evasion.”

Finally, on how Putin is trying to mitigate against the sanctions, he believes that crypto isn’t part of his plan. Rather,

“His strategy included diversifying Russia’s reserves into yuan & gold (not crypto), shifting trade to Asia (not onto blockchains), bringing manufacturing onshore, etc.

Putin could have built crypto infrastructure if he wanted. He didn’t. There’s no reason to think he will (or could) now.”

Furthermore, Ari Redbord of TRM labs, a blockchain intelligence company, speaking to Al Jazeera said

“It is very difficult to move large amounts of crypto and convert it to usable currency. Russia cannot use crypto to replace the hundreds of billions of dollars that could be potentially blocked or frozen.”

Crypto Mining

Mining cryptocurrency with its vast oil reserves is also an option, being one of the largest oil exporters. They could emulate Tehran in this case if sanctions target the energy sector.

Tom Robinson, the co-founder of Elliptic, a blockchain analysis provider, believes this could be an option.

Robinson told Al Jazeera that;

“Cryptocurrency mining allows them to monetize their energy reserves on the global market, without having to actually move them outside the country,”

But as Chervinsky said, crypto markets are too small compared to the scale of what it will take Putin to evade sanctions. So, for now, evading sanctions with crypto is an unlikely option, but not an impossible option.