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US, EU mull blocking crypto use by Russians to evade sanctions

The concern of the US and allies is that the Kremlin, as well as other ancillary actors supporting the offensive on Ukraine, will evade the sanctions regime via digital tokens, which are not owned or issued by a central authority like a bank

The US and European Union countries are likely to initiate sanctions targeting cryptocurrencies that are bouncing back as trading volume between a tumbling ruble and digital money surged.

The US Department of Justice announced early Wednesday a new task force broadly designed to enforce sanctions. As part of that, it will target efforts to use cryptocurrency to evade US sanctions, launder proceeds of foreign corruption or evade US responses to Russian military aggression.

The concern of the US and allies is that the Kremlin, as well as other ancillary actors supporting the offensive on Ukraine, will evade the sanctions regime via digital tokens, which are not owned or issued by a central authority like a bank. Bitcoin, like most cryptocurrencies, is decentralized and borderless, which means that it doesn’t respect national boundaries. Apart from enabling Russians a way of evading sanctions, cryptocurrencies offer investors a relatively safe haven.

Western powers have frozen the assets of Russia’s central bank with the aim of making it harder for Russia to mitigate the effect of sanctions on some of its biggest lenders and other companies.

Since Russia invaded Ukraine on February 24, data from Kaiko show that transactions on centralized bitcoin exchanges in both the Russian ruble and the Ukrainian hryvnia have surged to their highest levels in months. This is likely part of the reason why Ukraine asked all the top crypto exchanges to ban Russian users.

Many of the world’s largest crypto exchanges, including Binance and US-based Kraken and Coinbase, have stopped short of a blanket ban on Russian clients, despite a plea from the Ukrainian government for one. They said they would screen users and block anyone targeted by sanctions.

However, some other exchanges are staying put in Russia, breaking ranks with mainstream finance in a decision that experts say weakens Western attempts to isolate Moscow following the invasion of Ukraine. The crypto exchanges argued that cutting off a whole nation would run counter to bitcoin’s ethos of offering access to payments free of government oversight.

Some anti-money laundering specialists warned the exchanges could be keeping a route open for Russians to move money abroad, thus undermining Western efforts to pressure Russia to back away from war.

“There’s no question sanctions are diminished,” said Ross Delston, a US lawyer and former banking regulator, adding that cryptocurrencies “allow an avenue for a flight to safety that would not have existed otherwise.”

Prices of cryptocurrencies, including Bitcoin and Ethereum, have been climbing after the ruble plummeted to record low and Moscow was hit with new sanctions.

As on Tuesday, Bitcoin had jumped 13 per cent to $43,163, according to cryptocurrency tracker CoinDesk.

According to Arcane Research, an Oslo-based cryptocurrency research firm, the trading volume between ruble and cryptocurrencies has spiked in recent days on Binance, one of the world’s biggest cryptocurrency exchanges.

Investors appear to be “trying to get out of the ruble” due to its “drastic devaluation after all the sanctions,” said Bendik Schei, head of research at Arcane.

Schei added that more people were switching to tether rather than bitcoin. While bitcoin is the world’s most valuable cryptocurency, tether is known as a “stablecoin” since it is pegged to the US dollar.

“This is where they find the most comfort at the moment,” Schei said of investors. “Under the current market conditions, I’m not surprised to see investors, at least those in Russia, seeking stablecoins. This is about saving their funds, not investing.”

— issacjohn@khaleejtimes.com