Days after Russia launched a full-scale invasion of Ukraine in February, Western states, led by the U.S. and European Union, levied vast sanctions on the Russian economy, hoping to drive Moscow into an economic crisis that would prompt a military retreat.
Yet within a matter of days, U.S. officials and top financial analysts were warning that Moscow might use cryptocurrency to circumvent Western sanctions, fearing that blockchain-based platforms could enable Russians to evade U.S. anti-money laundering (AML) regulations and stave off economic collapse.
Mark Lurie is the CEO and co-founder of Shipyard Software. He is a serial entrepreneur and investor who previously founded two venture-backed startups.
One possible scenario is that Russian miners leverage the country’s plentiful energy reserves to mine bitcoin (BTC), then use unhosted wallets to move those bitcoins through a series of shady crypto transactions – likely involving chain-hopping, tumblers and peer-to-peer (P2P) marketplaces – to convert them into U.S. dollars to pay for goods. Well-known mixer Tornado Cash, which the U.S. Treasury Department sanctioned in August, has already been used to launder some $9 billion, so it may seem a feasible option.
But nearly seven months in, Russia has not gone this route. In fact, very little Russian money has been funneled through crypto. In April, the Wall Street Journal reported that daily ruble trading in cryptocurrencies spiked to 6.6 billion (US$46 million) in the days after Russia’s invasion, before quickly plummeting to 1 billion rubles ($7 million).
As of August, Russia’s crypto trading volume remains diminished, with 24-hour ruble to tether (USDT) trade volume currently ranging between 10s and 100s of millions of rubles each day, down from its peak of 4.3 billion rubles in early March.
The words of Todd Conklin, head of the Treasury’s cybersecurity portfolio, seem to have proven true. “You can’t flip a switch overnight and run a G-20 economy on cryptocurrency,” he said in March. “There just isn’t enough liquidity.”
If crypto did offer a potential loophole, we could expect to see Russia doing its darndest to drive through it. But thus far we have seen no signs of any concerted Russian effort – governmental or non-governmental – to boost crypto liquidity.
Instead, Russia President Vladimir Putin seems to be putting all his efforts into building alternative financial rails to counter the dollar-based SWIFT financial communications system. This includes Russia’s SWIFT competitor SPFS (System for Transfer of Financial Messages) and its Visa/Mastercard competitor, MIR payments.
Moscow has heavily promoted SPFS to key trade partners that are also Western allies, such as India, Israel and the United Arab Emirates. Some two dozen banks from nearly a dozen countries have signed onto SPFS, including India, Turkey, Iran, China, Germany, Armenia and Switzerland.
Meanwhile, five Turkish banks adopted MIR in July and Iran is in advanced talks to join the network. India, Cuba and Sri Lanka have also expressed interest in joining Mir.
Putin’s sanctions response indicates that he and his cronies view traditional financial tools as more porous than crypto. The Russian president seems to believe that building a traditional, if non-western, financial network offers a better way to evade sanctions than crypto.
And he’s probably right.
The first reason is that transaction data in the traditional financial system is insurmountably vast and likely filled with errors. U.S. regulations, for instance, dictate that if a bank sees a series of $9,999 transactions, ($10,000 is often the reporting threshold), it must send a suspicious activity report (SAR) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
In 2019, U.S. banks filed 2.7 million SARs, or about 10,000 per business day. And these are not short, simple documents, thus leaving room for error.
Peter Dittus, former secretary-general of the Bank for International Settlements, the international bank for the world’s central banks, acknowledged this in a recent conversation, after highlighting the advantages of the traditional financial system.
“[The western banking system] does, however, have two significant shortcomings: an inability to simultaneously monitor all the world’s transactions for questionable origins and an over-confidence in self-interested banks and states abiding by its regulations,” Dittus explained.
“The core constraint of the traditional financial system is that transaction data is nearly impossible to audit,” he added. In fact, in 2019, after a FinCEN staffer leaked 2,100 SARs, 400 journalists needed 16 months to examine them.
This brings us to the second reason, which is that the blockchain’s transaction data is free of errors and publicly accessible. All on-chain actions are tracked via a permanent, immutable and publicly viewable record. Sure, cryptocurrencies are anonymous to the extent that other users and exchanges may not know your identity, but all users leave breadcrumbs behind.
Whenever a cryptocurrency user makes any sort of transaction his wallet, or digital address, interacts with a crypto exchange or another user, leaving digital fingerprints for authorities to track. This may not fit neatly into the traditional know-your-customer (KYC) framework of today’s AML standards, but it has the potential to create effective new tools like know-your-transaction (KYT) – a different means to the same end.
The success of dictators, human traffickers, terrorists and drug cartels often hinges on their ability to launder money through the traditional financial system. Rather than giving them a lifeline, as some suggest, cryptocurrency gives us a chance to put them out of business – and now we may have proof.
The world knows all too well that no route is too unsavory for Putin to get what he’s after, from committing war-time atrocities to highly advanced digital meddling in electoral democracy. That his attempts to circumvent western sanctions have yet to incorporate crypto speaks volumes about its usefulness as a money laundering tool.
