Russian financiers may turn to crypto to circumvent US and European sanctions

Russian financiers may turn to crypto to circumvent US and European sanctions

After a new round of sanctions aimed at isolating Russian banks from the global financial system, experts are looking at cryptocurrencies as a means to circumvent the blacklist.

The measures imposed by the United States and Europe target Russian banks, technology companies and aerospace companies - a wide swath of the country's economy - following an escalation of Russian President Vladimir Putin's unprovoked invasion of Ukraine.

Leah Wald, CEO of crypto asset manager Valkyrie Investments, said it was uncertain whether Russia would use crypto to circumvent sanctions, but “the likelihood that they could make such a pivot is very high.”

It is worth remembering that using digital assets instead of US dollars is likely a violation of sanctions, legal experts say.

The primary sanctions watchdog in the U.S., the Office of Foreign Assets Control (OFAC), “is of the view that its sanctions apply to activities conducted in cryptocurrency,” said Evan Abrams, a sanctions attorney at Steptoe & Johnson.

“You would generally view a transaction made in Bitcoin or any other asset the same way you would a transaction made in dollars,” Abrams said.

US-based cryptocurrency exchanges and wallet providers must follow the same reporting and know-your-customer (KYC) regulations as banks, but decentralized exchanges and marketplaces in other countries may offer a workaround.

“As long as they don't use a US-regulated entity to buy and move the crypto, I don't think it would be difficult [to avoid sanctions],” David Tawil, president of crypto hedge fund firm ProChain Capital.

Using multiple exchanges would also make it easier for Russian financiers to cover their tracks, according to Wald, a former World Bank analyst.

“Russian companies could easily use Russia-based exchanges or brokers as fiat on-ramps and then trade in crypto across multiple decentralized exchanges or through other tools designed to hide the source of funds,” Wald said. “Then companies willing to work with them could potentially carry out transactions without facing any real consequences.”

The punitive measures come shortly after Russia's Finance Ministry pushed ahead with its plans to regulate cryptocurrency - doubling down on the country's existing policy of banning crypto as a means of payment, a potential challenge for companies looking to avoid sanctions.

The Russian central bank's digital currency, the digital ruble under development, could allow companies to trade legally without the dollar in a government-sanctioned workaround.

“It is probably no coincidence that Russia has recently moved to legalize cryptocurrencies to standardize their regulation and use, perhaps as a proactive measure to combat potential sanctions that would result from an invasion of Ukraine,” Wald said.

OFAC published in October new instructions on cryptocurrency and sanctions compliance, highlighting in the agency's eyes the increasing threat that blockchain technology poses to key government checkpoints.

Penalties for breaking OFAC sanctions without authorization can include a fine of up to $20 million and a prison sentence of up to 30 years.

The severity, Abrams said, depends on whether the violations were of primary or secondary U.S. sanctions. The former requires a U.S. citizen or resident of the mix.

When it comes to secondary sanctions involving non-U.S. citizens operating in other countries, OFAC has little legal authority to pursue civil or criminal sanctions, according to Abrams.

“But what they can do is essentially impose sanctions on these actors,” he said. “If a person interacts with the sanctioned person, the first person may be sanctioned in a similar manner to the person with whom he or she interacts.”

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The post “Russian Financiers May Turn to Crypto to Dodge U.S., European Sanctions” is not financial advice.