To impose sanctions, a government compiles a list of individuals and businesses that its citizens must avoid. Anyone caught interacting with a member of the list faces severe penalties. The global financial system, however, is the real key to any effective sanctions programme.
When the United States prohibited Americans from doing business with Russian banks, oil and gas developers, and other companies in 2014, following the country’s invasion of Crimea, the economic impact on Russia was immediate and massive. According to economists, Western sanctions cost Russia $50 billion per year.
Since then, the global market for cryptocurrencies and other digital assets has expanded dramatically. That is bad news for sanction enforcers but good news for Russia.
On Tuesday, the Biden administration imposed new sanctions on Russia in response to the Ukrainian conflict, aimed at limiting its access to foreign capital. However, Russian entities are preparing to mitigate some of the worst effects by striking deals with anyone anywhere in the world willing to work with them, according to experts. And, they claim, those entities can then use digital currencies to circumvent the control points that governments rely on to stymie deal execution — primarily money transfers by banks.
“Russia has had a lot of time to think about this specific consequence,” said Michael Parker, a former federal prosecutor who now heads the anti-money laundering and sanctions practice at Washington, D.C., law firm Ferrari & Associates. “It would be naive to think that they haven’t gamed out exactly this scenario.”
Sanctions are among the most powerful tools available to the United States and European countries for influencing the behaviour of nations that are not considered allies. Because the dollar is the world’s reserve currency and is used in payments all over the world, the United States, in particular, can use sanctions as a diplomatic tool. However, American government officials are becoming more aware of the potential for cryptocurrencies to mitigate the impact of sanctions and are increasing their scrutiny of digital assets.
Blockchain technology, a type of computer code that is publicly viewable by anyone, anywhere, is used by all digital currencies. This public ledger tracks the movement of individual digital coins from one “wallet” — as online digital asset repositories are known — to another. In theory, authorities should be able to track all cryptocurrency transactions and prevent sanctioned entities from completing them.
Officials from the administration are also urging the cryptocurrency industry to put in place internal controls to prevent bad actors from using their services. The Treasury Department published a 30-page sanctions-compliance manual in October, advising cryptocurrency companies to use geolocation tools to screen out customers from sanctioned jurisdictions. According to the report, crypto companies have taken months or years to implement such compliance procedures in many cases.
This may change as the industry matures. Chainalysis provides a “know your transaction” tool that notifies businesses when blacklisted entities use their services. Last year, the company’s private-sector customer base more than doubled, with many of them using the compliance tool.
However, astute cryptocurrency users can work around a blacklist.
“A Treasury designation of a crypto wallet address is not foolproof,” Fanusie of the Center for a New American Security explained. “That designated actor is still free to open a new wallet somewhere else.” That’s something you can do quite easily.”