When the United States banned Americans from doing business with Russian banks, oil and gas developers, and other companies in 2014, following the country’s invasion of Crimea, the impact on the Russian economy was rapid and dramatic. great. Economists estimate that sanctions imposed by Western nations cost Russia 50 billion dollars a year.
Since then, the global market for cryptocurrencies and other digital assets has flourished. That’s bad news for sanctions enforcers and good news for Russia.
On Tuesday, the Biden administration Enact new sanctions against Russia about the conflict in Ukraine, in order to hinder the country’s ability to access foreign capital. However, the Russian entities are preparing to cushion some of the worst effects by doing deals with anyone around the world willing to work with them, experts say. And, according to them, those entities could then use the digital currency to bypass the checkpoints that governments rely on — primarily the transfers of banks — to intercept the delivery. Translate.
“Russia has had plenty of time to think about this particular consequence,” said Michael Parker, a former federal prosecutor who now heads the anti-money laundering and sanctions division at the law firm Ferrari & Associates in Washington. “It is foolish to think that they did not calculate this scenario correctly.”
Sanctions are one of the most powerful tools the United States and European countries have to influence the behavior of countries they do not consider allies. In particular, the United States can use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and is used in payments around the world. But US government officials are increasingly aware of the potential of cryptocurrencies to ease the impact of sanctions and are increasing scrutiny of their digital assets.
To apply sanctions, governments make lists of people and businesses that their citizens must avoid. Anyone caught engaging with a member of the list faces hefty fines. But the real key to any effective sanctions program is the global financial system. Banks around the world play an important role in enforcement: They see where the money comes from and where it’s tied, and anti-money laundering laws require them to block transactions with sanctioned entities and report what they see to the authorities. But if banks are the eyes and ears of governments in this area, the explosion of digital currencies is blinding them.
Banks must adhere to “know your customer” rules, which include verifying the identities of their customers. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets rarely follow their customers as well as banks, even though they are said to follow the rules. same rule. In October, the US Treasury Department warned that cryptocurrencies pose a The threat is getting more and more serious US sanctions program and US authorities need to educate themselves about this technology.
Experts say that if Russia wants to avoid sanctions, Russia has many tools related to cryptocurrencies. All it takes is to find a way to trade without touching the dollar.
The Russian government is developing its own central bank digital currency, a currency called the digital ruble it hopes to use to trade directly with other countries willing to accept it without first converting it to dollars. Hacking techniques like ransomware can help Russian actors steal digital currency and make up for lost revenue due to sanctions.
And while crypto transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia could help conceal the origin of those transactions. That would allow businesses to transact with Russian entities without being detected.
There is precedent for these types of solutions. Iran and North Korea are among the countries that have used digital currencies to mitigate the impact of Western sanctions, a trend that US and UN officials recently observed. . For instance, North Korea used ransomware to steal cryptocurrency to fund its nuclear program, according to a United Nations report.
In October 2020, representatives of the central bank of Russia told a newspaper in Moscow that the new “digital ruble” will make the country less dependent on the United States and more resistant to sanctions. It will allow Russian entities to conduct transactions outside of the international banking system with any country willing to transact in digital currency.
Russia may find willing partners in other countries targeted by US sanctions, including Iran, is also developing government-backed digital currencies. According to the World Bank, China, Russia’s largest trading partner in both import and export, has launched its own central bank digital currency. The country’s leader, Xi Jinping, recently described China’s relationship with Russia as “unlimited. ”
Yaya Fanusie, a fellow at the Center for a New American Security who has studied the influence of cryptocurrencies on sanctions, said the central banking system is developing direct digital currency exchanges. create new risks. “A reduction in the power of US sanctions comes from a system where these countries can conduct transactions without going through the global banking system.”
In early February, independent sanctions monitors told the United Nations Security Council that North Korea used cryptocurrencies to fund its nuclear and ballistic missile programs, according to Reuters. (A spokesman for Norway’s permanent mission to the UN confirmed the existence of the report, which has not yet been made public.) Last May, the consulting firm Elliptic described how Iran use revenue from Bitcoin Mining to compensate for the restrictions on the country’s ability to sell oil due to sanctions.
Sanctioned Russian entities can deploy their own evasion strategy, using ransomware attacks. The book is simple: A hacker breaks into a computer network and locks digital information until the victim pays for the release, usually in cryptocurrency.
Russia is the center of The ransomware industry is growing. Last year, about 74% of global ransomware revenue, or more than $400 million in crypto, went to entities that may be linked to Russia in some way, according to a report. Report February 14 by blockchain tracking company Chainalysis.
Illegal funds have also flowed into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency and processed over $1 billion in revenue in 2020, according to Chainalysis. The platform’s strict rules – sellers are only allowed to liquidate cryptocurrencies through certain regional exchanges – have made it difficult for researchers to track this amount.
“We know that there are no questions asked, and we know that Hydra is active not only in Eastern Europe but throughout Western Europe,” said Kim Grauer, research director at Chainalysis. Chainalysis research director said. “There’s definitely cross-border business going on.”
Digital currencies all use blockchain technology, a form of computer code that is publicly viewable for anyone, anywhere. This public ledger tracks the movement of individual digital coins from one “wallet” – as the online repositories for digital assets are called – to another. In theory, this would allow authorities to track all crypto transactions and prevent sanctioned entities from completing them.
But the technology behind Hydra hides the source of the transaction, providing a potential tool for Russian users to move money outside the country’s borders. In essence, Hydra is still not large enough to handle the volume of transactions that Russia will need to successfully evade sanctions. But other money-laundering techniques — including “cages,” in which an illicit market bury itself within a larger, legal structure to conceal its activities — can also be helpful.
There are signs that the United States is stepping up its surveillance of cryptocurrency activity. On February 17, the Justice Department announced it had created a new national crypto enforcement team, a move that appears to underscore that federal prosecutors are paying more attention to bad behavior by the federal government. cryptocurrency users.
Mr. Parker, a former prosecutor, said that the arrest of a couple in Manhattan on February 8 for stealing $3.6 billion in Bitcoin from Hong Kong crypto exchange Bitfinex is “a tangible example of how well and quickly the government is doing what they need to do to be able to track this.”
Regulatory officials are also urging the crypto industry to implement internal controls to prevent bad actors from using their services. In October, the Treasury Department published a 30-page sanctions compliance publication handmade recommends that crypto companies use geofencing tools to weed out clients in sanctioned jurisdictions. In many cases, the report said, it took crypto companies months or years to implement such compliance processes.
That could change as the industry begins to grow. Chainalysis offers a “know your transaction” tool that alerts companies when blacklisted entities use their services. Last year, the company doubled the number of private-sector clients, many of whom use a compliance tool.
But crypto-savvy users can find a way to bypass the blacklist.
“The designation of the Treasury’s crypto wallet address is not straightforward,” said Fanusie of the Center for a New American Security. “That designated agent can still open new wallets elsewhere. You can do that pretty easily.”
https://www.nytimes.com/2022/02/23/business/russia-sanctions-cryptocurrency.html Russia Can Use Cryptocurrency to Mitigate US Sanctions