US and European sanctions over the past week and a half have made it possible for the Russian government and its oligarchs to use alternative methods to move their cash across the border.
“We believe it is very likely that Russian companies and citizens are trying to use crypto assets such as Bitcoin or US Dollar-pegged stablecoins such as Tether (USDT), to circumvent economic sanctions,” said Josh Olszewicz, head of research at Valkyrie Funds, a digital asset investment manager.
Stablecoins are pegged to fiat or backed by cash by central banks, while Bitcoin and other non-stablecoin digital currencies derive their value from supply and demand and otherwise have no intrinsic value. . Non-fungible tokens or NFTs are digital tokens tied to assets other than cash, but those “assets” can also have value like art and real estate or nonsense like a random photo or stuffed animal.
Along with the freezing of the assets of Russia’s key oligarchs, US and European governments ban Russian banks from using SWIFT, the world’s largest financial messaging network. The sanctions appear to have near-immediate and far-reaching economic consequences, as billions of dollars are suddenly unavailable to Russian banks.
In addition to cryptocurrencies, even SWIFT’s financial messaging network can be easily manipulated to conceal the cash transfers of sanctioned entities, according to Mark Gazit, CEO of ThetaRay, a blockchain solution. AI-powered transaction monitoring solution for cross-border payments.
SWIFT itself is a relatively secure network, but it shouldn’t be difficult to set up shell companies and move money through them and then use the financial messaging system to do cross-border transactions, says Gazit speak.
“It’s a pretty old system,” he said. “It was developed in 1973. That’s why all the security precautions you would expect a newer system to have won’t exist on SWIFT, which creates a lot of problems even before the current situation existed. The problem was that the system didn’t actually validate the transaction.”
Gazit says it is essential that AI-based software be able to review financial transactions on their own, not just identify senders to determine if they are nefarious. In addition, there are countries still connected to SWIFT that are sympathetic to Russia, and they are likely to act as proponents of the ruble move, Gazit added.
The US and European governments have become concerned about the Russian government, its banks and the oligarchs. will use alternative means to move assets in and out of the country.
In a letter to Secretary of the Treasury Janet Yellen, US politicians noted that Russia could use the “dark web market” of cryptocurrencies to circumvent sanctions and asked if governments needed additional tools to block any moves. such or not. “These reports are even more troubling as analyzes suggest that the crypto industry may not be fulfilling its responsibility to comply with US sanctions,” the letter states.
Following previous financial sanctions, the Treasury Department introduce new regulations last week to prevent Americans from using crypto to circumvent Russian sanctions. Treasury officials also asked crypto exchanges like Coinbase, Binanceand FTXto block sanctioned people and their addresses.
Coinbase, the largest U.S. cryptocurrency exchange, responded by saying that it has no plans to impose a mass ban on Russian customers, but will block trading activity involving individuals sanctioned person or organization, Coindesk reported. Binance, along with several other exchanges, have publicly stated that they will not block all Russian users or IP addresses, but will target sanctioned entities.
“Binance follows very strict sanctions rules,” Binance CEO Changpeng Zhao told Bloomberg last week.
However, the two main Ethereum digital currency ecosystem providers set access restrictions to keep users in “certain jurisdictions” evading international Russian sanctions. Users of MetaMask and Infura – on and off the ramp for Ethereum crypto exchanges – says users attempting to access the Ethereum network in those regions will encounter an error message.
“No single legislator or regulator can stop the on and off process in an unregulated exchange,” said Avivah Litan, vice president and prominent analyst at research firm Gartner. control or on the international blacklist”. But crypto institutions can; SHe called the move by MetaMask and Infura “very important” in that it shows that several decentralized crypto networks are trying to comply with the sanctions.
“Of course, they [Russia] Litan can hide their location in the future – so they can avoid location-based sanctions,” said Litan. But sanctioned entities can only spend their money in decentralized crypto networks and they can only take the newly converted fiat to crypto and take it out using exchanges. Transactions do not cooperate with sanctions. ”
So, for example, sanctioned Russian entities cannot move their funds out of blockchain financial systems that have banned them. Similarly, they cannot withdraw funds from frozen bank accounts to buy crypto, Litan said.
Cryptocurrencies run on Blockchain-based electronic ledger, which provides anonymity through encryption. So sanctioned entities can only be blocked from buying into crypto or selling crypto via the on and off ramps for exchanges. Those ramps include digital wallets used to store bitcoin and other crypto assets and APIs or software interfaces with crypto exchanges.
However, sanctioned entities must be identified in the blockchain network to prevent their movement away from the blockchain/crypto network. And they can use fake identities to get accounts at centralized exchanges, Litan explained.
“So the long and short of it is – there are punitive entities and criminals that can lurk in crypto networks, but they have a lot of trouble getting their money in and out of crypto networks. that network,” said Litan. “Entities sanctioned by Russia cannot stop holding and trading cryptocurrencies or stablecoins in crypto networks.”
Olszewicz of Valkyrie Funds agrees, adding that “of course” there will be some who stay away from helping Russians (especially financiers) launder their money through crypto.
“But the majority of those who dodge sanctions can get into trouble,” Olszewicz said. “The penalties for breaching sanctions are severe enough to deter most bad actors, and forensic accounting tools, regulators and other investigators are likely to catch up pretty much any real estate agent.” No one comes to the aid of the sanctioned sooner than many realize.”
Sanctions Drive Crypto Rise
Due to widespread financial sanctions against cross-border financial networks, the value of the cryptocurrency market surged last week.
Last Monday, Bitcoin rallied 10.4% to $41,807.16, while Ether gained 7.6% to $2,826.54. US stocks fell sharply earlier in the day before recovering a large portion of their losses.
For that matter, the average Russian or anyone from anywhere in the world using Bitcoin as an economic escape from forces beyond their control is “very much a feature, not error” of cryptocurrencies, Olszewicz said.
“Bitcoins, cryptocurrencies and stablecoins sometimes serve as important economic lifelines for many in Ukraine and Russia, and digital currencies are likely to continue to function as a means of payment and banking without a third-party intermediary, such as in the form of SWIFT. “
Valkyrie Funds CEO Leah Wald said crypto networks could reach the moment many have been waiting for, “where bitcoin and other coins have probably gone mainstream.” according to CNBC.
According to crypto trading data provider as the invasion of Ukraine unfolded, crypto trading volumes for Ukrainian trading pairs Ruble and Hryvnia spiked to a multi-month high, especially is for stablecoins, according to crypto transaction data provider Kaiko.
According to Kaiko’s February Market Report.
Russia’s invasion puts the crypto industry “in a unique and precarious position, needing to balance enforcement of sanctions with a lack of authority to restrict transactions on decentralized networks.” , said Kaiko’s report.
“In particular, cryptocurrencies and stablecoins are safe havens if you live in a country where your currency is depreciating,” said Litan. “It’s all about trusting the protocol instead of trusting the government or any company. I think this fight is proving that protocols are much more reliable than certain governments.”
Copyright © 2022 IDG Communications, Inc.
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