One of the primary benefits of cryptocurrency is that it makes cross-border financial transactions faster, cheaper and more secure. In the wake of Russia’s unjustifiable invasion of Ukraine, skeptics in Congress are claiming that Russia could use crypto to evade the devastating economic sanctions imposed by the West.
Already, Sen. Elizabeth Warren (D-Mass.) and several Democratic co-signers introduced legislation to satisfy their fears and place unnecessary and burdensome restrictions on crypto. Here’s the good news: Those fears are entirely unfounded. Russia won’t use crypto to evade sanctions because it can’t.
To explain, let me first briefly explain what sanctions are, how crypto markets work and how Russia fits in.
Sanctions are a foreign policy tool used to influence behavior and punish foreign bad actors. In the U.S., sanctions originate from either the president or Congress, and then the Office of Foreign Assets Control (OFAC) designates specific targets of sanctions: individuals, companies, governments, banks and so on. From there, OFAC adds targets to the Specially Designated Nationals and Blocked Persons (SDN) list, which makes it illegal for any U.S. person or organization to interact with those on the list.
This is crucial. SDNs are blocked from accessing U.S. goods or services, selling products to U.S. buyers, owning U.S. property, or otherwise engaging in any way economically with American entities. Anyone who violates these rules has committed a federal offense.
Since the Russian invasion, the U.S. and its allies imposed severe sanctions that are already devastating Russia’s economy. Right now, most of Russia’s economy is cut off from all goods and services offered by the free world: Which brings me to crypto.
A collection of democratic senators believe Russia may use the technology to evade sanctions and gain access to global finance. To this end, Warren’s bill encourages the Biden administration to impose more burdensome restrictions on crypto, including secondary sanctions on a huge number of individuals and companies — including U.S. citizens — who have nothing to do with Russian SDNs.
This fundamentally misunderstands what crypto is and what it can do.
First, just because crypto is separate from the traditional financial system doesn’t mean it’s immune to U.S. law. Crypto companies, like all American entities, are currently prohibited from engaging with Russian SDNs. It’s illegal for U.S. persons to transact with SDNs, period. It doesn’t matter if they use dollars, gold, seashells or bitcoin.
Second, although crypto has grown quickly in the last few years, crypto markets are still too small and transparent to be useful for the Russian economy. Crypto markets are relatively illiquid to start with, and ruble trading pairs are rare. To make a meaningful difference, Russian SDNs would have to convert billions of dollars worth of rubles into crypto. With Russia cut off from the world’s crypto industry, they can’t source nearly enough liquidity for that.
Third, Russian SDNs can’t hide their tracks with crypto. The transparency of public ledgers and the analytics capabilities of U.S. forensics firms render crypto useless for sanctions evasion; if Russia tried, the U.S. government would see and be able to trace their funds in real-time. More, the Treasury Department itself knows there isn’t a real risk of Russia using crypto to subvert sanctions.
Finally, the Russian government has shown no interest in trying to use crypto to evade sanctions. Russia has no crypto holdings and no crypto infrastructure. Instead, Russia has attempted to mitigate sanctions by diversifying its reserves into yuan and gold, and by replacing SWIFT with its own interbank messaging system, SPFS. Despite reports speculating about capabilities such as the digital ruble — which does not exist — the reality is that crypto has not been, and will not be, any help to Russian SDNs.
All this isn’t to say that crypto has no role in this crisis – in fact, crypto is actively helping the Ukrainian war effort. As Forbes reports, Ukraine has raised over $50 million in crypto donations for security and humanitarian aid since the Russian invasion. Given the devastation that sanctions have already wrought on the Russian economy, it’s clear that crypto is doing far more good than ill.
There’s still a lot of misunderstanding about crypto out there, and in times of crisis, it’s understandable why some may not trust this complex, next-generation technology. But as the crypto industry rapidly becomes a major player in global finance, we encourage Congress to engage with our industry. If they do, they’ll see thriving American companies that play by the rules and respect international law and human rights.