Cryptocurrencies like Bitcoin are decentralized and comparatively anonymous. It makes them ideally suited to circumvent economic sanctions – a problem in searching for penalties for Russia.
Almost two weeks ago, there was a brief piece of news: Russia’s government and the central bank agreed to legalize cryptocurrencies such as Bitcoin and recognize them as a currency. And this is even though just a few weeks earlier, the Russian central bank had called for the mining of Bitcoin and Co. to be banned in Russia – allegedly out of concern for high power consumption. President Vladimir Putin, however, called for the central bank to back down, and he got it.
Possibly Putin’s demand did not come without ulterior motives. But, hardly noticed at the time, the manoeuvre now sheds an entirely different light on the Ukraine crisis, on Putin’s invasion of eastern Ukraine and, above all, on the sanctions that the West is likely to impose on the Russian economy after Putin invades eastern Ukraine. Because many such measures typically cut off a country from the international flow of payments and make international trade more difficult for companies.
In the case of Russia, for example, there are discussions about excluding the country from the Swift international payment network, which enables global payments via a uniform system. The exclusion of Swift is a tried and tested means of sanctions; for example, Iran was excluded from economic sanctions. First, the EU wants to put hundreds of people and companies, including around 350 members of the Russian parliament, on a sanctions list.
However, cryptocurrencies like bitcoin – now recognized as a currency by Russia – could be a way out and thwart Western efforts. The reason: The digital coins are comparatively anonymous. The people behind payments with bitcoin or other cryptocurrencies are difficult to identify, unlike euros or dollars. While bank accounts can be blocked as part of sanctions because they can be easily determined based on the customer’s name and address, this is not easily possible with a wallet, i.e. a wallet for cryptocurrencies.
They are based on the blockchain, a decentralized data protocol in which transactions are stored. Anyone who pays with Bitcoin appears in this log. With their wallet address, a long sequence of up to 35 numbers and letters. There is no name or address. As a result, payments are so difficult to trace that sanctions violations are hardly noticed.
Sometimes that does happen, though. In August 2020, for example, US investigators seized millions of dollars worth of cryptocurrencies, which the terrorist group Al Qaeda and IS used to finance themselves despite sanctions… In addition, investigators can now identify individual wallet addresses and thus track payment flows in the blockchain.
On a large scale, however, this is hardly possible in the decentralized crypto world – especially since numerous unregulated crypto exchanges still do not require any proof of identity from their customers. Any e-mail address is often sufficient to trade Bitcoin, Ether and Co.
These are poor starting conditions for possible sanctions against Russia. The US administration around President Joe Biden recognized a while ago that cryptocurrencies could undermine their sanctions. That is why the White House presented new guidelines for the decree last October and intends to use sanctions even more specifically in the future. The EU Commission is also aware of the issue. At the beginning of last year, NFT Code reported that the commission wanted to investigate the issue to submit concrete recommendations or even a legislative proposal this year. However, the governments still have little concrete evidence to show, and it won’t be easy to regulate cryptocurrencies accordingly in the short term.
The loopholes created by decentralized money can currently be observed in Canada, where truckers have been using blockades to protest the corona measures for weeks. To clear the protests, Prime Minister Justin Trudeau had to declare a state of emergency and declare the whole thing illegal – banks and financial service providers could therefore freeze the protesters’ accounts.
. However, bitcoin quickly established itself as the alternative source of finance of choice. After the truckers could no longer finance themselves through their campaign on the GoFundMe platform, they switched to cryptocurrencies. The equivalent of over a million dollars is said to have landed on the truckers’ wallets. Some truckers’ wallets have been identified, and Trudeau has asked crypto exchanges to stop all transactions there.
