Is cryptocurrency Russia's secret weapon against international sanctions?

Earlier this week, Russian President Vladimir Putin ordered a "military operation" in Ukraine, which U.S. Secretary of State Antony John Blinken called the greatest threat to Europe since World War II.

The international community reacted quickly, with the United States and Western countries announcing a series of sanctions against Russia. The European Union imposed sanctions on Kremlin interest groups, while US President Biden condemned the invasion as a "premeditated attack" by President Putin and announced more economic sanctions and export controls on Russian banks and state-owned enterprises.

So far, other countries have not removed Russia from the SWIFT international payment network, which is used by more than 11,000 banks in 200 countries around the world to process cross-border payments. If Russia is really kicked out of SWIFT, perhaps Putin will consider using cryptocurrency as a "secret weapon" to evade international sanctions.

“Like the traditional financial system, Russia can use cryptocurrencies to evade sanctions imposed in response to its invasion of Ukraine,” Caroline Malcolm, head of international policy at blockchain analytics firm Chainalysis, told Decrypt. But she added that cryptocurrencies do not offer a panacea for Russia to evade sanctions: “Like the traditional financial system, the cryptocurrency ecosystem can take steps to identify and determine transactions by sanctioned entities.”

Does encryption “undermine” US sanctions?

Last October, the Biden administration warned that cryptocurrencies - described by the U.S. Treasury as digital assets - could undermine the broader U.S. sanctions regime.

"These technologies provide malicious actors with opportunities to hold and move funds outside the financial system... They also enable our adversaries to build new financial and payments systems that undermine the global role of the dollar," the U.S. Treasury said in a report.

According to a United Nations report, North Korea has used cryptocurrencies to partially fund its nuclear and ballistic missile programs. Several countries, including the United States, Japan, Australia and the United Kingdom, have imposed sanctions on North Korea, which has hired hackers to steal more than $400 million in cryptocurrencies from exchanges. North Korea also has an active crypto mining program, including Bitcoin and the privacy-focused Monero.

As early as 2018, Iranian businesses were able to use Bitcoin and other cryptocurrencies to evade sanctions imposed by the United States. “We chose cryptocurrencies because sanctions cannot prevent our clients from paying for their accommodation,” an Iranian travel agent told Decrypt.

Ransomware

One of the main ways Russia could use cryptocurrency to evade sanctions is through ransomware attacks — an underground industry that has been secretly developing in Russia for many years. A Chainalysis report recently found that Russian individuals and groups, some of which are already subject to U.S. sanctions, account for a “significant share” of crypto-related crime.

One example is ransomware. Research by Chainalysis found that roughly three-quarters (74%) of global ransomware revenue in 2021 was funded by entities “highly likely to be affiliated with Russia.”

Russia is also home to several cryptocurrency businesses that process “significant transaction volumes” from illicit sources, with Moscow’s Orient skyscraper — Russia’s tallest building — being the most “high-profile” den of cybercrime.

But the most high-profile is the Russian-affiliated cybercrime group REvil. Earlier this year, Russia's domestic intelligence service, the Federal Security Service (FSB), said it had disbanded the REvil ransomware group at the request of the United States.

The Russian claim was met with skepticism at the time, with former FBI agent Crane Hassold saying: "It's unclear who was arrested, are they affiliated, or who's posing as someone else? I don't think we know anything about it."

Hassold also mentioned that cryptocurrency is a "major factor" driving today's ransomware landscape: "It's allowed us to see ransomware ransoms expand to a really crazy number."

Bitcoin Mining

Russia’s crypto-related ransomware industry is well documented, but President Putin may also be pursuing a second cryptocurrency-related revenue stream: Bitcoin mining.

Earlier this year, Putin said Russia had a “competitive advantage” in bitcoin mining, citing the country’s “excess electricity and well-trained personnel.” For now, Putin’s claims appear to be borne out; bitcoin mining in Russia has continued largely uninterrupted.

“Most of the Bitcoin mining in Russia is powered by domestic natural gas or [hydroelectricity] from Siberia,” said Whit Gibbs, CEO of crypto mining company Compass Mining. “Unless sanctions affect mining pool providers, it is unlikely that hashrate will go offline.”

To date, it is unclear whether the Russian government has purchased any Bitcoin. Vladislav Ginko, a professor at the Russian Presidential Academy of National Economy and Public Administration, said in 2019 that Russia would circumvent US sanctions by investing heavily in Bitcoin. Yaya Fanusie, a senior researcher at the Washington think tank Center for a New American Security (CNAS), told the New York Times: "The weakening of the power of US sanctions comes from the system in which these nation states are able to trade without going through the global banking system."

What can be done?

However, there are ways to combat the use of cryptocurrencies to evade sanctions.

Malcolm told Decrypt that the U.S. and other sanctions-imposing governments around the world could invest in blockchain analytics to take a first-mover advantage. “The transparency of blockchain combined with these tools can be a powerful strategy to ensure sanctions remain a deterrent,” she said.

By Scott Chipolina

Compiled and edited by: Mary Liu