Sanctions imposed on companies and individuals in Russia and Belarus have triggered concerns that crypto-currencies offer an escape route to circumvent them. Insiders argued that these concerns are unjustified, although crypto sceptics argue that “we should not be naive”.
In the aftermath of Russia’s invasion of Ukraine, crypto sceptics have found new arguments. Where the assets of politicians, officials and oligarchs have been frozen and financial transactions through Russian banks are hardly possible, the fear is that these now will continue through crypto-currencies.
Lagarde concerned
A debate has now arisen between proponents and opponents of crypto-currencies about the role these assets play in the conflict in Ukraine. ECB President Christine Lagarde said she is convinced that crypto-currencies are being used to evade sanctions.
“Trading volumes from the ruble to crypto are currently at the highest level we have seen since 2021,” Lagarde told a conference last week. Several crypto-currency development platforms were asked not to allow Russian transactions to go through.
US Senators Elizabeth Warren and Mark Warner have called on Treasury Secretary Janet Yellen to inquire about sanctions compliance in the crypto sector. They expressed concern that “criminals, rogue traders and other actors can use digital assets and alternative payment platforms as a new means of hiding cross-border transactions for malicious purposes”.
Cryptomarket too small
Jonathan Levin, co-founder of Chainalysis Inc, a blockchain analysis company that sells anti-money laundering services to governments, believes such concerns are not justified. He said that there is no demonstrable evidence of Russian dignitaries possibly circumventing sanctions.
“The crypto market is too small to facilitate large-scale evasion of sanctions by the Russians,” Levin told the US Senate Banking Committee. “The limited liquidity, traceability and digital ledgers make crypto-currencies very suitable for recording and preventing criminal behaviour.”
The Digital Economy Institute, an independent think tank dedicated to crypto policy, also questions Lagarde’s statements. Rouble-denominated trading volumes in crypto currencies have already dropped significantly from their peaks in late February and early March, according to the institute. Also, the total daily volume of Bitcoin is estimated at 20-40 billion dollars, while the trading volume in rubles represents only 7.4 million dollars, according to the think tank, suggesting that fears may be overblown.
Although the figures seem to contradict Lagarde’s statements, Sylvester Eijffinger, emeritus professor of financial economics at Tilburg University and visiting professor at Harvard University’s economics department, notes the lack of measurability of crypto transactions.
“Transactions in crypto-currencies are by definition decentralised, so I am sceptical about the credibility of the figures. Even if the figures are correct, one may wonder to what extent the evasion of capital imports and exports can be stopped.”
Russia’s digital strategy
While the discussion continues on the extent to which Russia is able to evade sanctions through crypto-currencies, it is already clear that the Russian central bank is developing a digital rouble.
It is intended to be an alternative to cryptocurrencies for Russians, which “should be completely banned,” the Russian regulator said last month. The New York Times reported that Russia is also developing tools to hide the origin of digital transactions.
Michael Parker, a former American prosecutor, told the Times that it would be “naive” to think that Russia had not thought beforehand about the scenario in which sanctions were imposed and about ways of circumventing them.
Eijffinger is also sceptical on this point. His expectation is that Russia will have difficulty developing a digital currency or other crypto solutions now that many highly educated IT professionals are leaving the country. “Also, I don’t think there will be much demand for a digital ruble. The market will price in huge risk premiums for such a product.”
“On that topic, other central banks, such as the Fed, the ECB but also the Bank of England, will now roll out their own digital currencies at an accelerated pace. That will also put pressure on the demand for alternatives from Russia and China,” said Eijffinger.
This article was originally published on Dutch on Investmentofficer.nl:
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