The ongoing economic sanctions against Russian oligarchs may have a weak spot: cryptocurrency. Data shows that Russian interest in digital currency has increased since Russia invaded Ukraine. There are growing fears that tycoons in the country are converting rubles into bitcoins in order to circumvent global restrictions on their accounts. The nature of cryptocurrency – which exists in a closed system and is not regulated by central banks – could allow Russian users to hold onto their capital and possibly convert it into dollars.
Moreover, while the ruble has been falling for the past few days, bitcoin is on the rise, which means the oligarchs would not lose any purchasing power. Cryptocurrency movements are not linked to a user’s identity, unlike banking transactions, which were affected by the decision to ban Russia from the SWIFT payment platform and the fact that Visa, Mastercard and American Express have suspended all operations in the country.
So, are the Russian oligarchs using cryptocurrencies to avoid economic sanctions from the West? it could be. But most of their capital was probably already safe before the sanctions were introduced. “We must take into account that these oligarchs may have their tax residence in another country, or have business groups that operate in different jurisdictions, allowing at least partial avoidance of the new sanctions,” said Moisés Barrio, lawyer for the Spanish Council of State and author of the book Cryptoactives. Retos y defios normative (or, Cryptocurrencies. Challenges and Regulatory Obstacles).
But there was movement. Like the French financial daily The echoes noted, some of these tycoons started buying cryptocurrencies months ago. But it remains to be seen if they will be able to get their money back. Much will depend on how many digital currency platforms, also known as exchanges, decide to get involved in the dispute.
On Monday, Feb. 28, White House and US Treasury officials met with some of the major stock exchanges to ask them to stop operating in Russia to comply with Washington sanctions. On Thursday, Binance, one of the biggest trading platforms, refused. “We distinguish between Russian politicians who start wars and normal people, many normal Russians don’t agree with war,” Binance founder Chanpeng Zhao told BBC Radio 4 on Thursday.
Next up, Coinbase, another major exchange, also refused to comply. “We believe that everyone deserves access to basic financial services, unless otherwise required by law,” company founder Brian Armstrong said in a statement. message on twitter. Jesse Powell, the founder of the Kraken trading platform, also justified his denial on twitterarguing, “Sometimes the hardest thing about power is knowing when not to use it.”
1/6 I understand the merits of this request but, despite my deep respect for the Ukrainian people, @krakenfx cannot freeze the accounts of our Russian customers without a legal obligation to do so.
The Russians should be aware that such a demand could be imminent. #NYKNYC https://t.co/bMRrJzgF8N
— Jesse Powell (@jespow) February 28, 2022
Many cryptocurrency enthusiasts argue that industry access control goes against the spirit of the technology. Although most exchanges are following requests from the European Union and the United States to cease operating in Russia, some have chosen to block access to only certain accounts. But to do that, they need to know where to turn.
How the platforms work
When someone wants to buy bitcoin, they have to find a seller. There are two ways to do this: they can do the transaction over the internet – and run the risk of being scammed – or they can use an exchange, which may or may not be regulated. Most users opt for regulated exchanges, such as Binance, Kraken, and Coinbase, to protect their trades.
These platforms are essential for two reasons: first, they require their customers to identify themselves, and second, they are the only major bitcoin forks. Bitcoin is built on blockchain, a technology that shows the amount of money each address or user holds. “The addresses with the most bitcoins are the exchanges. An oligarch who wants to buy large amounts of bitcoin will have to go through one of these platforms,” explained Javier Pastor, commercial director of the Spanish cryptocurrency platform Bit2Me.
In order to list on a regulated exchange, users must upload a passport and corroborating ID. If they want to buy cryptocurrency, they must also indicate the source of the money they will use to buy it. “The idea is that all exchanges can be useful in police investigations, including those into money laundering,” Pastor added.
No one can stop someone from giving someone else a $50 bill. The same goes for bitcoin transactions. But intermediaries – such as banks or, in the case of cryptocurrency, exchanges – can be blocked.
How to find the oligarchs
Christine Lagarde, President of the European Central Bank (ECB), said on February 25, the day after the invasion began, that the EU needed legislation to regulate cryptocurrency transactions, among other measures. to control the movement of Russian capital. The law already provides ways for the government to intervene in cryptocurrency accounts, called wallets.
“In Spain, the Tax Agency, through the National Fraud Investigation Office [ONIF], has specific measures to detect cryptocurrency transactions. Your property must be registered in the overseas wealth declaration and your income is subject to income and wealth tax,” Barrio explained. “Spanish courts can block wallets operated by providers based in Spain or with branches in our country, and use judicial cooperation mechanisms in other cases,” he added.
Anyone who deposits large sums of dollars from bitcoins in Swiss bank accounts, as the Russian oligarchs tend to do, or in another tax haven, will automatically trigger red flags. For the French economist Thomas Piketty, pursuing these movements is in fact simple: “It would be enough for Western countries to finally create an international financial register that would keep track of who owns what in different countries”, he writes in an article by opinion for EL PAÍS.
Authorities can also intervene selectively before the currency conversion takes place. “There are companies, including exchanges, that can mark wallets that have been identified as being linked to the Russian government or its collaborators, just like those that come from hacking or drug trafficking. These transactions should be monitored and blocked, but not the transactions of all Russian citizens,” said Jorge Soriano, co-founder and CEO of cryptocurrency exchange Criptan.
Many industry professionals prefer to block only certain blacklisted accounts rather than shutting down an entire country. “It’s hard to do, but it can be done if the intelligence services identify the bitcoin addresses of [Russian President Vladimir] Putin or other key people and then tell the exchanges not to accept their trades,” said Raúl Marcos, CEO of the Carbono.com exchange.
The crypto alarm clock
The use of cryptocurrencies, especially bitcoin, has exploded in Russia and Ukraine since the start of the war. Within days, more than $140 million worth of rubles were converted into bitcoin, according to CryptoCompare data aggregated by Euronews. Russian citizens turned to decentralized digital currency to maintain their purchasing power in the face of the ruble’s collapse, just as Venezuelans and Argentines did before them when their economies began to collapse. In Ukraine, which before the invasion was fourth in the world in terms of crypto adoption, people converted their money to bitcoin so it could be easily transported – they can carry their savings on a USB drive and protect them from devaluation to a period of deep uncertainty.
Meanwhile, the Ukrainian government also relies on cryptocurrency donations to fund the country’s defense against Russia. The official government Twitter account has encouraged those willing to help donate money to their bitcoin and Ethereum addresses. As of March 1, donors have transferred over $15 million in crypto. Ukrainian NGO Come Back Alive has also raised $8.5 million in bitcoins since its inception in 2014, following Russia’s invasion of Crimea.
Ukraine also plans to issue NFTs (non-fungible digital tokens) to support the war against Russia, according to the FinancialTimes. Last week, one of the founders of Russian activist group Pussy Riot auctioned an NFT of the Ukrainian flag for more than 6.6 million euros ($6.7 million), with proceeds going to support people affected by war.