Russian Financial Institutions May Turn to Cryptocurrency to Avoid the US and European Sanctions

Utilizing cryptocurrency rather than US money would be a breach of sanction agreements.

Following the imposition of a new wave of sanctions aimed at isolating Russian banks from the global financial system, experts are considering cryptocurrency as a way to circumvent the blacklist.

Following an escalation of Russian President Vladimir Putin’s unjustified invasion of Ukraine, the US and Europe placed sanctions on Russian banks, technology industries, and aircraft operators – a broad slice of the country’s economy.

Leah Wald, CEO of crypto asset management Valkyrie Investments, said that although it is unknown if Russia will utilise crypto to bypass sanctions, “the possibility of them doing so is really strong.”

It’s worth noting that employing digital assets rather than US currency is almost certainly a breach of the sanctions, according to legal experts.

The US’s chief sanctions authority, the Office of Foreign Assets Control (OFAC), “believes that its sanctions extend to cryptocurrency activities,” according to Evan Abrams, a sanctions attorney at Steptoe & Johnson.

“They would normally treat a transaction involving bitcoin or another asset the same way they would treat a transaction involving cash,” Abrams said.

While cryptocurrency exchanges and wallet providers situated in the United States must adhere to the same reporting and know-your-customer (KYC) rules as banks, decentralised exchanges and marketplaces in other nations may give an alternative.

“As long as they do not employ a US-regulated organisation to acquire and transport the crypto, I do not believe [avoiding sanctions] would be difficult,” said David Tawil, head of crypto hedge fund ProChain Capital.

Using a variety of exchanges would also help Russian financiers conceal their activities, according to Wald, a former World Bank researcher.

“Russian businesses may easily utilise Russia-based exchanges or brokers as fiat on-ramps and then deal in crypto across various decentralised exchanges or through other technologies designed to obscure the source of money,” Wald added. “Then, entities wanting to interact with them may do so without fear of actual repercussions.”

The punitive measures come just days after Russia’s finance ministry announced plans to regulate cryptocurrency — plans that would double down on the country’s long-standing policy of prohibiting cryptocurrency as a form of payment, posing a potential obstacle for businesses seeking to avoid sanctions.

Russia’s central bank’s under-development digital ruble might enable businesses to conduct legal transactions without using the dollar in a state-sanctioned workaround.

“It is likely no coincidence that Russia just legalised cryptocurrencies in an effort to standardise their regulation and use, maybe as a preventative step against any possible sanctions resulting from an invasion of Ukraine,” Wald added.

In October, OFAC issued new guidelines on cryptocurrency and sanction compliance, emphasising the growing danger that blockchain technology presents to nations’ central control points.

Without approval, violators of OFAC sanctions face a fine of up to $20 million and a jail term of up to 30 years.

According to Abrams, the severity varies according to whether the offences are against main or secondary US sanctions. The former demands the presence of a US citizen or resident.

When it comes to secondary sanctions, which apply to non-US persons operating in other countries, Abrams argues that OFAC lacks the authority to seek civil or criminal penalties.

“However, what they can do is impose penalties on those actors,” he said. “If just one person interacts with the sanctioned individual, the first person may be sanctioned in the same way as the sanctioned individual.”

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