As many people do when discussing the complex world of cryptocurrencies, Vladimir Putin kept it simple: “Of course we also have certain competitive advantages here, especially in the so-called mining.” After the events of this weekend, when Russia was hit with severe financial sanctions, the Russian president may consider capitalizing on these advantages.
Putin was speaking in January, days after the country’s central bank proposed a blanket ban on cryptocurrency trading and mining. In the case of bitcoin, the cornerstone of cryptocurrency, mining is the energy-intensive process by which computers verify new bitcoin transactions – placing them on a virtual ledger known as a blockchain – and generate new bitcoins as a reward for this work.
The Bank of Russia was adamant in its warning, saying cryptocurrency mining carries “significant risks to the economy and financial stability.” A week later, Putin sounded less sure, pointing out that Russia has advantages in cryptocurrency mining due to its enormous energy wealth and expertise in the field.
Putin’s doubts about a full crypto embargo may well have deepened after the West put massive pressure on Russia’s financial system with new sanctions. The EU, US, UK and Canada have targeted the country’s $640bn (£478bn) in foreign exchange reserves – a financial buffer held as a reserve to deal with emergencies and ensure financial stability – by agreeing to “prevent the Russian central bank from deploying its international reserves in a way that undermines the impact of our sanctions”.
The same group also announced that anonymous Russian banks would be kicked out of Swift, the main global payment messaging system used by banks to make cross-border money transfers.
Russia and its banks could take a closer look at cryptocurrencies as they could represent an alternative international medium of exchange to the dollar. Cryptocurrencies could also bypass the international banking system which is essential for enforcing sanctions as a listening post for financial transactions worldwide (a feature of cryptocurrencies that watchdogs and central banks don’t like), offering an alternative means of making irreversible cross-border transactions.
“We are at a watershed moment in world history when the central banks of nation states no longer directly control the financial instruments once used to impose global regulations. With cryptocurrency in its infancy, these decentralized currencies lack the agency and infrastructure to be able to regulate institutions as large as Russia,” says Eric Michaud, co-founder of Off The Chain, a conference on blockchain security.
Other crypto experts, however, argue that the transparent nature of blockchains makes it difficult for sanctioned entities to use cryptocurrencies to evade sanctions.
Nonetheless, some nation states have turned to bitcoin as an escape. Iran, heavily sanctioned by the United States but with large reserves of fossil fuels, efficiently converts its excess energy into cash by acquiring bitcoins from Iran-based bitcoin miners (powered by electricity generated by fossil fuels) and using the currency to buy imports.
“The Iranian state…effectively sells its energy reserves on global markets, using the Bitcoin mining process to circumvent trade embargoes,” said Elliptic, a blockchain consultancy that helps clients fight back. against crypto-related crime, in a blog post last year.
Elliptic’s director of policy and regulatory affairs, David Carlisle, said cryptocurrency mining is “one of the most feasible options” for Russia, which is already the third-largest country for mining. bitcoin mining according to data from the University of Cambridge.
“In addition to minting cryptos that can be used to trade with governments, Russia can also tax the underlying monetary activity. They can license and tax the activity itself,” Carlisle explains. Elliptic believes that the Iranian government could earn around $1 billion a year from bitcoin mining Carlisle adds: “Once it has large amounts of mined bitcoin, Russia can then use that bitcoin to pay for imports of goods and services that she would otherwise struggle to access, due to US and EU restrictions.”
However, the Wall Street Journal reported last week that the United States is considering imposing sanctions on the Russian cryptocurrency market. Companies such as Elliptic offer software that allows businesses to spot illegal crypto transactions.
According to Chainalysis, a blockchain analysis company, the transparent nature of blockchains makes it difficult to use cryptocurrencies as a basis to avoid swashbuckling penalties. “Sanctions evasion activity is captured on public, permanent, immutable blockchain ledgers,” says Caroline Malcolm, head of international public policy and research at Chainalysis.
There are still other routes Russian players could take, including the North Korean route of hacking cryptocurrency platforms, which raised $400 million for Kim Jong-un’s state. last year alone, according to Chainalysis.
There are also ransomware attacks, where criminal groups encrypt a target’s computers and demand cryptocurrency in exchange for unlocking them, although Russian security agency FSB recently claimed to have taken down ransomware group REvil . Last year, the US Treasury Department sanctioned two Russian-owned cryptocurrency exchanges, SUEX OTC and Chatex, for allegedly helping to launder ransomware proceeds. On Monday, crypto exchange Binance said it was blocking the accounts of all sanctioned Russian customers.
According to Elliptic’s Carlisle, the Russian state could be using a network of exchanges to conceal crypto ownership. “If the Russian government or Russian entities wanted to look for ways to evade sanctions using crypto, they could try to develop a network of complicit exchange services that would help them do that,” he says. There are also hard-to-trace cryptocurrencies, such as the privacy-focused Monero.
But Carlisle adds that the scale of the financial restrictions Russia faces is such that cryptocurrencies will not be enough. “Crypto alone will never allow Russia to circumvent financial restrictions on the scale it needs to mitigate the full impact of the restrictions; The total assets of the Russian banking sector amount to $1.4 billion, which is almost the size of the entire crypto market.
There are also alternatives to cryptocurrency. The ejection of Russian banks from Swift could encourage China to bolster its own fledgling payments network, the Cross-Border International Payments System. Alexi Drew, senior analyst at RAND Europe, a research institute, said: “It would not be beyond the bounds of belief for China to take the Russian stance on unfair sanctions and provide a way to mitigate them by giving to Russia the use of CIPS. .”
Or the answer could be even closer to home. The Bank of Russia is also developing its own digital ruble.