Days after Russia started a full-scale invasion of Ukraine in February, Western countries, headed by the United States and the European Union, imposed massive sanctions on the Russian economy with the hope of forcing Moscow into an economic catastrophe that would induce a military retreat.

Yet, within days, top US officials and financial analysts were warning that Moscow would utilize cryptocurrencies to avoid Western sanctions, worrying that blockchain-based platforms would allow Russians to avoid US anti-money laundering (AML) standards and avert economic disaster.

One probable scenario is that Russian miners exploit the country’s abundant energy supplies to generate bitcoin (BTC), then transport those bitcoins through a series of dubious crypto transactions – most likely using unhosted wallets to move those bitcoins through a series of shady crypto transactions involving chain-hopping, tumblers, and peer-to-peer (P2P) marketplaces to convert them into US dollars to pay for goods. Tornado Cash, a well-known mixer sanctioned by the US Treasury Department in August, has previously been used to launder $9 billion, so it may appear to be a viable choice.

But, after nearly seven months, Russia has not taken this path. In reality, very little Russian money has been routed through cryptocurrency. The Wall Street Journal claimed in April that daily ruble trade in cryptocurrency increased to 6.6 billion (US$46 million) in the days following Russia’s invasion before rapidly falling to 1 billion rubles ($7 million).
As of August, Russia’s crypto trading volume remained low, with 24-hour ruble to tether (USDT) transaction volume averaging between tens and hundreds of millions of rubles per day, down from 4.3 billion rubles in early March.

Todd Conklin, head of the Treasury’s cybersecurity portfolio, appears to have been correct. “You can’t flick a switch and operate a G-20 economy on bitcoin overnight,” he remarked in March. “There is simply insufficient liquidity.”
Conversely, Russia’s President Vladimir Putin appears to be focusing all of his efforts on developing alternative financial railroads to compete with the dollar-based SWIFT financial communications system. This includes Russia’s SWIFT counterpart SPFS (System for Transfer of Financial Messages) and MIR payments, which compete with Visa/Mastercard.

SPFS has been actively marketed by Moscow to major trade partners who are also Western allies, like India, Israel, and the United Arab Emirates. SPFS has almost two dozen banks from nearly a dozen countries, including India, Turkey, Iran, China, Germany, Armenia, and Switzerland.

Nevertheless, in July, five Turkish banks embraced MIR, and Iran is in advanced discussions to join the network. Mir has also received interest from India, Cuba, and Sri Lanka.

Putin’s restrictions tone suggests that he and his associates regard traditional financial instruments as more permeable than cryptocurrency. The Russian president appears to feel that establishing a regular, but non-Western, banking network is a better method to avoid sanctions than cryptocurrency.

The first reason is that the old banking system’s transaction data is insurmountably large and possibly rife with inaccuracies. In the United States, for example, if a bank notices a sequence of $9,999 transactions ($10,000 is frequently the reporting level), it must submit a suspicious activity report (SAR) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

In 2019, banks in the United States submitted 2.7 million SARs, or around 10,000 every working day. And because they are not short, basic texts, there is space for inaccuracy.
In a recent interview, Peter Dittus, former secretary-general of the Bank for International Settlements, the international bank for the world’s central banks, admitted this after stressing the benefits of the old financial system.

“[The Western financial system] does, however, have two big flaws: an inability to simultaneously monitor all of the world’s transactions for suspicious origins and an over-reliance on self-interested institutions and nations adhering by its standards,” Dittus stated.

“The basic restriction of the old banking system is that transaction data is almost hard to audit,” he continued. In fact, once a FinCEN employee disclosed 2,100 SARs in 2019, 400 journalists required 16 months to review them.

This takes us to the second point, which is that the blockchain’s transaction data is error-free and publicly available. All on-chain transactions are documented in a permanent, unchangeable, and publicly accessible record. While cryptocurrencies are anonymous in the sense that other users and exchanges may not know your identify, all users leave traces of their activities.

Whenever a cryptocurrency user conducts a transaction, his wallet, or digital address, interacts with a cryptocurrency exchange or another user, leaving digital fingerprints for authorities to follow. This may not easily fit into today’s AML standards’ traditional know-your-customer (KYC) framework, but it has the potential to generate successful new tools like know-your-transaction (KYT) – a different means to the same end.
The capacity of dictators, human traffickers, terrorists, and drug cartels to launder money via the traditional banking system is frequently critical to their success. Rather than providing a lifeline, as some claim, bitcoin allows us to drive them out of business – and we may finally have proof.

The world is well aware that Putin will go to any length to achieve his goals, from committing atrocities during wartime to highly sophisticated digital tampering in democratic democracy. The fact that his attempts to avoid Western sanctions have yet to include crypto says loudly about its utility as a money-laundering weapon.

Natasha Dean

With an eye for detail and understanding of this exciting industry. My experience has given me an understanding of crypto trends and how to effectively break them down. I have a soft spot for NFTs and the Metaverse.