Using cryptocurrency to avoid sanctions is possible, but difficult

On Feb. 24, the Russian military invaded Ukraine. In response to the invasion, the U.S. and its allies, including the European Union, responded by imposing sanctions on the Russian government and dozens of individuals close to the government. 

The U.S. Department of the Treasury said the severe economic sanctions will have both immediate and long-term effects on the Russian economy and financial system. The stated goal is to destabilize the Russian economy. 

Russia’s largest financial institutions were targeted in the sanctions, but cryptocurrency exists beyond bank walls. Cryptocurrency, such as bitcoin, is a decentralized digital currency that is not regulated by any government. It’s difficult to track, semi-anonymous and the crypto value isn’t plummeting like the Russian ruble has been since the invasion started. 

Several U.S. senators penned a letter expressing concern about the Russian government or oligarchs using cryptocurrency to get around the global sanctions. The letter said sanctioned persons could use dark web cryptocurrency marketplaces to move funds and conduct transactions, use crypto wallets to transfer and hide their wealth, deploy a digital ruble that would allow Russia to conduct foreign trade, or conduct cyberattacks that would recoup revenues lost to sanctions.

THE QUESTION

Can the Russian government or oligarchs use cryptocurrency to evade economic sanctions?

THE SOURCES

• Merav Ozair, Ph.D., blockchain expert and a FinTech professor at Rutgers Business School
• Erich Ferrari, founder and principal attorney of Ferrari & Associates
• The U.S. Department of Justice
• Federal Crimes Enforcement Center
• Binance, a cryptocurrency exchange
• Coinbase, a cryptocurrency exchange 

THE ANSWER

It’s possible to use cryptocurrency to avoid sanctions, but it’s not as simple as signing up for crypto as a means to hide money.

There are some rules in place that would regulate cryptocurrency exchanges, but they're not legally binding and it's up to each individual exchange to regulate their customers. Some exchanges have verification processes in place when someone signs up for an account, but others don't. Some exchanges have frozen or blocked sanctioned individuals, and others have not. 

There are no global rules cryptocurrency exchanges need to follow.

WHAT WE FOUND

Cryptocurrency, such as bitcoin, has gained popularity over the past few years as a potential alternative to a regulated and centralized currency like the U.S. dollar. 

An individual can use an exchange like Coinbase or Binance to buy a type of cryptocurrency using traditional money, like dollars, similar to how someone would purchase stock through a broker. Once a user owns some cryptocurrency, these exchanges allow them to buy and sell cryptocurrency with one another, peer-to-peer, without the need for brokers or banks conducting the transactions. 

Each exchange operates under its own set of policies. For example, Coinbase uses identity verification  to comply with Know Your Customer regulations. Know Your Customer (KYC) standards are required by the Financial Crimes Enforcement Network (FinCEN), a division of the Department of Treasury, within the investment and financial services industry to verify a customer’s identity. They are not currently required for crypto exchanges. In a report published in December 2020, FinCEN announced a proposal to expand KYC rules to the cryptocurrency industry, and wrote the agency had met with representatives from the industry on several occasions. Most exchanges under U.S. jurisdiction choose to comply with KYC regulations for customers opening new accounts.

For exchanges complying with KYC regulations, a new user would need to provide their driver’s license or state identification card and also take an ID selfie. The individual exchange then polices the accounts.

For users with existing accounts, it’s up to the individual exchange to determine how those accounts are being monitored. Coinbase published a blog post that said they would be blocking account access to sanctioned actors. 

Cryptocurrency exchange Binance told VERIFY in an email they are taking action against those who have had sanctions levied against them, and have active accounts on the exchange. In a blog post, Binance CEO Changpeng Zhao said Binance “applies the same sanctions rules as the banks, according to international standards.”

Kraken is one exchange that is not cracking down on Russian users with existing accounts. 

“I understand the rationale for this request but, despite my deep respect for the Ukrainian people, @krakenfx cannot freeze the accounts of our Russian clients without a legal requirement to do so. Russians should be aware that such a requirement could be imminent,” Kraken CEO Jesse Powell wrote on Twitter. 

Reuters reported Russians are moving their assets to cryptocurrency firms in places like the United Arab Emirates, which has not imposed sanctions on Russia. According to the report, locations that have not imposed sanctions or have lax restrictions are considered “safe havens.”

Erich Ferrari, founder and principal attorney of Ferrari & Associates, told VERIFY cryptocurrency is not a loophole when it comes to sanctions. Ferrari & Associates is a law firm that specializes in U.S. economic sanctions issues. He said a lot of the same tools that are used for compliance in traditional financial services are being used by many cryptocurrency exchanges.

“I don’t think they can avoid sanctions using cryptocurrency any more than they could avoid sanctions using cash, physical cash,” Ferrari said. “I think a lot is made about ‘Oh, well, crypto is a way to get around sanctions.’ It's not. It's a different method of value transfer. But it's subject to a lot of the same, if not all of the same compliance measures as financial institutions.”

When someone makes a transaction using a cryptocurrency exchange, it’s recorded on the blockchain, which is the system in which a record of transactions made in bitcoin or another cryptocurrency are saved. Merav Ozair, Ph.D., told VERIFY the transactions recorded on the blockchain are completely traceable, which is another reason why it’s difficult to use cryptocurrency as a way to escape sanctions. 

On March 2, the Department of Justice announced the KleptoCapture task force, which is dedicated to enforcing sanctions, export restrictions and economic countermeasures that were put in place by the U.S. and its allies. 

One role of the task force is to target “efforts to use cryptocurrency to evade U.S. sanctions, launder proceeds of foreign corruption, or evade U.S. responses to Russian military aggression,” the task force press release said.

“This whole task force is really reliant upon cooperation with the private sector, and their accurate identification of sanctions, evasion schemes and sharing that information with the U.S. government,” Ferrari said.