Sanction Evasion with Crypto
Introduction:
After the US and many European countries imposed sanctions barring national businesses to interact with Russian banks in 2014, the impact on the Russian economy has been immense. As estimated, the cost for Russia due to these sanctions will be around $50 billion a year. The global market for cryptocurrency has soared ever since and Russia has been trying to use cryptocurrencies to cope with financial sanctions held against them. In this article you will get to know about sanctions evasion by using cryptocurrency.
Chain 1: How does the evasion of sanctions functions by using crypto?
To start off, sanctions are the most powerful tools Nations have to influence the behaviors of non-allied countries, any national citizen going against the sanctions could face heavy fines. The United States in particular, uses sanctions as a powerful diplomatic tool as the dollar is the worlds reserve currency and is a worldwide payment method.
The global financial system plays a crucial role in enforcing sanctions, since they are the ones acknowledging all the transactions happening worldwide. Although anti-money-laundering laws requires them to obstruct and report transactions made against the sanctions, transactions happening using cryptocurrencies and digital assets are hard to trace back to individuals. Therefore, cryptocurrencies has become an increasingly threat towards sanction programs.
Chain 2: Is sanctions evasion using crypto a realistic possibility?
Whether the sanctions evasion with crypto is realistic or not is a big topic to be debated on. Some main arguments have been pointed out, such as:
claiming that the crypto industry is too small, thus not supplying enough liquidity to meet the needs of bigger nations since the entire crypto market cap is about $2 trillion.
the Swift process of 42 million financial messages on a daily basis cannot be handled by the decentralized financial technology.
the reliability of the blockchain infrastructure and the myth of full decentralization.
To expand on the last point, decentralized finance (DeFi) which refers back to the blockchain technology, claims to operate financial transactions avoiding any intermediaries in a peer-to-peer way. In an article published by Economic Research, Fabian Schär highlights that DeFi is a niche market with certain risks.
As a result, it will be nearly “impossible to evade sanctions with cryptocurrency.
Chain 3: The current situation of sanctions evasion
Russia has been targeted by western sanctions for a longer period of time now, these sanctions have also affected the Russian economy on a very large scale. Due to the proposal of western sanctions, Russia will have to find its way to trade without touching the dollar to enhance its financial situation. The Russian government decided to develop its own digital currency, the digital ruble, hoping to apply it into international transactions with countries who accept it without converting it into dollars. Additionally, hacking technology lie ransomware can assist Russia to steal digital currencies and make up revenue lost to sanctions. While cryptocurrency transactions happen in the transparent blockchain system, new tools and technologies developed by Russia can allow business trade to happen without detection.
Other countries like North Korea and Iran have also been using cryptocurrencies to mitigate sanctions. According to a UN report, North Korea used ransomware to steal cryptocurrency to fund its nuclear program in early February 2022. Later on in May, it has been confirmed that Iran used the revenue of Bitcoin mining to make up for the limitations on its ability to sell oil due to sanctions.
Illegal funds has been flowing in Europe through a dark web called “Hydra”, which is also powered by cryptocurrency. The blockchain technology uses a computer coding system in which the transactions are transparent to anyone anywhere, but when using Hydra, the source of the transaction is hidden, thus making it easier for russian users to trade.
The American government are increasingly aware of the potential impact crypto may bring to the power of its sanctions and are enhancing the scrutiny of digital assets. In february 2022, the Justice Department announced the creation of a new national cryptocurrency enforcement team. The same year October, the Treasury Department published a 30-page sanctions-compliance manual, recommending companies to use geolocation tools to filter customers in restricted jurisdictions.
Conclusion:
Overall, sanctions proposed against certain trade partners have affected national economies on larger scales, therefore reaching out for new solutions such as digital currency could resolve some lost revenue. As mentioned above, the scale of the crypto market, the amount of financial messages and the reliability of the blockchain infrastructure could all be obstacles for big countries like Russia to trade on an international scale with other Nations.
