It was unusually quiet in the rarely quiet crypto community as major cryptocurrency prices took a plunge on Monday. The bitcoin was suddenly worth around ten percent more – the day after the sanctions against the Russian central bank came into force. Investors appear to be betting on a scenario that the US Treasury Department warned about back in October, namely that cryptocurrencies pose a growing threat to the effectiveness of Western sanctions. Less dollar payment transactions, more Bitcoin, so the logic goes. Could cryptocurrencies actually serve to open up alternative payment channels to Russia outside of the reach of western governments?
After all, the promise of cryptocurrencies lies precisely in creating monetary systems that are independent of governments, apparently even in times of war. Ukrainian Deputy Prime Minister Mykhailo Fedorov urged crypto exchanges to make corresponding commitments when he tweeted on Sunday urging them to stop doing business with Russian customers. Binance, the world’s leading crypto exchange, told CNBC that crypto is intended to “enable greater financial freedom. Unilaterally denying people access to their crypto assets would totally defeat the very spirit of crypto even existing.” Other exchanges made similar statements. They emphasized that they would implement the sanctions that had been decided, but not take any action beyond that. “A unilateral and full lockdown on Russia would penalize ordinary Russian citizens who are experiencing an historic destabilization of their currency,” crypto exchange Coinbase told the magazine Vice.
Evidence of sanctions violations would be indelible
In fact, cryptocurrency trading is picking up in both Russia and Ukraine due to the war. Since the start of the Russian invasion, crypto exchanges have seen the highest transaction volumes in Russian rubles and Ukrainian hryvnias in months.
But there is little evidence that banks and companies that have been sanctioned are using these channels to a relevant extent, says Philipp Sandner, professor at the Frankfurt School of Finance & Management. The Russian economy – just like the German and others – is simply not ready to deal with cryptocurrencies. Lots of things could go wrong. Hackers could loot the crypto company accounts if security mistakes were made. “Now imagine if tomorrow your boss decided to process company payments in Bitcoin. Can you imagine that?”
At least in the next nine to twelve months, that won’t be possible, Sandner continues. The Russian economy needs at least that long to switch to crypto – if it happens. The fundamental problem is not solved if you have open payment channels outside the banking system, but no one on the other side who accepts the payments: Western companies would hardly accept bitcoins from Russian partners who are on the sanctions list. Because cryptocurrencies can be processed without giving a name, but every transaction is technically traceable and indelible. Once it has been determined to whom which crypto account belongs, the evidence of sanctions violations is crystal clear.
North Korea loots cryptocurrencies with digital heists
However, China, Russia’s most important trading partner, is not participating in the sanctions. With the E-Yuan, the Chinese People’s Bank is building a digital payment system that is independent of the international banking system and thus of the dollar. Currently it is only used within China. If Russia were given the opportunity to access it as well, financial flows to its Chinese partners would be restored – possibly until Moscow develops its e-ruble. In October 2020, representatives of the Central Bank of Russia told the Moscow newspaper Izvestia, a digital ruble could make the country more independent from the US and enable it to better protect itself against sanctions. But all of this is speculation for the time being, emphasizes Sandner.
A Western-controlled international banking communications system like Swift, from which some Russian financial institutions were recently banned, would no longer be necessary in a world of digital currencies. Like China, Russia could then establish financial flows with trading partners that do not participate in the sanctions. Like with Iran. The regime there has also found a way to use cryptocurrencies in the short term to get money. The oil, which it can no longer sell due to international sanctions, burns it in power plants and uses the electricity generated in this way to generate bitcoins. Should Russia no longer get rid of its gas, that could also be a conceivable scenario for Moscow.
Finally, experts refer to another possible source of crypto money. The model for this would be North Korea. The money for its nuclear program is said to come in large part from so-called ransomware cyber attacks, where hackers steal companies’ data and return it in exchange for crypto ransom. That would be a very robust form of foreign exchange procurement. But it’s not exactly the case that the Russian government has recently shown itself to be particularly squeamish.