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Tuesday, May 24, 2022

Will Russia use cryptocurrencies to evade sanctions?: Editorial

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(Bloomberg) — Financial restrictions imposed on Russia have focused attention on cryptocurrencies. Could the Russian government, or sanctioned officials, use digital assets to hide and move their wealth, undermining efforts to punish President Vladimir Putin’s regime for its bloody war in Ukraine?

Such is the case: Global illicit crypto activity totaled $14 billion in 2021, or roughly 0.015% of global gross domestic product, according to analytics firm Chainalysis. Russia’s exports totaled more than $500 billion in 2021, a transaction volume that far exceeds what even the largest and most liquid cryptocurrencies like Bitcoin can handle. Additionally, activity on most blockchains leaves a permanent public record. Any significant state-driven sanctions violation would be immediately highlighted, alerting authorities and threatening undesirable consequences for all involved.

That said, there is still room for smaller-scale evasions. Suppose, for example, that a sanctioned Russian wanted to take a few million dollars in rubles out of the country. He would have to buy digital assets in Russia and then sell those assets for usable fiat currency in the country where the funds are meant to go, all without the authorities knowing who the money really is.

The first step would be easy: convert rubles into cryptocurrencies in one of the several accessible markets operating in Moscow. The next step would further obscure where the funds are coming from, perhaps through the fast-growing market for non-fungible tokens, where markets are not required to identify users or report suspicious activity. Once the funds appear legitimate enough, they could be converted into dollars in an established insurance market and deposited into the account of an entity that the sanctioned individual controls anonymously.

However, such laundering carries considerable risk. Unlike a bill, a crypto token retains the fingerprints of everyone who has held it. Although each of those forks is identified only by an alphanumeric address, law enforcement agencies, aided by increasingly cooperative markets, are constantly improving their ability to recognize crime-related addresses and connect them to people. This allows authorities to seize stolen funds and catch people even years after the fact.

In the case of Russia, the authorities have already taken steps to confuse potential sanctions evaders. The US Treasury Department has cracked down on two exchanges, Suex and Chatex, popular with money launderers, along with a long list of associated addresses. The department has alerted crypto markets and other financial institutions to identify certain suspicious transactions, with the implied threat of fines for failing to report. And President Joe Biden has established a special task force, called KleptoCapture, to identify and seize the assets of sanctioned Russians.

More can be done. Officials can sanction other markets and addresses related to laundering. They may require a broader range of intermediaries, including non-fungible token markets and decentralized crypto platforms, to learn who they are doing business with and report suspicious transactions. The US, in particular, needs to catch up when it comes to financial transparency, for example by establishing a genuinely public registry of corporate ownership and shedding light on dodgy trusts. Eventually, cryptocurrencies could become even more transparent than the traditional banking system, if enough platforms and apps required identification when appropriate.

The effort to enforce sanctions against Russia provides an opportunity: if immediate policymakers take steps to prevent Putin and those who support him from turning crypto into a haven for money they want to hide, they will also make life more difficult. criminals in general.

original note:

Will the Russians use cryptocurrencies to end sanctions?: Editorial

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