Cryptocurrencies have long been accused of being the tool of criminals. Allegedly, they are used for money laundering and terrorism financing. Now that Western countries are trying to deter Russian aggression in Ukraine with economic sanctions, the question has popped up whether Russian actors might use cryptocurrencies to circumvent sanctions.
Theory and Practice
At first sight, cryptocurrencies might indeed be a useful tool to circumvent sanctions. They are based on decentralized blockchain networks that don’t need banks or other centralized intermediaries to control the money flow. As centralized intermediaries do not need to be involved, it is challenging for governments to control who is sending money to whom and for what purpose.
However, in practice, most crypto transactions are done through centralized intermediaries such as crypto exchanges or crypto payment providers. Most of these centralized providers are regulated, meaning new users have to go through a KYC process if they want to use the respective platform. As a result, governments may prohibit Russian users from using certain exchanges or force exchanges to freeze Russian users' assets.
Although it might be possible for Russians to use unregulated exchanges to circumvent sanctions, the liquidity on such exchanges is relatively low. That makes it difficult for people with a large amount of assets to hide from the government. Also, at one point, they will have to take their assets out of the unregulated environment to convert them into fiat currency to buy real-world goods and services. At that point, they will likely have to go through a regulated exchange.
So to sum it up: it is theoretically possible to use cryptocurrencies to circumvent economic sanctions, but it is unlikely to happen in practice.
What Has Happened So Far
Several exchanges have already announced that Russian users will be blocked. Switzerland, for example, has announced that it will freeze the crypto assets of sanctioned Russian individuals. All of this proves the preceding points.
On the other hand, the Ukrainian government has received many donations denominated in cryptocurrencies. So, besides the potential downsides of cryptocurrencies in this conflict, they have also played a major role in supporting Ukrainians in their fight against Russian aggression and refugees in financing their escape from Ukraine.
Stay Connected with EXIMA
EXIMA is dedicated to providing our users with a network for communication, as well as all the information they need to trade confidently. Join today for access to everything we have to offer!