Hugh Harsono

The View | Why cryptocurrencies will not solve Russia’s sanctions problem

Not only can cryptocurrency fund flows be tracked, their decentralised nature makes the large-scale transactions needed to evade sanctions unfeasible

A central bank digital currency could offer an alternative, but Russia’s digital rouble lacks the scale required, and China is very unlikely to allow the digital yuan to be used for this purpose

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Illuminated mining rigs operate inside racks at the CryptoUniverse cryptocurrency mining farm in Nadvoitsy, Russia, on March 18, 2021. There have been fears that Russian companies could use cryptocurrency to evade sanctions. Photo: Bloomberg

Hugh Harsono

Published: 1:30am, 17 Mar 2022

Russia’s invasion of Ukraine has resulted in an escalating flurry of responses from governments, regulators and international financial institutions alike. These actions included economic sanctions and the removal of Russian banks from the Swift global payment system.

This has led to the rouble sliding in value and the Russian central bank raising its key interest rate. As a result, there is increasing interest in and concern over the potential use of cryptocurrencies by Russian threat actors to evade sanctions.

There have been calls to ban Russian accounts on cryptocurrency exchanges, though this would have little effect in deterring large-scale Russian threat actors from accessing various financial resources. Rather, it is a central bank digital currency, rather than decentralised cryptocurrencies, that could enable Russian entities to evade enterprise-level sanctions.

On the face of it, cryptocurrencies seem like a potent tool for sanctions evasion due to their immutability, liquidity and pseudo-anonymous nature. However, these factors also work against cryptocurrencies being used by large companies to evade sanctions, as the distributed ledger technology that underpins them enables the tracking of fund flows.

Additionally, cryptocurrencies’ decentralised nature makes large-scale transactions with a view to evading sanctions unfeasible. Cryptocurrency transactions happen fastest through exchanges, which facilitate the conversion of fiat currency into cryptocurrency and vice versa.