Prominent Russian oligarchs have found themselves on the receiving end of significant sanctions following Russia’s invasion of Ukraine. As a result of the invasion, the Russian ruble has collapsed and Russians are rushing to banks to withdraw rubles and American dollars. Amid all of this economic turmoil there has been an uptick in cryptocurrency trades involving rubles and the Ukrainian hryvnia. As a means to preserve savings in the midst of economic turmoil, buying cryptocurrencies might sound appealing despite their well-known volatility. However, those buying Bitcoin in an attempt to avoid sanctions will quickly learn that such an approach is unlikely to work. This is thanks to the transparent nature of Bitcoin and the regulations governing financial institutions and cryptocurrency exchanges.
Bitcoin is often described as “anonymous.” This is not true. It is more accurate to describe Bitcoin as pseudonymous. The entire history of Bitcoin transactions is available for anyone with an Internet connection to see. Transactions are linked to accounts, which you can find by conducting a simple search of the Bitcoin blockchain.
Yesterday, for example, a Bitcoin user transferred 919.877 BTC (worth almost $41 million at time of writing) to an account hosted by the popular cryptocurrency exchange Coinbase. The account’s address is: 17QyR2ixNj1AgpD5ZuXubvSJ3gPPQVcsvp. As you can see if you take a look at the account, the owner(s) of the account has conducted more than 700 transactions. This transparency is by design.
Even though an address does not come with a name attached, it is possible for investigators to link a Bitcoin address to an identity by using methods such as clustering. The blockchain data platform Chainalysis was able to identify a generous donor to individuals and organizations associated with the Alt-Right by tracing the wallet to a service that allows users to link their Bitcoin wallet address to an email address. After finding the email address it was not hard for researchers to identify a French computer programmer as the donor.
As the Chainalysis report noted:
“[T]hanks to the inherent transparency of cryptocurrency blockchains, law enforcement can track these transactions in real time and work with cryptocurrency businesses to prevent funds from reaching violent groups who may use them to fund their operations and commit acts of violence.”
The transparency of the Bitcoin network has also allowed the Southern Poverty Law Center to compile a list of wallets associated with racists and those catering to extremist politics.
I highlighted the 919.877 BTC above in particular because of the transfer to Coinbase, one of the most popular cryptocurrency exchanges. Coinbase verifies its customers’ identities to satisfy Know Your Customer (KYC) regulations. Whoever set up the account where the 919.877 BTC sits went through Coinbase’s identity verification process. Coinbase has already committed to blocking transactions associated with sanctioned Russians, but has declined to ban all Russian users.
If you are a Russian oligarch seeking to use cryptocurrencies to evade sanctions there are a few steps you have to take:
- Use your $, €, £, or ₽ to buy cryptocurrencies at an exchange
- Sell your cryptocurrencies for $, €, £, or ₽ on the exchange
- Transfer the $, €, £, or ₽ from the exchange to a traditional financial institution.
All three steps would be very easy for investigators to trace. For many on the list of sanctioned individuals step #1 is already impossible, as their accounts are frozen and prominent cryptocurrency exchanges would not accept your transfer even if they could access their accounts.
An oligarch who does manage to buy cryptocurrencies on an exchange with fiat could seek to throw investigators off their trail by sending their holdings to a tumbler. But these are not without significant drawbacks, and some exchanges do not allow assets that have been through tumblers to enter their platform. If tumblers are not a viable option, a panicked oligarch might turn to privacy-oriented cryptocurrencies such as Monero, which allows users to hide transaction histories.
But Monero will not help you solve the problems inherent in step #3. Even if buying Monero does make it harder for investigators to trace your holdings, you still need to find an exchange that will allow you to sell your cryptocurrencies for fiat and then transfer that fiat to a financial institution such as a bank. Or wait for Monero to become a widely accepted cryptocurrency for ordinary everyday payments, which is unlikely any time soon.
There are exchanges that do not require identity verification. These might sound appealing to sanctioned oligarchs, but the conversion of cryptocurrencies into fiat and the use of cryptocurrency for purchases would put them back on the radar of investigators before too long.
Given the costs and risks associated with transferring and concealing massive cryptocurrency transfers it is unlikely that many oligarchs will try to evade sanctions by using cryptocurrencies. This should reassure lawmakers such as Sen. Elizabeth Warren (D‑MA), who yesterday tweeted, “Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain. U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets.”
The conflict in Ukraine does not require financial regulators to increase their scrutiny of cryptocurrencies. Lawmakers should remember that for millions of law-abiding people across the world living under authoritarian regimes, cryptocurrencies offer the opportunity to evade corrupt, unreliable, and unstable institutions. But they are of limited use to prominent international pariahs seeking to hide billions of dollars.
