On Thursday, March 24, Pavel Zavalny, Chairman of the Russian State Duma Committee for Energy, announced payment terms for countries seeking to buy oil and gas from Russia. This is an extension of the Russian government’s earlier statement to “hostile countries” (directed at most European Union member states) saying they should pay for their energy in rubles or gold.
These two announcements from Moscow are part of a response to the Biden administration’s White House briefing that the United States will impose sanctions on Russia. Primarily, the US sanctions were aimed at imposing export controls intended to hinder imports from Russia, to prevent Russian banks from entering into transactions with Western companies and to prevent access to Russian financial assets held in Western financial institutions.
This latest news has raised the question of whether cryptocurrencies, as a whole, can become instruments for circumventing sanctions. The US sanctions, as set out in its fact sheet, did not mention the use of cryptocurrencies. However, the Treasury Department said in early March that the sanctions would apply to US citizens and digital asset companies that dealt in cryptocurrencies, i.e. exchanges. The European Central Bank has also expressed such concerns about the use of cryptocurrencies to circumvent sanctions. For example, if an exchange like Binance were to help the Russian government make payments, Binance could be held responsible for violating the sanctions.
Pressure can now be exerted on all stock exchanges to close their operations in Russia. And indeed, some of them did. Ukraine’s deputy prime minister called for cryptocurrency exchanges to block all Russian users. So far, Bitwell and Coinbase Global have both said they won’t block ordinary Russian users. That said, Coinbase has blocked accounts belonging to people and companies already on the sanctions list. Binance has been accused of continuing to work with the Russian government. Binance’s recent trading volume on the USDT/RUB pair supported the accusation as it had peaked from a norm of around $10 million to $34 million on February 28, 2022, and then to $37 million on March 6. However, the volume has since decreased, to an even lower level than it was originally.
Could Russia be using Bitcoin to evade sanctions?
No one is suggesting that the sanctions will stop ordinary Russians from using bitcoin. It’s just that western exchanges might be reluctant to trade with them for fear of being shut down for being involved with a sanctioned entity.
US sanctions legally prevent Americans from trading with Russians, but the sanctions may cause problems for Russian attempts to use other forms of cryptocurrency and platforms. Sanctioned Russians can use stablecoins such as USDT, over-the-counter (OTC) or cross-border exchanges (perhaps through peer-to-peer or fiat-to-fiat using exchanges domiciled in a friendly country of Russia). Sooner or later, the money will have to be cashed, which means it will have reached the end point where law enforcement can see where the illicit funds have landed and then step in to seize them.
The sanctions decision comes a little too early for the Russian government to deploy its digital ruble, the digital currency of the Bank of Russia central bank (CBDC). In fact, the Ministry of Finance admitted in October 2020 that the digital ruble would fall under the strict anti-money laundering (AML) and counter-terrorist financing (CFT) rules of the Financial Action Task Force and suspicious activity reports that other CBDCs will experience. . This closes any chance that the digital ruble will be used to circumvent sanctions.
Meanwhile, there is some skepticism that the Russian government might use bitcoin as a payment bypass. Bitcoin may be pseudonymous (you can see identifiers on the blockchain but true identities remain obscure), but there is enough information for an open source intelligence analyst (OSINT) to connect the dots and prove that Russia is using bitcoin in a manner that violates sanctions.
Does cooperation with US sanctions meet a BRICS wall?
But what makes this new sanctions initiative difficult for the US government is that we are not just dealing with errant Americans and digital asset companies looking to transact bitcoin with Russia. We deal with entire states, one of which has just offered to set up bitcoin exchange facilities to arrange payments for oil and gas. The actual reach of US sanctions depends on how much authority the country still has over other countries like China, Turkey and indeed any other country that seems closer to Russia’s sphere of influence than the United States. Recent actions by major economies like China, India, Brazil and now South Africa suggest that the United States does not have as much global sway as it did twenty years ago.
What might raise some eyebrows is that Russia is offering bitcoin as a form of payment to two countries that have shown hostility to bitcoin so far. China banned cryptocurrency mining and trading in the fall of 2021. Turkey has a partial ban on bitcoin, significantly it has banned its
citizens to use it for payments as part of an effort to protect the struggling Turkish lira. It’s possible that Russia is building on a currency swap deal that China signed with Turkey in June 2021. Perhaps a bitcoin upgrade could be in play.
Would countries really use Bitcoin for oil payments?
It will be interesting to see exactly if these bitcoin/oil/gas exchanges take place. There is no mention of this on Russian news sources, such as The Russian News Agency or Russia today. I thought of three reasons why this might just be bluster:
Even if Zavalny’s offer is genuine, it can be difficult for anyone to judge whether oil-for-bitcoin transactions have taken place if the three governments wish to hide the fact that they used bitcoin. If they do not want a record of their bitcoin-denominated transactions, they will denominate their bitcoin trade in rubles or the partner currency. There is likely to be a record of the transaction on the blockchain anyway but as I said above Bitcoin is pseudonymous and there are ways to split a purchase into multiple mini-transactions in order to conceal the scale of the exchanges and against any undesirable audit of the blockchain by third parties. This type of Bitcoin transparency revealed North Korean activity on one occasion.
2. We don’t know if Russia, China, or Turkey have enough rubles, yuan, or liras redeemable for bitcoin to make regular payments for the amounts of oil or gas that these large economies will demand. In other words, the Bitcoin market is still too small to meet the financial demands of three major G20 countries to use it to hide their tracks from the US government.
3. The United States can only enforce sanctions violations if the US dollar was used. Russia and China have been looking for ways to keep the US dollar out of their trade payments since at least 2014. I find China and Turkey to be much more likely to use a gold swap than a gold swap. bitcoins, simply because they are already used to running such trades. In 2013, Turkey arranged a three-way gold swap with India and Iran for Iranian oil as part of Iran’s challenge to the Obama administration’s sanctions on Iran at the time . In 2017, China implemented a gold-backed RMB-oil futures contract as a mechanism to bypass the US dollar for oil trade settlement. The gold reserves of these countries are huge and they have a long-standing strategy to circumvent the US dollar payment architecture. Bitcoin will leave an immutable, timestamped “paper” trail that allows for real-time auditing. Records of a gold transaction will be easier to control for these countries.
The strength of these American sanctions is unprecedented because the entire Russian economy is targeted. This means that ordinary Russians have been caught up in the sanctions program which has so far only affected the Russian government, Russian companies and high-profile Russian figures. Time will tell if the US sanctions will work as intended, but, on the Bitcoin side, this presents a dilemma for the community as Bitcoiners have often bragged that Bitcoin doesn’t care who you are, as long as you are who you are. say you are and you don’t spend your bitcoin twice.
This is a guest post by Stephen Thompson. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or bitcoin magazine.