A crypto workaround?

The idea behind economic sanctions is that they make it legally, possibly even logistically, impossible to trade with the sanctioned country. And for most of the 20th century they have prevented trade with places such as Cuba or Saddam Hussein’s Iraq. In 2022, there could be another force that makes sanctions harder to enforce: crypto.

“There’s been a bit of chatter about using Bitcoin to get round the sanctions… and it could,” said Frances Coppola. “Russia’s imposing soft capital controls, but people being what they are, they’re going to find ways around them. And we’ve seen crypto used before for capital flight in places like Venezuela.”

Because cryptocurrencies such as Bitcoin don’t use the traditional financial system or require governments or banks to function, it makes it much more difficult for authorities to control how money is used.

This isn’t just science fiction. In early February, a report published by the United Nations argued that

North Korea had funded its nuclear missile programme to the tune of $2 billion by using cryptocurrency stolen in cyberattacks around the world. Similarly, early this year the central bank of Iran officially launched a programme to help businesses in the country make payments in crypto that evade sanctions.

Could Russia, now isolated in large part from the global economy, turn to cryptocurrencies such as Bitcoin too? “The first problem with Bitcoin is that it’s incredibly volatile,” said Coppola. “And the second is that it’s actually incredibly slow, and then you have the problem of on-off ramps.”

By this, Coppola means the problem of still requiring crypto exchanges to convert Bitcoin into US dollars and other useful currencies; many exchanges don’t have many dollars on hand. She does envisage a way that Russia might get around this, though, by using so-called “stablecoins”, which function and act like crypto, but are algorithmically linked in value to traditional currencies such as the dollar.

“That will ensure the exchange rates, and it’s actually a whole lot easier to use something that kind of looks like a dollar and behaves like a dollar,” she said. “And you can exchange it for actual dollars at some point at your leisure, rather than having to immediately get it out in case the whole thing crashes. So I think stablecoins are quite a considerable risk for the sanctions.”

Of course, it isn’t only Russia that knows this – the US and Europe do, too. Which is why one consequence of the Ukraine invasion could turn out to be western governments further tightening the screws on crypto exchanges (as discussed in PC Probe in issue 327.)

“I imagine the US government will want to take steps to ensure that crypto exchanges and stablecoin issuers can’t be used to evade sanctions,” said Coppola. “I expect to see more regulation of crypto as a result of this.”