Is crypto Russia’s ticket out of sanctions?

Feb 28, 2022

What a remarkable few days it’s been. While I thought Russia would invade Ukraine, I only imagined they would do so in the Donbass. By going as far as he has, Putin has put in motion a series of events that will change Europe and the world forever. And it’s incredible to watch it all transpire in real time and on one’s screens.

But we’re here to talk about crypto, and boy what a role is it playing. There are two narratives here, a positive one and a negative one.

First, Ukraine and Ukrainian NGOs have received over $20 million and counting in crypto donations, according to Elliptic. (Patreon had kicked out these NGOs on Thursday because raised funds would be used for weapons.) Most remarkably, the Ukrainian government itself set up crypto addresses to accept funds.


The amounts received there will no doubt help, but more than anything it is a way for Ukraine to ask people around the world to put a little skin in the game in solidarity. (FYI I created a web page that live tracks the amounts received at the @Ukraine addresses in BTC and ETH.) What I love about this is that given crypto’s nature, anyone in the world can pitch in—even people in Russia and China or even Canada.

Crypto also seems to be proving as a lifeline to some who otherwise would be cut-off from their bank money.


So, what we’re seeing is that crypto is what it is: permissionless and censorship-resistant. It’s not perfect, but it is more than useful in situations in which the alternative is no access to funds at all. I don’t understand how some can’t see that there’s value in cryptocurrency.

Now, because it’s permissionless, if the good guys can use it, then so can the bad guys. It’s just like the internet in that respect. And so we’ve seen a lot of hand-wringing over whether Russia will be able to use Bitcoin and other crypto to evade sanctions.

NYT: Russia Could Use Cryptocurrency to Mitigate U.S. Sanctions

POLITICO: Russia’s hidden tool to undermine sanctions

WSJ: U.S. Looks to New Measures to Punish Russia for Ukraine Invasion

Bloomberg: How Russia, Billionaires Could Use Crypto to Go Around ‘Severe’ US Sanctions

Sounds scary, but let me point out a few things.

First, while the Ukrainian grass-roots use of crypto in this conflict is evident, its use by Russians to evade sanctions is speculative. None of the articles I’ve read show that Russia has any crypto or has any plans to use it. I mean, where exactly is it going to get billions of dollars of crypto right now? And who exactly is going to accept it? It’s certainly physically possible, but completely speculative at this point.

Second, the people that matter seem to understand this. In the articles driving the sanctions-busting narrative, once you get past the breathless speculations of analysts and consultants, you get to the assessments of government practitioners on the front lines. This is from the POLITICO piece linked above:

Treasury officials say they aren’t overly worried about crypto undermining the effort to choke off the Kremlin’s access to capital. Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming and would likely be visible in the broader crypto market, given the massive investment portfolios of individuals and institutions named in the sanctions.

“The scale of what they have to move, and where they have to move things from, [crypto’s] not necessarily going to be that concerning,” said Todd Conklin, counselor to the deputy Treasury secretary. Any attempt to move that much money through exchanges would contribute to “a bit more of a spike in the crypto market, in my view, than has been observed lately.”

And from the WSJ article (emphasis added):

Targeting the country’s access to cryptocurrencies, such as bitcoin and ether, would take sanctions policy into uncharted territory. Blocking transactions would be challenging, since by nature private, digital currencies are designed to exist without borders and for the most part outside the government-regulated financial system.

The Biden administration is in the early stages of exploring the area, with the aim of disrupting economic activity in the country, The Wall Street Journal reported Friday, citing an administration official. Sanctions on Russia’s crypto activities would need to be crafted in a way that didn’t destroy the broader crypto market, which might make imposing them difficult, the official said.

And here is Chainalysis, one of Treasury’s top partners, in a useful thread:


So, while we won’t be able to prevent some journalists, politicians, and consultants from overhyping the risk that crypto could pose, the reality is that crypto won’t undermine sanctions in any significant way, and the folks that matter understand that. Serious folks in government can see right through speculation, like this from the NYT (emphasis added):

Should it choose to evade sanctions, Russia has multiple cryptocurrency-related tools at its disposal, experts said. All it needs is to find ways to trade without touching the dollar.

The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars. Hacking techniques like ransomware could help Russians steal digital currencies and make up revenue lost to sanctions.

And while cryptocurrency transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia can help mask the origin of such transactions. That would allow businesses to trade with Russian entities without detection.

Where to begin? The digital ruble doesn’t exist, but it’s ‘a tool at Russia’s disposal’? And all Russia needs to do is find sellers who will accept it? Would you want to accept digital rubles today? What of these new Russian-developed tools to mask crypto transactions? They don’t explain it or give any source or reference. And to think that ransomware could make up income lost to sanctions is to misunderstand the scale of the blockade being imposed. The whole thing is preposterous.

Could crypto be used to evade sanctions? Of course. Could it be used at a scale that would seriously undermine the measures being taken this week? I don’t see how. Will legitimate crypto intermediaries comply with sanctions obligations? Better than a lot of banks, if recent history is any guide.

That all said, things could change in the future. No doubt the sanctions against Russia’s central bank have been a wake up call for nations all around the world—even Western ones. The vast majority of Russia’s foreign currency reserves have been paralyzed, and what gold and other instruments it has in its vaults is of limited use right now. It would not surprise me to see states, including China, take a lesson from these events and choose to diversify into an asset that is a scarce commodity that can be self-custodied like gold, but that is also weightless and can move at the speed of light. But as I say, that’s in the future.

Why Due Process Matters

Before I go I want to bring to your attention a remarkable article by Canadian researcher Howard Anglin on the weaponization of the financial system by his country’s government. His point is that cutting people off from their money is essentially equivalent to putting them in jail, and therefore due process is paramount.

As during the October Crisis [of 1970], the lack of legal safeguards on government action increases the likelihood of mistakes. Given that many of the people who donated to the convoy seem to have a less than perfect understanding of the law and of how their donations could be used, doing away with questions of mens rea (guilty intent) and normal burdens of proof means the government can freeze first and ask questions later. By then, it could be too late. A lawyer interviewed by the CBC opined that, in some cases, risk-averse banks “may just decide to shut the person’s account down” without bothering to sort the guilty from the innocent. The long-term consequences of such overreach would be worse than temporary incarceration.

The government’s action is troubling enough, but what should really disturb us is the ease and invisibility with which it is being done. When we can’t see the consequences of government conduct, the risks of government misconduct increases. A government that sends in riot troops to dispel a crowd will rightly pay a price if the police commit abuses. But the diffuse and anonymous nature of financial enforcement mean that sweeping repression can easily go undetected. It is the political equivalent of using drone strikes instead of boots on the ground.

What makes Canada’s recent actions so dangerous isn’t just that financial intermediaries were deputized to restrict the freedom of individuals (this actually happens all the time), it’s that it was done without any due process or transparency. I encourage you to read the whole thing.

The reason it resonated so much with me is the parallel I see with our recent fight to spike Rep. Jim Himes’s proposed gutting of all transparency and administrative checks on “special measures” the Treasury Secretary can take under the Bank Secrecy Act. Many people have not understood why Coin Center kicked up such a fuss over this provision, some going so far as to wonder whether we were raising the alarm for attention or as a fundraising gimmick.

Well, if you think the Canadian government’s recent behavior under the Emergencies Act is unjustifiable, the Himes provision would have made such actions possible not just when the government declares an emergency but at any time. If the provisions were to make it into law, the Secretary of the Treasury would be able to issue secret orders to cut off certain accounts or transactions or types of transactions without any due process whatsoever. The public would have no way to know how the government was using its powers, there would be no way to check the power. Completely insidious.

So yeah, I think we were more than justified in raising the alarm especially since we knew from dealing with this same provision in the past that only drawing public attention would cause its sponsor to reconsider its scope. It was the right call and I’m glad we did it.

Without transparency and due process individuals can be cut off with little recourse, and having cryptocurrency then can be of little use as crypto-skeptic Doomberg recently wrote in a good article:

Imagine you donated C$50 to the Freedom Convoy before it arrived in Ottawa, an action Trudeau has retroactively decided disqualifies you from participating in modern society. (This is not a hypothetical, at least if this Canadian Member of Parliament’s tweet is to be believed). Your bank accounts have been frozen, credit cards canceled, and access to your brokerage account denied. Further, imagine you have accumulated some Bitcoin in a cold storage wallet (i.e., on a flash drive in your possession), carefully ensuring that it is outside Trudeau’s reach. How are you going to pay your mortgage, car payment, tuition expenses, or buy groceries with it? The answer is you can’t. Does that wallet represent a store of value that might be reactivated in the future should the government change its stance towards you, or is itself changed altogether? Absolutely. Does it represent a practical medium of exchange, one that is useful during this personal crisis? Absolutely not.

Well, if you’ve been “switched off,” then yes, your bitcoin will be cold comfort, and the fact that you might be able to barely get by on the margins of society just proves the point more. But to me that misses the point a bit. What about the rest of the time when martial law hasn’t been declared but we still face a politicized financial system? That’s when you need access to an alternative that may not be perfect, but is the kind of escape valve that is necessary for a liberal open society.

As Doomberg says, “The answer to government weaponization of the financial system isn’t a new financial system. It’s a new government.” Well, without transparency to know how the system is being used, and without public input to push for new government, all the token fundraising in the world isn’t worth much. And that’s why we have to prevent process-gutting measures like the Himes provision from becoming law. I’m glad we have.

And P.S. the Ukrainian vice prime minister’s call on crypto exchanges to freeze the accounts of all Russian persons without any due process is incredibly disappointing. “It's crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users,” he wrote. He’s at war, so I can understand where his sentiment comes from, but ordinary Russians are no more to blame for what’s happening than ordinary Ukranians. Jesse Powell had the right response.

Various and Sundry

There’s a new episode of my book review podcast with Stably available. This time we discuss Not Born Yesterday: The Science of Who We Trust and What We Believe by Hugo Mercier.

Last week I had a discussion (debate?) with Dr. Oonagh McDonald on her new book Cryptocurrencies: Money, Trust and Regulation, which was hosted by the Federalist Society. Video is now up.

Next week, on Monday, March 7, I’ll be the featured speaker at the CryptoMondays meetup in Greenwich, Connecticut. You can register to attend here.

Nota Bene

A moment of clarity - Noah Smith

Bitcoin Can Fix Financial Deplatforming of Canada’s Truckers—But It Won’t Be Easy - Reason – This is by my friend and colleague Andrea O’Sullivan (who is an essential follow on Twitter BTW.) I’ll point out that Block (née Square) is working on precisely the challenges that Andrea identifies with their lightning,self-custody, and decentralized exchange initiatives. Good luck to them, and hurry up.

I was wrong, we need crypto - David Heinemeier Hansson

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