- Russia has stepped up its adoption of cryptocurrencies since its invasion of Ukraine
- The country sees the technology as a way to bypass sanctions, in line with other anti-West countries
- How can the West tackle the growing threat of Russian crypto use?
Russia has stepped up its adoption of cryptocurrencies significantly since its invasion of Ukraine, with Vladimir Putin reportedly signing a new law recognizing digital assets as property. This comes after talks of Russia and other politically aligned countries allowing international trade in cryptocurrencies, bypassing US sanctions. For the West, taking action to prevent such activities is essential to maintaining the effectiveness of sanctions, and there are several steps they could consider to achieve this.
Enhancing Blockchain Monitoring
Cryptocurrencies operate on transparent blockchain networks, which record every transaction. This transparency provides an opportunity for Western nations to deploy sophisticated blockchain analytics tools.
Companies like Chainalysis and Elliptic specialize in tracing illicit crypto transactions, and governments could partner with these firms to monitor activity that indicates sanction evasion, such as large transfers to obscure wallets or the use of privacy coins like Monero.
Regulating Crypto Exchanges
Many Russian entities rely on cryptocurrency exchanges to convert digital assets into fiat currency, which is, after all, the end goal. The West can (and has) pressure major exchanges to comply with stringent anti-money laundering (AML) and know-your-customer (KYC) regulations, ensuring that they avoid serving sanctioned individuals and entities.
Non-compliant exchanges could face severe penalties, including exclusion from Western financial systems.
International Cooperation
Sanction enforcement is most effective when coordinated globally. The West should work closely with allies, including the G7, to align on regulatory frameworks for cryptocurrency transactions. Engaging with countries like Switzerland and the UAE, which have historically been crypto-friendly, is vital to close potential loopholes, but so far, crypto regulation has been country-specific rather than a global effort.
Targeting Crypto Mining
Russia is a significant player in cryptocurrency mining, having expanded the practice in recent years. The West can target this sector by imposing export controls on mining hardware and software. Additionally, discouraging global firms from offering hosting services or energy resources for mining operations in Russia can disrupt its capacity to generate new cryptocurrency.
No Easy Answers
By adopting these measures, the West can limit Russia’s ability to leverage cryptocurrencies to evade economic isolation, reinforcing the impact of sanctions and maintaining the integrity of the global financial system.
Of course, it won’t eliminate Russia’s use, especially if it comes up with a proprietary blockchain that cannot be externally analyzed, but given the progress it has already made, something needs to be done soon before the situation becomes harder to tackle.
