On Thursday, March 24, Pavel Zavalny, Chairman of the Russian State Duma Committee on Energy, announced terms of payment for countries that want to buy oil and gas from Russia. It is an extension of the Russian government’s earlier statement to “unfriendly countries” (addressed to most European Union member states) that they should pay for their energy in rubles or gold.
The US sanctions
Both announcements from Moscow are part of a response to the Biden administration’s White House fact sheet, which said the US will impose sanctions on Russia. In essence, US sanctions were designed to impose export controls to hamper imports from Russia, prevent Russian banks from completing transactions with Western companies, and prevent access to Russian financial assets held at Western financial institutions.
This latest news has raised the question of whether cryptocurrencies as a whole can become sanctions evasion tools. The US sanctions, as outlined in their memo, made no mention of the use of cryptocurrencies. However, the Treasury Department said in early March that the sanctions would apply to US citizens and companies on digital assets trading cryptocurrencies, i.e. exchanges. The European Central Bank has also raised such concerns about using cryptocurrencies to circumvent the sanctions. For example, if an exchange like Binance assisted the Russian government with payments, Binance could be held liable for violating the sanctions.
Now all stock exchanges could be pressured to stop their Russian business. And indeed, some of them have. Deputy Prime Minister of Ukraine called for cryptocurrency exchanges to block all Russian users. So far, Bitwell and Coinbase Global have both said they will not block regular Russian users. However, Coinbase has suspended the accounts of individuals and companies already on the sanctions list. Binance has been accused of continuing to work with the Russian government. The recent trading volume of Binance’s USDT/RUB pair supported the accusation, as it does had reached its peak from a norm of around $10 million to $34 million on February 28, 2022 and then to $37 million on March 6. Since then, however, the volume has declined to even lower levels than originally.
Would Russia Use Bitcoin to Bypass Sanctions?
Nobody is suggesting that the sanctions will stop ordinary Russians from using Bitcoin. It’s just that Western exchanges might shy away from trading them for fear of being shut down for being associated with a sanctioned organization.
US sanctions legally restrict Americans from trading with Russians, but the sanctions may cause problems for Russian attempts to use other forms of cryptocurrency and platforms. Sanctioned Russians could use stablecoins like USDT, over-the-counter (OTC) desks, or cross-border exchanges (perhaps through peer-to-peer or fiat-fiat through exchanges based in a Russia-friendly country). Sooner or later, the money has to be cashed in, meaning it has reached the terminus where law enforcement can see where the illicit funds ended up and then step in to seize them.
The sanctions move comes a bit too early for the Russian government to deploy its digital ruble, the Bank of Russia’s (CBDC) central bank digital currency. In fact, in October 2020, the Ministry of Finance admitted that the digital ruble would fall under the Financial Action Task Force’s strict rules on combating money laundering (AML) and countering the financing of terrorism (CFT) and suspicious activity reporting, which other CBDCs face become subject to . This eliminates any chance that the digital ruble will be used to circumvent the sanctions.
Meanwhile, there is some skepticism that the Russian government could 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 (OSINT) analyst to connect the dots and prove that Russia Using bitcoin in a way that violates the sanctions.
Cooperation with US sanctions meets BRICS wall?
But what makes this new sanctions initiative difficult for the US government is that we’re not just dealing with errant Americans and digital asset companies looking to transact Bitcoin with Russia. We’re dealing with entire states, one of which has just offered to set up bitcoin swap facilities to arrange payments for oil and gas. The actual scope of US sanctions depends on how much authority the country still has over other countries like China, Turkey and any other country that seems closer to Russia’s sphere of influence than that of the US. India, Brazil and now South Africa suggest that the US is not as influential around the world as it was twenty years ago.
What might cause a stir is that Russia is offering bitcoin as a means of payment for two countries that have so far been hostile to bitcoin. China banned cryptocurrency mining and trading in fall 2021. Turkey has a partial ban on bitcoin, mostly banning it
Preventing citizens from using it for payments to protect the ailing Turkish lira. It’s possible that Russia is piggybacking on a currency swap deal that China signed with Turkey in June 2021. Perhaps a bitcoin retrofit could be at play.
Would Countries Really Use Bitcoin for Oil Payments?
It will be interesting to see exactly if these bitcoin/oil/gas swaps happen. In Russian news sources such as B. This is not mentioned The Russian News Agency or Russia today. I can think of three reasons why this might just be rumbling:
Even if Zavalny’s offer is genuine, it can be difficult for anyone to assess whether oil-for-bitcoin transactions have taken place if the three governments want to hide the fact that they used bitcoin. If they do not wish their transactions to be recorded in Bitcoin, they will declare their Bitcoin trades in rubles or the partner currency. There’s probably 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 to obfuscate the scale of the trades and avoid unwanted blockchain checks overlooked by third parties. This type of bitcoin transparency exposed North Korean activity on one occasion.
2. We don’t know if Russia, China, or Turkey have enough rubles, yuan, or lira tradable with bitcoin to make regular payments for the amounts of oil or gas that these major 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 to cover their tracks from the US government.
3. The US can only enforce sanctions violations if the US dollar has been used. Both Russia and China have been exploring ways to exclude the US dollar from their trade payments since at least 2014. I think it’s much more likely that China and Turkey will use a gold swap than a bitcoin swap simply because they already have practice in such trades. In 2013, Turkey arranged a three-way gold swap with India and Iran for Iranian oil as part of Iran’s opposition to the Obama administration’s then-sanctions on Iran. In 2017, China set up a gold-backed RMB oil futures contract as a mechanism to bypass the US dollar to settle oil trades. These countries’ gold reserves are vast and they have a longstanding strategy to circumvent the US dollar payment architecture. Bitcoin leaves an immutable and time-stamped “paper trail” that allows for real-time auditing. Records of a gold transaction will be easier for these countries to control.
The strength of these US sanctions is unprecedented as the entire Russian economy is targeted. This means that ordinary Russians have been embroiled in the sanctions program, which so far has only affected the Russian government, Russian companies, and high-profile Russian individuals. Time will tell if US sanctions work as intended, but on the bitcoin side, this poses a dilemma for the community, as bitcoiners have often boasted that bitcoin doesn’t care who you are as long as they are you who you say you are and you don’t double-spend your bitcoin.
This is a guest post by Stephen Thompson. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.