Why Russia Can’t Beat Sanctions By Using Cryptocurrencies
Turns out that digital money like bitcoin and etherium just won’t cut it for an oligarch under sanctions.
Just in case you may have missed it between threats of nuclear war in the Pacific Rim and neo-Nazi riots, there’s a hot new theory out there about Russia, cryptocurrencies, and money laundering. In a sudden reversal of its previous policy, the Kremlin is now really interested in peer-to-peer digital money, especially etherium, and the main reason why is bound to be money laundering for Putin and his oligarchs’ ill gotten gains. Obviously, they want to use the anonymity offered by cryptocurrencies to move their cash around the world outside the traditional banking system, right?
On the surface, this idea makes sense. Sanctions directly aimed at Putin and his inner circle have been rattling Russia for a while, and the latest round is really cramping the oligarchs’ style. However, when you consider how those currencies actually work, the notion starts to fall apart, especially when we take into account just how much money would need to be moved to make this a viable means of laundering, and how easily it could still be traced by someone who has a little time and can write a few lines of code.
But first, let’s take a step back and talk about what a cryptocurrency is and isn’t since they’ve been covered much the same way as your local news go after “the latest teen sex-drug craze” for an audience of senior citizens who are absolutely sure the world will fall apart the minute today’s generation of teenagers hits puberty. They’re not black magic used only by hackers and criminals, and they actually have plenty of legitimate uses, although their fundamentals are certainly debatable in an economic sense.
So What Exactly Is A Cryptocurrency?
At its most basic, a cryptocurrency is a peer-to-peer, or P2P system in which encrypted bits of data function as money. You can “mine” them by solving a set of complicated mathematical puzzles which get harder and harder with more bits of data in circulation or just store them in your encrypted digital wallet for future use. At the heart of every cryptocurrency is a tool called a blockchain, a publicly distributed ledger meant to prevent transactions from happening more than once, and it’s this tool that makes them viable for use in real world markets.
There’s nothing in particular that makes these currencies valuable. They’re not really backed by anything but the mutual trust of those who use them, which means that your currency of choice is limited to its own ecosystem to a large extent. However, that’s kind of how all money works today. A dollar bill is valuable because we say it is, and because the U.S. government uses its resources to make sure it remains in circulation. Should that trust wane for any reason, that dollar might become a lot less valuable.
Right now, the two most established cryptocurrencies in the wild are bitcoin and etherium, worth $4,250 per unit and $297 per unit respectively as of this writing. Just like with every other currency, exchange rates vary constantly based on demand, but unlike every other currency, you can effectively use an infinitesimal fraction of a single ether or bitcoin to pay for something. It’s yet another way to turn them into viable methods of payment still tethered to the real world economy. We won’t do a deep dive into the cryptocurrency economy here because that’s a whole other article, but these are the basics.
A Digital Penny Saved Vs. Digital Penny Earned
All right, so let’s say you sign up with a cryptocurrency exchange like Kraken or Coinbase and buy a few ether coins, then decide you want to get a drink to celebrate your new investment. Can you pay your bill with that fancy new digital cash? In a few places around the world, sure. Anywhere else? Not so much. You’d have to convert it into real cash from the same exchange, which is why the primary use for cryptocurrencies is hoarding them and watching to see if they grow in value. There are just not enough places in the real world that can accept and process your payment.
Certainly, you can pay for some things online with it, but the businesses that take your money will now have the same problem. How do they cash crypto revenue? Do they let it sit in the wallet and grow in value instead? There’s a fairly complicated chain of decisions that have to be made before you accept cryptocurrencies, and there are a lot of companies excited about the idea of using money that can be exchanged worldwide through a vastly simpler and far less regulated system than cash as we know it, but there are still quite a few details to work out before this becomes anywhere close to the norm.
Same issues apply when it comes to how to tax those transactions. Can you pay your taxes on income earned in bitcoin with bitcoin? How would a local tax board or a national government cash it? Would they be allowed to hold on to the units or would they have to cash them in right away to avoid what amounts to currency speculation on the open market with taxpayer money? The lack of answers to these questions is the main reason why, right now, a cryptocurrency is mostly an investment opportunity for the adventurous.
Now, that said, none of this means that digital P2P money won’t have a role to play in the future. We just need to hammer out how we want it to work once we actually stand spending it in the real world on a massive scale and it does have the potential to make our typical cash dollars obsolete in the far future. But when it comes to Russia’s interest in it, we’re not talking about the far future. We’re talking about the idea that panicked oligarchs are very interested in using it now to launder sanctioned assets.
Why The Blockchain Can Be Laundering Kryptonite
As mentioned previously, the blockchain is the secret sauce that makes any digital currency viable and it used to be sold as a way to anonymously move money around, especially when it comes to dark web criminal enterprises. This is what made bitcoin famous to laypeople and horrified news anchors and lawmakers until the Silk Road case, and the subsequent conviction of its mastermind Ross Ulbricht, a.k.a. Dread Pirate Roberts, in no small part due to his use of bitcoin, with every incriminating transaction reflected in the blockchain and traced back to his digital identity.
In fact, it may be impossible to launder money or hide your assets using any digital currency simply due to the fact that there’s an open P2P ledger there recording your every move. Even trying to mix and scramble transactions is going to eventually reveal what you’re doing the minute the identities you’re using can be traced. If you’re a Russian oligarch trying to hide your money in eBther coins, there’s going to be a huge problem for you, especially when you actually want to use it because it will need to be turned into a currency controlled by a government and re-enter the traditional banking system.
Since you can’t just show up at a bank with duffel bags of cash, or a check for millions in local currency without having that transaction flagged by the bank and forwarded to authorities for investigation, you can’t just cash it at your destination and enjoy the good life. You would have to figure out a way to pull it from the exchange, although those are beginning to get regulated and would notice a very large withdrawal, possibly flagging it for a law enforcement agency to get involved. From there they could trace the exact origin of the money and build a serious case.
But maybe you have a friend who will sell you a house or an office in ether coin and you won’t have to turn it back into cash? You could even split up and mix the payments to make it less obvious and possibly get away with it. That’s great. Now what? You still can’t use that money to invest in business ventures, or even go get groceries at the store. That money will have to be exchanged at some point for the foreseeable future and every transaction is yet another fingerprint for law enforcement which can be used to track you and show you’re trying to hide and use money under sanctions.
The True Wild Wild West Of Banking
Of course, this is all provided that your exchange can actually securely deal with your money and assure you that you’ll get back what it’s worth when you’re ready to withdraw it. Traditional banks typically have some sort of government insurance, like the FDIC in the United States. If your bank ever goes broke, they’ll pitch in to help you recover your lost cash. Etherium or bitcoin have no such guarantees and if your exchange goes under, or gets hacked, or just scams you, you lose all your money.
This is exactly what those who put their money in the Mt. Gox exchange found out when it lost over $400 million worth of bitcoin. Since there was no one to insure this not really bank, not really investment, there was very little the Japanese government could do to help them other than treat it in the same manner as a failing business that defaulted on its debts. It was a rude awakening for many libertarians who believed that cryptocurrency has made banking as we know it obsolete and that the financial giants behind the Great Recession would soon be on life support.
Bitcoin owners also had a rough time with MyBitcoin when the site went dark to then return without their digital wallets, claiming to be broke, and Bitomat, which said it accidentally destroyed all of its funds with some bad code. Even though exchanges have stabilized now, just imagine putting a fortune into them, knowing there’s a very real chance you might not get it back or have it stolen by a hacker with no recourse and no insurance. With billions to move around, the sane thing for Russian oligarchs to do would be to have patience and negotiate rather than risk their immense wealth in a moment of desperation, even if that risk is now much lower.
It’s Not Easy Being Under Sanctions In The 21st Century
No matter how you slice it, cryptocurrencies are hardly the bearer bonds of the money laundering world. In fact, they might even help us combat this type of old-fashioned financial crime in the future, something that Russian technical experts definitely know. So what explains the Kremlin’s backing of digital money soon after sanctions? Well, Putin and Co. could just be trying to find some way around new sanctions.
As noted previously, this round is particularly brutal to them and leaves them with few options to retaliate in any meaningful way past expelling a lot of diplomats to Trump’s nauseating gratitude. With a media that says Russia is like a bear trapped in a corner reflecting the current mood, they may be simply brainstorming and seeing what they could accomplish. The bitcoin world is dominated by Chinese digital mining farms. Maybe they want to become the dominant force in etherium now in case this gamble will eventually pay off later?
This certainly seems to be the thought in the cryptocurrency community, and experts estimate that 30% of global crypto mining might eventually be in Russian hands. While the payoff may be a long time coming, having a big hand in a brand new investment opportunity is probably not a bad idea as your traditional cash pool dwindles and your assets are under lock and key. But this too isn’t a panacea for the oligarchs. It gives the West something new to target should there be a need for yet another round of sanctions in the future, with even more painful results.