A practical reason why crypto might not work for large-scale sanctions evasion

One of Russian oligarch Alisher Usmanov's prestigious villas on the Costa Smeralda in Sardinia, also affected by the EU's economic sanctions aimed at countering the conflict in Ukraine on March 20, 2022 in Porto Cervo, Italy. Italian authorities have seized several villas and yachts owned by wealthy Russians targeted by EU sanctions in the wake of Russia's invasion of Ukraine. (Photo by Contributor#8526142/Getty Images)


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When lawmakers recently asked experts about Russia’s ability to use cryptocurrency to avoid sanctions, the answer was simple: There wasn’t any evidence of such activity.

The experts now say they have more insight as to why cryptocurrency isn’t playing a large-scale role in whatever Russia might be doing to dodge the restrictions Western nations have placed on its industries and the oligarchs that run them.

According to crypto-tracking company Chainalysis, cryptocurrency markets couldn’t handle the kind of volume necessary for that kind of activity.

“By nearly any measure, cryptocurrency markets don’t have the liquidity to support Russian sanctions evasion en masse,” the company says in a blog post Wednesday. “The assets of sanctioned actors far exceed what one could hope to sell without either crashing the prices of crypto assets or drawing the attention of blockchain observers.”

The U.S. government warned in early March that crypto could be a tool for President Vladimir Putin and his allies to evade the international financial punishments created in response to Russia’s invasion of Ukraine. Chainalysis looked at the numbers and decided that liquidity was the key. If it’s happening, it’s only on a small scale, the company says.

The oligarchs collectively hold about $800 billion in assets, Chainalysis estimates, while the amount of “free floating” cryptocurrency worldwide is about $296 billion — or less than half what would be needed for the Russian big shots to hide everything. “Free float” is loosely defined as the estimated amount of digital coinage that’s truly available to circulate at any moment. For bitcoin, it’s about 14% of the overall market capitalization, or $127 billion of that $296 billion across all crypto, Chainalysis says.

“This reinforces our belief that any Russian sanctions evasion using cryptocurrency will most likely resemble typical money laundering, in which small amounts of cryptocurrency are moved to cashout services over time, rather than systematic, mass conversions between cryptocurrency and cash,” Chainalysis said.

“”It would take ten days of service inflows at that level for Russian oligarchs to move cryptocurrency equivalent to their wealth to a service where it could be liquidated.”


An example of the conundrum — although not a direct parallel — is what happened to the bitcoins stolen from the infamous 2016 of the Bitfinex exchange.

As of this time last year, crypto-tracking company Elliptic had found that just 21% of the roughly 120,000 bitcoins had been moved in one way or another, and only 4% had been laundered or exchanged. Elliptic chalked it up to “the maturation of the crypto industry and how law enforcement capabilities, regulation and blockchain analytics have together made it very challenging to make crime pay in crypto.”

Indeed, law enforcement eventually caught up with those bitcoins. Married couple Ilya “Dutch” Lichtenstein and Heather “Razzlekhan” Morgan were charged in early February for allegedly trying to launder them.

The Chainalysis report also looks at what it might mean for a steady bump in “inflows” — money coming in — to appear in cryptocurrency services. Over the last year, the biggest day was $80 billion on May 19, 2021, Chainlaysis says.

“It would take ten days of service inflows at that level for Russian oligarchs to move cryptocurrency equivalent to their wealth to a service where it could be liquidated,” Chainalysis said. “That would raise red flags not just for those services’ compliance teams, but for law enforcement and the cryptocurrency community at large.” 

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Chainalysis, cryptocurrency, Elliptic, Russia, sanctions