The push to penalize Russia for invading Ukraine is the first major sanctions campaign aimed at “financially destabilizing a head of state” by targeting digital assets, said Michael Fasanello, chief compliance officer of LVL, a banking and crypto-trading company.
But it’s not the first sanctions program to take crypto into account. The Trump administration has banned US transactions based on petro, the digital currency issued by the Venezuelan government under President Nicolás Maduro.
This campaign, Fasanello said, was “tiny compared to the attack on digital assets focused on Putin and his oligarchy.”
The start of the invasion was reportedly followed by a spike in crypto exchanges involving the Russian ruble, which some took as a sign that the oligarchs might try to use digital currencies to evade sanctions.
The US Treasury’s Office of Foreign Assets Control tightened its rules this month to clarify that sanctions against Russia included digital assets. Last week, Senate Democrats led by Elizabeth Warren raised concerns with the Treasury Department that Russian oligarchs could use crypto for “nefarious purposes.” And on Monday, FinCEN specifically warned that sanctioned individuals and entities in Russia and Belarus could use “convertible virtual currencies” to evade restrictions.
Crypto crime is real and big: it reached $14 billion last year, according to Chainalysis, up from $7.8 billion in 2020. It also has the unique aspect of happening in plain sight. Unlike fiat money laundered through a series of opaque shell company transactions, every crypto transfer is permanently recorded on the blockchain. It’s just a question of whether the authorities can link these transactions to a real identity.
Oligarchs can hide their crypto. Moving it is another matter.
There is no complete anonymity on a blockchain. A crypto account or wallet, which is usually identified as a series of numbers and letters, is visible on a network. Although no name or other information is visible, virtually all transactions can be tracked.
“At the end of the day, crypto is very easy to follow, whether it’s decentralized or centralized,” said Steven Waterhouse, CEO of Orchid Labs.
To monitor accounts and transactions, all you need is a wallet address. “With this, you can see how much there is in crypto accounts,” Marco Bellin, founder and CEO of Datacappy, told Protocol. “There is a trail that can be followed. Every transaction that an identified account has with another account is logged and can be traced.
Tigran Gambaryan, VP of Global Intelligence and Investigations at Binance, said crypto is “a terrible thing to use to evade sanctions” because “everyone is looking at these transactions,” which makes it extremely difficult to move large amounts of money.
FinCEN noted in its Monday alert that “large-scale sanctions evasion using convertible virtual currency by a government such as the Russian Federation is not necessarily feasible.”
But Fasanello observed that “cryptography enables pseudo-anonymity,” which, when combined with tools to obfuscate transactions, “can present a very difficult situation for investigators — even using the best blockchain analytics out there. their category.
It is possible to protect a crypto wallet from scrutiny by taking it offline. This usually means using a hardware wallet – also known as a cold wallet – which is not constantly connected to a blockchain network.
But that means an oligarch couldn’t do anything with crypto. “If you have crypto and want to store it in a cold wallet, that will depend on when you want it to move and how you want to treat it at that point,” Waterhouse said.
And it won’t be easy, especially if they’re moving huge amounts.
“If they’re sending to an unhosted wallet, we won’t always know who’s controlling that in the background,” Protocol Nirvana Patel, chief compliance officer at Prime Trust, an asset infrastructure software company, told Protocol Nirvana Patel. digital.
But once they try to move funds, the wallet will become visible on the network. And those connections can be traced — a “Kevin Bacon six-degree kind of thing,” Patel said. “You will know that someone is connected to something in the chain at some point.”
Tools for Hiding Crypto Aren’t Perfect
Money launderers use blockchain-based tools known as tumblers or mixers to obfuscate transactions. The idea is to bundle the coins to be transferred, breaking the chain of origin and destination and allowing crypto users to cover their tracks.
But these tools are generally slow and “expensive to use,” Binance’s Gambaryan said. “And they’re not very efficient if you’re trying to move billions or hundreds of millions of dollars because they’re not designed to process those kinds of transactions… They’re designed to move small amounts. And if you’re actually trying to move large amounts, it’s actually very easy to puncture the cups.
Waterhouse agreed, saying, “for the magnitude of what we’re talking about…these tools aren’t really enough.”
Some crypto exchanges have blocked withdrawals to mixing services.
The blockchain never forgets
Cryptographic technology continues to evolve. And deals done stealthily now could come back to haunt sanctions officials years later.
“The scary thing about this stuff for bad actors is that it’s not like you get away with it and somebody forgets about it,” Waterhouse said. “The tools are improving. And then a few years later, someone thought, “Oh, actually, I found out who did this and I can go back and trace it.”
But the flip side is also true, Fasanello argued. With the resources at their disposal, the oligarchs can access “the best of hackers to discover new ways to outsmart the system”.
“The oligarchs have been perfecting the art of hiding assets and obscuring the price of funds for a very long time,” he said. “Marry that skill set with cutting-edge technology, and you’ve got a hell of a fight on your hands as a counter-[financial crime] professional.”
But even the slightest mistake can unravel years of secrecy. A $500 Walmart gift card helped investigators find the couple accused of laundering $4.5 billion stolen in the Bitfinex hack. Ultimately, cryptography is safer when hidden. And the oligarchs tend to flaunt their wealth – like those yachts seized around the world.