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In the wake of Russia’s invasion of Ukraine about a year ago, we saw, in a matter of days, unprecedented global economic sanctions imposed on the Kremlin.
The US and European allies sanctioned Russia’s largest financial institutions, the Central Bank, and various key players in critically important sectors such as oil and gas. A large proportion of the country’s foreign reserves were frozen. Even Russia’s sovereign debt was sanctioned, meaning Russia can no longer raise money from the West or trade debt on US or European markets.
In the midst of almost daily sanctions updates, the news media seemed to have one question: Can Russia use cryptocurrency — which lives and moves outside the traditional financial system — to evade the unrelenting wave of sanctions?
The answer, from both industry and governments, was a resounding no.
As we move into the second year of Russia’s war on Ukraine, the picture of crypto’s role is becoming more clear.
While the Kremlin cannot use crypto to fill coffers emptied by sanctions and an ever more costly conflict, we will likely continue to see crypto used by cybercriminals, paramilitary groups and parts of the Russian illicit finance ecosystem. But those efforts are at a much smaller scale and pale in comparison to the weight of global economic sanctions.
There is not enough crypto to support the Kremlin in the wake of sanctions and the war in Ukraine: Cryptocurrency is still not the answer for Russia.
Too little cryptocurrency?
Prior to Russia’s invasion of Ukraine, 80% of its daily foreign exchange transactions and half of its international trade was conducted in dollars.
Senior Treasury Official Todd Conklin explained what then happened in the wake of Russia’s invasion. “Russia is a G20, fiat-based economy, and now the ruble is at a record low…Russia has not focused on building the rails needed to support crypto or DeFi [decentralized finance] innovation,” Conklin said in an interview with me on TRM Talks back in March 2022. “You can’t flip a switch overnight and run a G20 economy on cryptocurrency.”
The fact is that there is not enough liquidity in the entire cryptocurrency market — about $1 trillion — to support a G20 economy and execute an increasingly costly war.
But while there is not enough crypto for the Kremlin to dodge unprecedented sanctions, we have seen pro-Russian organizations — such as OFAC-sanctioned Task Force Rusich — raise hundreds of thousands in cryptocurrency donations since the start of the war.
Rusich (referred to by the US Treasury as a “neo-Nazi paramilitary group”) the Novorossia Aid Coordinating Center (NACC), and others have reportedly raised almost $2 million in cryptocurrency since the start of the war effort to fund drone technology, body armor, ammunition, clothing and other materials needed to execute the war in Ukraine.
KillNet, a pro-Russian cybercriminal group operating since 2021, has been raising funds in crypto for the Russian war effort and targeting government entities and critical infrastructure in countries opposing the invasion.
It is no surprise that Russian actors would turn to cybercriminal activity to fund the war effort. Russia has, for years, been the global leader in cybercrime as the home of darknet markets, ransomware groups, non-compliant cryptocurrency exchanges, and other illicit actors.
Even prior to February 2022, crypto exchanges linked to Russia and Ukraine accounted for more than half of all international volumes of illicit crypto funds, while cybercriminal syndicates and other illicit groups were staffed by Russian speakers. Russian-language darknet markets (DNMs) dominated the global crypto drugs trade in terms of volumes and appeared impervious to law enforcement action.
Regulators and law enforcement target Russian illicit finance
While we have, not surprisingly, seen Russian actors attempt to use crypto on a relatively small scale, those actors have also been the target of global regulators and law enforcement.
Beginning even prior to Russia’s invasion of Ukraine, US authorities and allies began to target Russia-based non-compliant cryptocurrency exchanges with back-to-back sanctions actions against SUEX, Chatex and Garantex for facilitating ransomware-related payments. These actions were followed by the takedown of Russian-language darknet mega market Hydra, with the US seizing its servers and $25 million in bitcoin.
Then, in January 2023, authorities went after Russia-linked exchange Bitzlato explaining, “Hydra and Bitzlato formed a high-tech axis of cryptocrime.” In the Bitzlato action, the US Treasury Department designated Bitzlato as a “primary money laundering concern,” using a special authority to target Russian illicit finance for the first time.
Crypto does have a role to play for humanitarian aid and defense
While there might not be enough crypto for Russia’s war, there is certainly enough to support Ukraine.
Over the last year, we have seen a surge in cryptocurrency donation campaigns in support of Ukraine. A report by blockchain intelligence company TRM Labs, my employer, found that Ukraine groups raised more than $135.7 million in a one month period between February 22, 2022 and March 28, 2022 alone. Those funds have gone to NGOs such as Ukraine DAO and official government entities including the Cyberpolice of Ukraine and the Ministry of Health of Ukraine.
So, where does this leave us? The answer to the question of whether or not Russia can use cryptocurrencies to evade sanctions remains a hard no.
But we have learned over the last year that cryptocurrencies will play a role on both sides of the conflict, with authorities continuing to go after those that facilitate Russian illicit finance.
As the war continues, we are likely going to see more of the same and a growing use case for technology that can send funds for humanitarian aid and defense at the speed of the internet.