Why sanctions evaders can’t hide in cryptocurrency

As Russ­ian tanks rolled into Ukraine and cities came under attack, the world watched in hor­ror and finan­cial aid for those trapped in the coun­try began flood­ing in.

By ear­ly March, almost $100m had been donat­ed to Ukraine in cryp­tocur­ren­cy alone, under­lin­ing the unique oppor­tu­ni­ty cryp­to presents for send­ing mon­ey direct­ly to peo­ple in war zones to sup­port relief efforts.

Mean­while, for those trapped in Rus­sia, cryp­tocur­ren­cy also pro­vides a haven against the falling ruble and gov­ern­ment-imposed cap­i­tal con­trols. It equal­ly high­lights the oppor­tu­ni­ty cryp­to presents for help­ing indi­vid­u­als main­tain their eco­nom­ic free­dom.

“This is a good use case for why you may not want to be depen­dent on a [fiat] cur­ren­cy that is col­laps­ing in val­ue and being reliant on banks that can no longer send mon­ey on your behalf to the rest of the world,” says Ben­jamin Sauter, a cryp­to lawyer at glob­al dis­putes and inves­ti­ga­tions firm Kobre & Kim.

Yet while cryp­to can be a force for good, there remain con­cerns that it can be used to facil­i­tate wrong­do­ing. As West­ern gov­ern­ments placed finan­cial sanc­tions on Russ­ian busi­ness­es and indi­vid­u­als, one ques­tion loomed large: could sanc­tions be evad­ed by shift­ing assets into cryp­to?

The answer is, not as eas­i­ly as you might think. 

“Cryp­tocur­ren­cy, in some ways, is no dif­fer­ent than tra­di­tion­al finance,” says Sauter. “Law-abid­ing cryp­tocur­ren­cy exchanges and oth­er ser­vices that are poten­tial on-ramps and off-ramps for cryp­to are aware of who those sanc­tions apply to; just like any tra­di­tion­al com­pli­ant bank, would not allow those sanc­tioned enti­ties to move their funds.”

Anoth­er rea­son why evad­ing sanc­tions using cryp­to is a chal­lenge is the size of the over­all mar­ket, which is about $3tn. By con­trast, the val­ue of the glob­al real estate mar­ket rose to almost $330tn in 2020, accord­ing to Sav­ills. 


“The cryp­to mar­ket has grown rapid­ly but is there actu­al­ly the liq­uid­i­ty to wash quite sub­stan­tial amounts of mon­ey? A lot of peo­ple would argue no,” says Deb­o­rah Hut­ton, a part­ner at Ever­sheds Suther­land.

Crypto is not completely anonymous 

The volatil­i­ty of the mar­ket may also make cryp­to less suit­ed for stor­ing sub­stan­tial assets, and its pseu­do-anony­mous nature means it is dif­fi­cult to entire­ly con­ceal own­er­ship. Any time some­one wants to con­vert fiat cur­ren­cy into cryp­to or cash back into fiat, they will need to use an exchange that will like­ly com­ply with exist­ing anti-mon­ey laun­der­ing (AML) and know-your-cus­tomer (KYC) reg­u­la­tions.

“There may have ini­tial­ly been a mis­un­der­stand­ing that things were a lot more anony­mous than they real­ly are,” Hut­ton says. “We are look­ing at a glob­al reg­u­la­to­ry approach. We’re look­ing at the rise of blockchain analy­sis tools. And we’re also look­ing at more sophis­ti­cat­ed inves­ti­ga­tion pro­ce­dures.”

One com­pa­ny that is devel­op­ing blockchain and cryp­to mon­i­tor­ing tools is Chainal­y­sis, which can place alerts on cryp­to wal­lets that have been linked to sanc­tioned indi­vid­u­als or com­pa­nies.

“If you are a cryp­to exchange who is inter­act­ing direct­ly or indi­rect­ly with a sanc­tioned wal­let, you will receive an alert that you’re receiv­ing funds or some­one is try­ing to make a trans­fer from a sanc­tioned enti­ty,” says Car­o­line Mal­colm, head of pol­i­cy at Chainal­y­sis.

Being able to detect indi­rect fund flows is an essen­tial tool for mon­i­tor­ing if sanc­tioned accounts are try­ing to cov­er their tracks by mov­ing funds in and out of mul­ti­ple wal­lets.

“Some­one who is try­ing to evade sanc­tions is not going to open up an account under their own name and then trans­fer to anoth­er exchange direct­ly, they are obvi­ous­ly going to try and obfus­cate that,” Mal­colm says. “But even if you’re not trans­fer­ring direct­ly, we can still see that, maybe three hops away, those funds came from a sanc­tioned wal­let address.”

Sanctions avoidance challenges

One poten­tial way to cir­cum­vent AML and KYC rules is to use an exchange in a juris­dic­tion that might have a more relaxed approach to sanc­tions com­pli­ance.

“You could use off­shore enti­ties that don’t fol­low sanc­tions poli­cies, so that is one poten­tial weak spot. But as soon as you move towards dol­lars or euros or pounds, then you will most like­ly have to deal with a cryp­to com­pa­ny that’s sub­ject to sanc­tion poli­cies itself,” says Teu­nis Brosens, head econ­o­mist for dig­i­tal finance and reg­u­la­tion at ING.

The growth in decen­tralised finance apps may also offer a way for sanc­tioned indi­vid­u­als to move their cryp­to assets with­out need­ing to use a tra­di­tion­al exchange.

Sauter says: “That’s not going to result in cash, but you can change assets into dif­fer­ent forms. And you can do it a lot and make it hard­er to track and obscure the path that assets take and who con­trols them.”

He explains that mix­ing ser­vices, which break down funds into small­er trans­ac­tions or exchange them into oth­er cryp­tocur­ren­cies, can also poten­tial­ly enable sanc­tioned indi­vid­u­als to obscure where their funds are head­ing.

How­ev­er, while evad­ing sanc­tions at scale using cryp­to remains chal­leng­ing today, it is unlike­ly to get any eas­i­er in the future. Even as the size of the cryp­to mar­ket grows and main­stream adop­tion reduces the need for on and off ramps to con­vert funds in and out of fiat.

“Even if you could trans­act entire­ly in cryp­to, pure Bit­coin barter trans­ac­tions prob­a­bly aren’t going to get sanc­tioned bil­lion­aires very far,” says Sauter. “And even if we get to the point where there is wide­spread day-to-day spend­ing adop­tion, then what you might see evolve is KYC require­ments for mer­chants who do siz­able busi­ness using cryp­to.”

The fact that there is a per­ma­nent record of all blockchain trans­ac­tions means inves­ti­ga­tors can poten­tial­ly piece togeth­er fund move­ments and wal­let own­er­ship as more infor­ma­tion becomes avail­able.

Mal­colm says: “Blockchain gives you the map of the cryp­to world and on top of that, we over­lay the street signs and the names of the street tell you where to go and who is who. That infor­ma­tion is gath­ered over time, so even if you don’t have a com­plete pic­ture today, we con­tin­u­al­ly add to that data pool and so you can grad­u­al­ly build up a clear­er view of where funds have flowed.”

There­fore, any fears that cryp­to can be used to side­step sanc­tions are large­ly overblown.