BEFORE YOU GO...
Check how Shufti Pro can verify your customers within secondsRequest Demo
The Russia-Ukraine conflict has had some serious effects on the global financial landscape. While sanctions are targeting Russia’s financial paradigm, oligarchs and wealthy businessmen are looking for cryptocurrencies to clean their dirty money.
Putin’s billionaire allies have been actively looking for ways to conceal the billions they made during his 20-year long autocratic tenure. These wealthy Russians know that the sanctions from the West have mostly targeted US dollar-based financial operations in the country. That being said, anti-money laundering experts have shed light on the possibilities of evading sanctions through the comparatively less regulated cryptocurrencies.
Why is Crypto a Virtual Safe Haven?
Despite being recorded on digital ledgers, transactions in crypto provide a certain level of anonymity. Transaction data from the blockchain is directly linked to the crypto wallets of owners. After the Russian invasion of Ukraine, crypto experts recorded a threefold rise in trade between the Ruble and other cryptocurrencies. Even though this was only a fraction of the highest spike in crypto trading volume that came in May 2021, it is still a notable event.
In the past month after the invasion, blockchain data platform Chainalysis found that almost $62 million in crypto were sent through Russia-based crypto wallets to other addresses. Although this is a considerably low amount when taking into account the wealth of Russian oligarchs, the threat of crypto being used as a virtual safe haven is still looming.
As a result, global authorities are looking to impose even more stringent sanctions that cover more than just the traditional financial processes. US Senator Elizabeth Warren addressed the situation and stated that “cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to avoid economic pain.”
How Crypto Can be Used to Evade Sanctions
Countries like North Korea and Iran are taking steps to block the crypto trade route to avoid being affected by the sanctions. For instance, Iran has been working to develop its own cryptocurrencies and has moved Bitcoin mining to a government-approved sector. There is also documented proof of how North Korea has made use of ransomware to steal crypto and use its value for its nuclear program.
The Central Bank of the Russian Federation has been formulating its own digital currency called the digital Ruble for quite some time. This strategy is aimed at promoting transactions with countries that look to avoid converting their currency to the US dollar and would accept the conversion of Russian crypto directly to their local currency. That’s not all, Russian Central Bank’s officials have also indirectly revealed their motives regarding the digital Ruble, which they expect to assist Russian oligarchs evade sanctions by bypassing the US financial system.
Other countries that share Russia’s point of view in avoiding the US financial system are Iran and China. While Iran has been developing its own digital currencies, China boasts a boundless financial and diplomatic friendship with Russia.
Effect of Sanctions on Russian Banks
After the invasion of Ukraine, Russia has been facing the consequences in the form of removal from global cross-border payment systems. This affected Russia’s banks negatively and restricted their ability to bank on their reserves of foreign money. Prominent crypto exchanges like Binance and Coinbase have stated that they are ready to comply with sanctions and restrict accounts or transactions that are linked to sanctioned entities and businesses.
That being said, they do not plan on banning Russians completely from performing transactions. According to them, this step is taken to distinguish between actual oligarchs that are linked to Putin and normal Russian citizens that aren’t involved in the invasion.
Loopholes in the Cryptocurrency System
The risks of cryptocurrencies being used to conceal dirty money and evade sanctions are greatly elevated if the anonymity of crypto transactions is considered. This is because crypto wallet addresses are based on a sequence of letters and numbers, which directly link them to individuals. However, blockchain’s decentralized structure not only stores crypto transaction data but also reduces anonymity.
This means that bad actors who try to manipulate and misuse the crypto way to circumvent their ill-gotten funds will need to go through a series of steps. Transactions recorded on the blockchain registers are publicly accessible, which means financial regulators are able to monitor and mitigate suspicious crypto transactions. Based on these conditions, US officials say that cryptocurrencies do not really bring any significant risks of money laundering from Russia.
According to the US Treasury, sanctioned individuals or entities will find it difficult to hide money through cryptocurrencies, to a spokesperson commenting. “Even at the level of individual elites, laundering billions of dollars through digital wallets would expose themselves to those tracking flows within the virtual currency markets.”
Even when crypto transactions are dealt with and secured, bad actors have also found a way to avoid sanctions through Bitcoin mining. For instance, Iran had previously adopted this strategy and faced a 10-year ban from the US that resulted in an excess of energy which it failed to export. Consequently, Iran used the excess energy to mine Bitcoin, which has benefits in both using up big chunks of energy and producing Bitcoin.
Like Iran, Russia is a big oil-producing state that constantly faces bans from various world powers. This is why Russians are now looking toward Bitcoin mining in order to use excessive energy and dirty money in order to circumvent global sanctions. This alternative route can allow Russia to continue the flow of money in the form of Bitcoin export.
Iranian miners are estimated to contribute to almost 4.5% of the global Bitcoin mining, which generates yearly revenue of more or less $1 billion. As of now, Russia can be seen as the world’s third-largest country in terms of Bitcoin mining, which means the risk of sanctions evasion is considerably high.
To address anonymity and crypto-based money laundering amid Russian sanctions, identity verification of customers in the crypto trade has become seriously important. Verifying the identity of crypto investors allows businesses to comply with Know Your Customer (KYC) regulations as well as AML requirements of global regulatory bodies. Acquiring identity information from customers helps maintain transparency and trust to establish long-standing business relationships.
Shufti Pro’s identity verification solution enables cryptocurrency service providers to identify and verify their users in real-time. Our AML/KYC solution powered with artificial intelligence allows digital currency providers to comply with international standards of different countries. Shufti Pro’s IDV solution provides an accuracy of over 98.67% for an effortless verification of customer identity allowing regulatory compliance.
Want to learn more about our AML screening solution for your business?