Bitcoin could be the next sanctions target, but most Russians don't care

As Moscow's war on Ukraine intensifies and Russia's economy and currency spiral to new lows, Washington is reportedly trying a new way to pressure Putin: sanctions on cryptocurrencies like bitcoin and ethereum.

The U.S. Department of Justice announced early Wednesday the creation of a new task force focused on imposing sanctions. As part of this, it will target efforts to use cryptocurrencies to evade U.S. sanctions, launder the proceeds of foreign corruption, or evade the U.S. response to Russian military aggression.

The United States and its allies, including the notoriously neutral Switzerland, have slapped Moscow with harsh penalties for Russia's access to digital cash.

Bitcoin could be the next sanctions target, but most Russians don't care

The fear is that the Kremlin and other ancillary actors supporting the offensive against Ukraine will use digital tokens to evade the sanctions regime. Digital tokens are not owned or issued by a central authority such as a bank. Like most cryptocurrencies, Bitcoin is decentralized and borderless, which means it does not respect national borders. Digital currencies have also faced boycotts due to the lack of a central authority to block transactions.

Bitcoin transactions in both the Russian ruble and the Ukrainian hryvnia have surged to their highest levels in months since Russia invaded Ukraine on February 24, according to statistics from crypto data provider Kaiko. This may be part of the reason why Ukraine has demanded that all top cryptocurrency exchanges ban Russian users, a request that has been rejected by many major players who believe such a move would go against the real reason cryptocurrencies exist.

Despite growing signs of cryptocurrency adoption and world leaders calling for a ban on digital currency transactions for sanctioned Russians, cryptocurrencies are not a viable option at scale as a way to evade sanctions.

First, crypto markets are illiquid, and token transactions are designed to be tracked through a public ledger called the blockchain. Beyond that, experts told CNBC that there will eventually be better and smarter ways to bypass global financial blockades than using Bitcoin.

“The size and scale of the crypto market — and the liquidity of their country — is not sufficient to offset the disruption and disruption that other sanctions from banks have taken place,” said Yaya Fanusie, research fellow at the Center for a New American Security, National Security and Money Laundering Risk Evaluate related digital assets.

"It's like, if someone deducts a month's salary from you, you have to rely on your piggy bank to make it up," he said.

Russia is no stranger to sanctions

Russia is no stranger to sanctions, and its political class has been finding creative workarounds for years.

Moscow was condemned by the international community after Russia annexed Ukraine's Crimea peninsula in 2014. Also that year, a passenger plane en route from the Netherlands to Malaysia was shot down by a Russian-made surface-to-air missile that was fired over areas controlled by pro-Russian separatists in eastern Ukraine.

Russian President Vladimir Putin has since built buffers to shield Russia from Western sanctions. Economists estimate that Western sanctions cost Russia $50 billion a year.

Typically, sanctions are implemented by the government making a list of individuals and companies that must be avoided, and those doing business with these banned entities are subject to hefty fines. However, Sarah Beth Felix, an authority on anti-money laundering and sanctions compliance, explains that the effect of sanctions is only effective if KYC (know your customer) meets the onboarding requirements.

“It depends on how strict the sanctions are, and then it affects the data, which in turn affects whether the sanctions actually work,” Felix said. “It’s agnostic to the underlying flow of money, whether it’s crypto, fiat Wire transfers, through payment accounts — all based on underlying data captured and verified based on ownership by companies, individuals, and whatnot.”

Putin's strategy includes diversifying away from U.S. Treasuries and the dollar, cultivating a new debt structure based largely on the euro and gold. Putin's war fund includes $630 billion in foreign reserves, a financial shield designed to mitigate the impact of sweeping sanctions.

Russia's underlying financial fundamentals also help absorb shocks. NBC Finance has reported that Russia has a debt-to-GDP ratio of just 18%, a current account surplus and oil prices soaring to $113 a barrel (the highest level in more than a decade), which is certainly a good thing. So far, the White House has not sanctioned Russian oil sales.