Russia Sanctions and Cryptocurrencies: Policy Issues

INSIGHTi

Russia Sanctions and Cryptocurrencies: Policy
Issues
May 26, 2022
The G-7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), the
European Union (EU), and other countries have responded to Russia’s expanded invasion of Ukraine in
February 2022 with swift, coordinated, and broad sanctions designed to exert significant pressure on key
Russian individuals and companies, as well as the broader Russian economy. As the multilateral coalition
seeks to sustain economic pressure on Russia, and Russia seeks ways to mitigate the impact of sanctions,
some in Congress are asking whether cryptocurrencies offer Russia a way to evade sanctions.
This Insight discusses related policy issues and proposed legislation; for technical analysis of
cryptocurrency as a potential means of sanctions evasion, see CRS Insight IN11920, Russian Sanctions
and Cryptocurrency, by Kristen E. Busch and Paul Tierno.
Are Transactions in Cryptocurrencies Subject to Sanctions?
The United States and G-7 partners have reiterated that sanctions apply to all transactions involving
designated parties, regardless of the currency in which a transaction is denominated or the means used to
complete a transaction. U.S. sanctions apply equally to transactions conducted in traditional fiat
currencies (e.g., dollars, yen, euros, pounds, renminbi) and transactions conducted in cryptocurrencies or
other digital currencies.
Is Russia Evading Sanctions with Cryptocurrency?
The pseudonymous nature of cryptocurrency may facilitate illicit finance by making payments more
difficult to trace. However, the Treasury Department has found little evidence to date that Russian
government officials or Russian individuals are using digital currencies to evade sanctions. Analysis by a
private-sector blockchain analytics firm reached the same conclusion. More generally, the global
cryptocurrency market is not liquid enough to backfill the financial needs of the entire Russian economy,
the 11th largest in the world before the 2022 war. The collapse in the cryptocurrency market in May 2022
also highlights the volatility risk reliance on cryptocurrencies poses for would-be sanction evaders.
Reasons for concern remain. The cryptocurrency market is likely liquid enough to allow some Russian
individuals and companies to transfer large sums of money. Actors associated with robust sanctions
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programs (most notably Iran and North Korea) have used cryptocurrencies to evade sanctions. At least
one Russian legislator has suggested allowing friendly countries to pay for Russian oil and gas with
cryptocurrency. New sanctions on Russia reportedly triggered suspicious activity in cryptocurrency
markets. Trading between the ruble and Tether, a cryptocurrency, spiked after the G-7 announced a new
round of Russia sanctions, and cryptocurrency exchanges in the United Arab Emirates (which has not
imposed sanctions on Russia) have been deluged with requests from Russians to convert billions of
dollars of cryptocurrencies. (Cryptocurrency exchanges are where cryptocurrencies can be exchanged for
more-usable fiat currencies.)
More broadly, Russia has a track record of using digital currencies for illicit purposes. The Treasury
Department characterizes Russia as “a haven for cybercriminals.” In April 2022, the United States
imposed sanctions on a Russian-based darknet market (Hydra) and virtual currency exchange (Garantex)
that conducts most of its operations in Moscow for various illicit transactions.
The Treasury Department also has sought to limit the ability of Russian entities to raise funds through
cryptocurrency mining (the creation of new cryptocurrency tokens). In April 2022, Treasury designated
companies and individuals operating in Russia’s virtual currency mining industry as facilitators of
sanctions evasion. Russia’s crypto mining industry relies on imported computer equipment, and was
estimated to be the third-largest bitcoin mining country in the world in August 2021.
Policy Options
Some Members of Congress have introduced legislation to prevent designated Russian entities from using
cryptocurrencies as a sanctions evasion tool, such as S. 3867/H.R. 7429 and H.R. 7067. The bills would
target foreign cryptocurrency entities processing transactions for sanctioned Russian entities and
strengthen reporting requirements for international cryptocurrency transactions.
Secondary Sanctions on Foreign Cryptocurrency Firms
U.S. sanctions prohibit U.S. individuals and entities from transacting with sanctioned Russian entities;
U.S. sanctions do not (and cannot) directly prohibit cryptocurrency firms in other countries from engaging
in transactions with sanctioned Russian entities. Several major economies, including Brazil, China, India,
Mexico, Saudi Arabia, and the United Arab Emirates, have not imposed sanctions on Russia, and
sanctioned Russian entities could engage in fiat or cryptocurrency transactions with firms in these
countries.
Proposed legislation would raise the costs for foreign cryptocurrency firms engaging in transactions with
sanctioned Russian firms by imposing restrictions on any foreign cryptocurrency platform or “transaction
facilitator” that assists or supports transactions with sanctioned Russian entities. These secondary
sanctions could force foreign cryptocurrency entities to choose between (1) access to the U.S. financial
system and U.S. dollar, and (2) transacting with sanctioned Russian entities.
Enhanced Reporting Requirements
Many cryptocurrency exchanges have adopted know-your-customer (KYC) anti-money laundering
measures. KYC regulations help cryptocurrency exchanges enforce sanctions; for example, in March
2022, Coinbase, the largest U.S. cryptocurrency exchange, blocked 25,000 cryptocurrency wallets tied to
Russians suspected of illicit activity. It is difficult to know how well all cryptocurrency firms apply KYC
measures; further, the pseudonymous nature of cryptocurrency transactions complicates compliance with
KYC regulations in place. Legislation could strengthen the effectiveness of KYC policy and support
sanctions enforcement efforts by requiring U.S. persons to report on certain cryptocurrency transactions
with financial accounts held outside the United States. However, the requirements would not pertain to

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non-U.S. persons and thus it is still feasible that Russians could use foreign exchanges to get around U.S.
sanctions.
Cryptocurrency Industry Reactions
The cryptocurrency community in the United States is divided over the proposed legislation. Opponents
argue that there is little evidence that wealthy Russians or Russian state entities are using cryptocurrencies
to evade sanctions, and that legislation could undermine the privacy afforded to cryptocurrency users and
stifle innovation in the industry. There are also general concerns that secondary sanctions could accelerate
efforts by some actors to reduce their reliance on the U.S. financial system and the U.S. dollar.
Others argue that the legislation’s effect would be minimal, because it would apply regulations to
cryptocurrency transactions that the financial industry already applies to transactions using fiat currencies.
Legislation could level the playing field for U.S. cryptocurrency firms by requiring all cryptocurrency
firms to comply with U.S. sanctions (or risk losing access to the U.S. market and financial system).

Author Information

Rebecca M. Nelson
Andrew P. Scott
Specialist in International Trade and Finance
Analyst in Financial Economics





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