The West has firmly moved to cut Russia from the SWIFT banking system. The decision comes alongside another round of harsh financial sanctions targeted toward Russian banks and oligarchs. As ordinary Russian people continue to queue to get cash from ATMs, some experts opine that, thanks in part to the surge in cryptocurrency’s adoption in Russia, the impact of these western sanctions could be blunted.
Crypto Adoption in Russia
According to data gathered by Cambridge University, Russia became the world’s third-biggest crypto-miner in 2021, after the U.S. and Kazakhstan.
While Russian law doesn’t officially recognize crypto mining, President Putin himself opposed the ban on crypto proposed by the central bank earlier in 2022. Putin supports the notion of allowing mining to continue, as Russia has many regions with a surplus of electricity, including Irkutsk, Krasnoyarsk, and Karelia. The central bank, on the other hand, continues to oppose mining due to environmental concerns and the lack of regulations around it.
According to the Russian Association of Cryptoeconomics, more than 17 million Russians, or about 12% of the total population, own cryptocurrencies. The worth of these digital currencies makes up an estimated $214 billion, and the fluctuation in the exchange rates of the Russian ruble have only served to add to the popularity of cryptocurrency. Following the start of the war in Ukraine and the resulting financial sanctions on Russia, the ruble hit an all-time low, and as such, crypto trading volumes have already seen a spike.
Roman Sannikov, a Russian cybersecurity specialist, when asked for comment by Fortune, explained that the legitimate use of cryptocurrencies in Eastern Europe is a legacy of the Soviet Union and the chaos that ensued after its collapse. For roughly a decade, beginning in the early 1990s, former Soviet citizens lacked proper access to the global banking system, so they had to use alternative ways of sending money internationally, including cryptocurrency precursors such as e-gold.
While the vast majority of crypto activity is legal, Eastern Europe has one of the highest rates of crypto transaction volume associated with criminal activity, according to research by Chainalysis. Websites used for illicit trades, known as darknet markets, brought in a record $1.7 billion worth of cryptocurrency in 2020, most of it in Bitcoin.
A vast majority of the growth in the darknet market can be attributed to a prominent Russian marketplace called Hydra. Hydra is “by far the largest darknet market in the world, accounting for over 75% of darknet market revenue worldwide in 2020,” Chainalysis wrote in a report earlier this month.
Russia and the entire Eastern Europe region stand at the center of the ransomware industry. Approximately 74% of the global ransomware revenue, or more than $400 million worth of cryptocurrency, was related to entities affiliated with Russia. In ransomware schemes, hackers lock their victims’ files or computers and demand payment to unlock them. Usually, the ransomware is transferred in cryptocurrencies.
The SWIFT ban and the Search for Alternatives
SWIFT (the Society for Worldwide Interbank Financial Telecommunication) has become a crucial mechanism for empowering international trade. Through the system, banks use a secure messaging system to make rapid and secure cross-border payments.
Founded in the 1970s, SWIFT is a cooperative of thousands of member institutions. Based in Belgium, it remains neutral in trade disputes, being run principally as a service to its members. In 2020, approximately 38 million transactions were sent each day via the SWIFT platform, facilitating trillions of dollars worth of deals.
The alliance of world leaders agreed to cut Russia from the network, a move intended to negatively impact the Russian economy. Financial transactions made without SWIFT would need to be conducted directly between banks, or routed through fledgling rival systems, increasing costs and causing delays.
However, the impact on Russian businesses may not be as dreadful as first anticipated, due to the available options of using other channels for payments, such as phones, messaging apps, or even emails. Russian banks also can re-route transactions via third-party countries that have not imposed sanctions yet, such as China, which has set up its own payments system to rival SWIFT: the Cips system. A ban on using SWIFT could serve to accelerate the use of a rival banking system and thereby increase the usage of cryptocurrencies.
Cryptocurrencies Are Harder to Trace
Fiat currencies are traceable and controlled by third-party institutions that can track, freeze, or block them. On the other hand, cryptocurrencies can potentially be sent directly from one person to another, regardless of government sanctions or other restrictions.
Crypto exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are not as efficient at tracking their customers as banks are, even though they are subject to the same rules, not to mention that many regulating authorities still lack the necessary knowledge regarding blockchain technology.
Furthermore, users owning multiple wallets with different addresses across several exchanges can make it particularly difficult to track the activities performed, and even harder to connect transactions to a specific individual. A crypto holder can choose to use cryptocurrency exchanges that are not tied to the nation effecting or being affected by sanctions, which therefore don’t necessarily have to adhere to the same regulations.
Once the sanctions hit Russia, digital currencies could assist in the purchase of goods and services, and for investing in assets outside of Russia, all the while, avoiding the banks adhering to the sanctions which could trace their transactions.
"If the Russians decide — and they're already doing this, I'm sure — to avoid using any currency other than cryptocurrency, they can effectively avoid virtually all of the sanctions,"
said Ross S. Delston to CNN, an expert on anti-money laundering compliance.
Crypto cards are not a new tactic in the sanctioned countries’ playbook. Harshly sanctioned countries, such as Iran and North Korea, have already found crypto workarounds. According to Reuters, North Korea was using cryptocurrencies to fund its nuclear and ballistic missile program. Iran, which has been dealing with economic restrictions for almost a decade, avoided some of these sanctions by turning to Bitcoin mining, according to a report by Elliptic.
On the flipside, some assets held in cryptocurrencies are not easily converted into fiat. This makes any money that trades hands less disposable. In this case, businesses could shift to accepting digital payments in crypto in order to circumvent banks, or even centralized exchanges that adhere to the sanctions. This may not be easy, however, as not all companies and consumers have the access to start using cryptocurrencies.
Is the Crypto Industry Turning Against Russia?
Despite the optimistic forecast for Russia’s crypto market, many players in the crypto industry have begun to form their own restrictions, condemning the conflict and attempting to halt Russia from using their services.
Flexpool, the world’s fifth-largest Ethereum mining pool, is cutting all services to Russian users in support of Ukraine in the wake of Russia’s invasion. The decision makes FlexPool one of the first cryptocurrency-based businesses to take a side by showing solidarity with Ukraine. Despite this measure, Reddit users have pointed out that miners can still use efficient virtual private networks (VPNs) to bypass the Flexpool restrictions.
The week also started with Binance announcing that it would be complying with any further sanctions imposed by the international community. Binance has established a dedicated global compliance task force, including world-renowned sanctions experts.
The leading crypto exchange is also taking the required steps to ensure that it can take action against those who have had sanctions levied against them while minimizing its impact on innocent users.