Regulators trying to hunt down Russian crypto assets are looking for a needle in a haystack.
It is remarkable to think that only a year ago, much of the market was up in arms about meme stocks and the ability of cryptocurrency to disrupt the market and how both were dangers to investors.
How much has changed, and how quickly.
Before Russia invaded Ukraine, the uses for cryptocurrency were limited to how quickly they made their fans money, how easily it could lose or gain value, and how irritated larger traditional financial institutions were by the vast market moves they were able to achieve in 2020 and 2021.
Now, however, market watchers and the world’s citizens alike find themselves learning about cryptocurrency, and in particular, bitcoin, for another reason: The way it is allowing, and has the potential to continue allowing, Russia’s elite to avoid sanctions.
There is also the possibility that Russian hackers, well familiar to American voters for manipulating the 2016 presidential election, will simply hack whatever cryptocurrency they need.
Wondering who made the list of Russians hit with sanctions? TheStreet has you covered.
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Tracking Something Without a Trail
As sanctions have mounted over the last week, international regulators are increasingly focused on if crypto coin usage leaves a trail they can follow.
Although much of cryptocurrency mining and trading, and bitcoin particularly, takes place in forums unfamiliar to most banking officials, there are ways to track who and what is holding how much of any particular amount and which coin.
Keegan Francis, bitcoin and cryptocurrency specialist and founder at Finder, told TheStreet that there are some ways to find what you are looking for — and sanctioned individuals are no different.
“Generally speaking, yes. Most blockchain transactions leave an audit trail that can be followed to learn about the people who previously held the coin,” Francis said.
Now is a good time to note that we said there are “some” ways to track different types of crypto, and only in certain circumstances.
“With that being said, coins like Monero and zCash do not leave a followable trail, thus they are desirable for those who wish to keep the details of their transactions private,” Francis said.
Rance Masheck, CEO and founder of iVest+, put it more bluntly, pointing out that right now, international sanctions do not cover bitcoin or other cryptocurrencies as assets that must be frozen.
“Coin usage does not leave a trail. Coin exchanges, which means converting coins to another currency, will typically leave a trail that international regulators can follow, Masheck said.
“Think of it like buying a TV from your neighbor for cash. There’s no way that anyone else would know, but how you get that money out of your bank and how your neighbor puts it back into their bank is tracked.”
Michael Parker, head of the anti-money-laundering and sanctions practice at Washington law firm Ferrari & Associate, told TheStreet that even with cash, there is recourse for tracking what has changed hands, how and for how much.
“By way of comparison: cash, in and of itself, is very difficult [or] impossible to track. So U.S. law has reporting requirements for dealing in cash,” Parker said.
“For example, purchases, deposits, or persons leaving/entering the U.S. with over $10,000 in hard currency require a specific form to be filled out and registered with the U.S. government,” he said.
“The legal requirements are on businesses, people, and institutions that deal in cash because, otherwise, it is a means of exchange that is effectively anonymous,” Parker, who is a former federal prosecutor said.
“[Bitcoin], on the other hand, has a public blockchain ledger that creates a permanent record of all its transactions: in this way, it is far less anonymous than hard currency.
You can read all about how that process works right here.
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How Much Ransomware Are We Talking About Here?
On the other hand, you might not have to steal what you already have and can easily move.
Chainanalysis estimated in its 2021 Crypto Crime Report that around $400 million in cryptocurrencies were ransomed by companies or people linked to Russia that year, comprising almost two-thirds of total ransomware revenue in 2021.
There are many marketplaces on what is known as the dark web, but the one most popular, by Chainanalysis research, is Hydra, which allows billions of dollars to cross borders and avoid the official banking system altogether.
“We know that there’s no questions asked, and we know that Hydra operates not just throughout Eastern Europe but throughout Western Europe,” Kim Grauer, director of research at Chainalysis, told the Times. “There’s definitely cross-border business happening.”
Hydra only requires that sellers cash in their crypto through regional exchanges, which can make it opaque for some regulators, but easier to understand if a savvy watcher was looking for a huge flow of volume.
You can read more about how that works here, in a brilliant analysis from our colleague Luc Olinga.
The Upshot for Tracking Russian Assets
While the idea of Russian war profiteers swanning into Biarritz to buy a new Gucci purse may be galling for many people, it is still legal.
While the United States has experimented with ways to sanction the trading of alt coins via its sanctions on North Korea and Iran, it has not yet set in place a specific set of sanctions designed to curb the usage of cryptocurrency.
That reprieve may be brief — the Treasury Department is reportedly finalizing its guidelines on how to crack down on assets held as cryptocurrency. But for now, it is still perfectly legal for sanctioned listees to access their bitcoin and other alt coins.
Wondering what exactly an oligarch is? We can help you with that, too.
Sometimes a Sanction is a Sanction in Name Only
It is also important to note that not all countries have yet imposed sanctions, which simply put mean a business conducting transactions of any sort someone on the sanction list would be penalized and fined for doing so.
Therefore, a sanction itself doesn’t freeze anything, Masheck said.
“The SWIFT lockout and seizing of assets does freeze transactions,” he said.
So what if a Russian on the sanction list wanted to buy a yacht, TheStreet asked. Could he walk right in, pay in bitcoin, and be totally within the letter of the law, and not in violation of sanctions?
“So one answer would be, if a sanctioned Russian or Russian entity were to walk into a business in the country that has imposed the sanctions and look to buy a yacht with a U.S. credit card,” Masheck said, “this would be trackable and immediately the business would be in trouble and ultimately fined for doing that.”
But there are other scenarios, just like everything else in this war so far.
“Now, if the same Russian walked into the same business and offered to pay in bitcoin for the yacht, the transaction would not be trackable,” Masheck said, “but the business would still be in violation of the sanctions if this was ever discovered.”
