Crypto-assets as a means of circumventing economic sanctions: what is their real value?
In recent weeks, digital assets have come under the spotlight for their role in the war following Russia’s invasion of Ukraine. On the one hand, they have enabled the rapid collection of over $100 million in aid for Ukraine, helped support local populations on both sides of the conflict, and raised questions about whether Russia might use them to circumvent economic sanctions against it.
In this article, ADAN seeks to answer this legitimate question and explain why crypto-assets are not an effective tool for circumventing economic sanctions.
Anyone wishing to derive a benefit from their crypto-assets in the real economy must engage with a natural or legal person who, if located in the European Union, is themselves bound to comply with the sanctions regime in force. The technical characteristics of crypto-assets (traceability, transparency, lack of anonymity) make them ill-suited for any fraudulent or discreet transaction.
To ensure the greatest effectiveness of the measures taken, the European Union must therefore place greater emphasis on ensuring that a large number of operators are established within its territory and thus subject to the application of the regulations.
Shortly after the start of the Russian offensive against Ukraine on February 24, the dynamics of the crypto-asset markets in both countries sparked surprise and raised questions. However, while Ukraine’s fundraising efforts in digital assets—despite raising significant amounts in record time—generated little debate, the possibility that Russian leaders could circumvent the sanctions and asset freezes imposed by Europe and the United States raised far more questions.
Admittedly, given the current size of the crypto-asset market, it seems unlikely that these assets alone could sustain the Russian economy in the face of sanctions imposed through traditional payment systems. Nevertheless, it is still worthwhile and legitimate to ask whether they could theoretically achieve this.
1.Circumvention of sanctions: a risk already addressed by regulations
It is true that a crypto-asset based on a decentralized blockchain—such as Bitcoin—can hardly be controlled or sanctioned by a government or public authority. By their very nature, these networks are accessible to everyone and belong to everyone. However, anyone wishing to ultimately derive any benefit from the purchase or holding of one or more digital assets will necessarily have to exchange them for legal tender, a product, or a service. In all three of these situations, the holder of crypto-assets will inevitably have to route them through an intermediary and/or transfer them to a recipient who, in turn, remains subject to the legal obligations applicable in their jurisdiction of residence.
This forms the basis of measures to combat money laundering and terrorist financing. Their purpose is to hold all stakeholders accountable for potential financial fraud risks by requiring them to exercise due diligence throughout the business relationship. These operators are able to verify the identity of the payer and decide whether or not to carry out the transaction based on the assessed risks.
Consequently, if the beneficiary or fund intermediary has its registered office in a country that has imposed sanctions against Russia and asset freezes—as is the case, for example, within the European Union—it will be required to comply with the restrictions in force in that jurisdiction and, as a result, must refuse the cryptocurrency transaction.
Conversely, if the beneficiary in question is located in a jurisdiction without such restrictions, the holder of crypto-assets will indeed be able to engage in financial or commercial transactions, just as they would be able to do using a legal tender.
Any transaction between Russia and the European Union, whether or not it involves crypto-assets, will therefore involve an identifiable party capable of complying with the regulations in force in the relevant jurisdiction; failure to do so would expose that party to civil and criminal penalties.
It should be noted here that in France, digital asset service providers (DASPs) that regularly act as intermediaries in crypto-asset transactions are a prime example. Since the entry into force of the Law on Business Growth and Transformation (PACTE) in May 2019, these providers have been required to register with the French Financial Markets Authority (AMF) through a procedure that demands commitment and rigor. As such, they comply with regulatory requirements that are sometimes stricter than those for traditional financial institutions, such as the obligation to implement a know-your-customer (KYC) system starting from the first euro of a transaction, compared to 250 euros for a transaction and 1,000 euros for a transfer in the case of a traditional operator.
2.Technological features that are not well suited to fraudulent activity
From a technical standpoint, crypto-assets are often highlighted for their traceability and transparency. These characteristics do not meet the expectations of either a government seeking to keep its financial flows confidential or individuals wishing to discreetly transfer their assets abroad.
The traceability provided by crypto-assets actually makes it easier for companies to comply with applicable regulations and enhances their efficiency over time, regardless of the number of intermediate transactions.
Indeed, if an individual listed in the register of sanctioned persons purchases crypto-assets and attempts to use them several years later, they can be identified with ease. Similarly, if the crypto-asset traded by that individual passes through various wallets before an attempt is made to use it within the European Union, the underlying blockchain technologies will make it possible to trace the transaction history back to the source of the financial flow. Such a feature does not exist with cash or precious metals, making them far better tools than digital assets for fraudulent operations.
Added to this is the transparency afforded by digital assets, since anyone can freely access the data recorded on blockchain technology. This feature also helps ensure that donations sent to Ukraine are not misappropriated for corrupt purposes.
In addition, to further deter the use of crypto-assets for fraudulent purposes, the transaction analysis firm Chainalysis has developed new online tools that will help decentralized finance projects meet regulatory compliance requirements by enabling them to better identify sanctioned wallets.
3.Effective enforcement of regulatory requirements depends on the presence of major players in the region
The existing regulations in France and those currently being implemented at the European level are therefore more than sufficient to address the risks in question, as they require service providers engaged in activities related to digital assets to comply with anti-money laundering and counter-terrorist financing obligations.
Imposing additional restrictions on them would not be any more effective in ensuring compliance with existing sanctions or asset freeze measures. On the contrary, the inherent characteristics of digital assets can not only be accommodated within existing regulations but can also help to strengthen them.
However, for these measures to be effectively enforced, companies must fall within the scope of these obligations—and therefore be located in the jurisdiction where the measures are imposed. Yet to date, the major crypto-asset trading platforms, which act as intermediaries in transactions, are based outside European borders. They therefore comply with requirements that do not stem from our laws but from those of the countries in which they are established, whose policies may differ from those of Europe.
The United States, despite its strong commitment to the dollar’s hegemony and its monetary sovereignty in general, has clearly understood what is at stake. In an executive order dated March 9, 2022, President Joe Biden directed his administration to explore the possibility of issuing a digital dollar with the aim of strengthening the country’s leadership in the global financial system while enhancing its economic competitiveness.
A balance must therefore be struck in Europe to prevent overly restrictive regulations from ultimately leading to the closure or relocation of European companies abroad, and consequently to a weakening of the Union’s leverage.
