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Russia Serves as a Case Study on Why TradFi is More Attractive for Money Laundering
We don’t agree with everything asserted in this Coindesk article, but it highlights some facts that run counter to the anti-crypto narrative. Sanctions always hurt the nation doing the sanctions more than the targeted nation. And crypto isn’t the automatic go-to for anyone looking to launder money or evade sanctions.
Anti-crypto regulators and legislators like to portray crypto as inherently suspect and crime enabling simply because of the privacy it allows, and because it’s easier to go after crypto the tool rather than the minority of bad actors who use it. But when it comes to money laundering and sanction evasion, traditional finance systems serve the purpose of bad actors just as well, and sometimes even better.
Days after Russia launched a full-scale invasion of Ukraine in February, Western states, led by the U.S. and European Union, levied vast sanctions on the Russian economy, hoping to drive Moscow into an economic crisis that would prompt a military retreat.
Yet within a matter of days, U.S. officials and top financial analysts were warning that Moscow might use cryptocurrency to circumvent Western sanctions, fearing that blockchain-based platforms could enable Russians to evade U.S. anti-money laundering (AML) regulations and stave off economic collapse.
One possible scenario is that Russian miners leverage the country’s plentiful energy reserves to mine bitcoin (BTC), then use unhosted wallets to move those bitcoins through a series of shady crypto transactions – likely involving chain-hopping, tumblers and peer-to-peer (P2P) marketplaces – to convert them into U.S. dollars to pay for goods. Well-known mixer Tornado Cash, which the U.S. Treasury Department sanctioned in August, has already been used to launder some $9 billion, so it may seem a feasible option.
But nearly seven months in, Russia has not gone this route. In fact, very little Russian money has been funneled through crypto. In April, the Wall Street Journal reported that daily ruble trading in cryptocurrencies spiked to 6.6 billion (US$46 million) in the days after Russia’s invasion, before quickly plummeting to 1 billion rubles ($7 million).
The words of Todd Conklin, head of the Treasury’s cybersecurity portfolio, seem to have proven true. “You can't flip a switch overnight and run a G-20 economy on cryptocurrency,” he said in March. “There just isn’t enough liquidity."
If crypto did offer a potential loophole, we could expect to see Russia doing its darndest to drive through it. But thus far we have seen no signs of any concerted Russian effort – governmental or non-governmental – to boost crypto liquidity.
Instead, Russia President Vladimir Putin seems to be putting all his efforts into building alternative financial rails to counter the dollar-based SWIFT financial communications system. This includes Russia’s SWIFT competitor SPFS (System for Transfer of Financial Messages) and its Visa/Mastercard competitor, MIR payments.
Putin’s sanctions response indicates that he and his cronies view traditional financial tools as more porous than crypto. The Russian president seems to believe that building a traditional, if non-western, financial network offers a better way to evade sanctions than crypto.
And he’s probably right.
The first reason is that transaction data in the traditional financial system is insurmountably vast and likely filled with errors. U.S. regulations, for instance, dictate that if a bank sees a series of $9,999 transactions, ($10,000 is often the reporting threshold), it must send a suspicious activity report (SAR) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
This brings us to the second reason, which is that the blockchain’s transaction data is free of errors and publicly accessible. All on-chain actions are tracked via a permanent, immutable and publicly viewable record. Sure, cryptocurrencies are anonymous to the extent that other users and exchanges may not know your identity, but all users leave breadcrumbs behind.
Whenever a cryptocurrency user makes any sort of transaction his wallet, or digital address, interacts with a crypto exchange or another user, leaving digital fingerprints for authorities to track. This may not fit neatly into the traditional know-your-customer (KYC) framework of today’s AML standards, but it has the potential to create effective new tools like know-your-transaction (KYT) – a different means to the same end.
The success of dictators, human traffickers, terrorists and drug cartels often hinges on their ability to launder money through the traditional financial system. Rather than giving them a lifeline, as some suggest, cryptocurrency gives us a chance to put them out of business – and now we may have proof.