The position of cryptocurrency in time of war – can sanctions be bypassed through Bitcoin?

The stock market has become a more volatile place as the humanitarian crisis in Ukraine intensifies. With huge fluctuations now impossible to predict, more and more traders have participated in massive selloffs of tumbling stocks in favour of safe havens like gold, and more recently, cryptocurrencies such as Bitcoin.

In many cases, traders even prefer crypto over gold, and the reason for that is clear: despite both instruments being politically neutral and relatively unaffected by the value of the fiat currency, gold is difficult to carry around whereas crypto wallets can be accessed by just remembering one’s private keys.

This preference for and utilisation of crypto in time of war was shown when, on the 26^th of February, Ukrainian vice prime minister Mykhailo Fedorov tweeted a call for international support and donations for the country via crypto. He asked for the rest of the world to ‘stand with the people of Ukraine’ through donations of Bitcoin and Ethereum, and in less than a week, received over 70 million USD from coiners around the world.

As crypto can be transferred instantly with no strings attached, many have also speculated it could be an avenue utilised by Russia to bypass sanctions. When war broke out, we witnessed many bank runs in both Russia and Ukraine, with large groups of depositors running to their local banks to withdraw money, while others turned to buying cryptocurrency to preserve the value of their assets. By the beginning of March, the number of addresses with more than 1,000 Bitcoins spiked as many frantically exchanged their free-falling roubles for crypto.

Around the same time, the world’s largest crypto exchange, Binance, declined freezing Russian accounts. A spokesperson for Coinbase has also added that a ‘unilateral and total ban would punish ordinary Russian citizens who are enduring historic currency destabilisation as a result of their government’s aggression’.

However, banks believe that the use of crypto to avoid sanctions would be challenging and unsustainable in the long run, and we are already starting to see the cracks. While the Russian volume of crypto trades peaked at 70.7 million USD on the 24^th of February, it was reduced by half at 34.1 million just a week later. Saxo Cryptocurrency Analyst Mads Eberhardt also noted that the Russian crypto market is in fact ‘somewhat illiquid’ at present on the 8^th of March, and another reason it will not be able to facilitate notable evasion of sanctions is due to the public nature of the blockchain.

Locally, Singapore became the first Southeast Asian country to impose sanctions on Russia when the Ministry of Foreign Affairs condemned its invasion just days ago on the 5^th of March. The official bulletin stated that the island nation will impose financial restrictions targeted at Russian banks, entitles, and activities, introduce curbs on trading, and freeze Russian assets and funds. The bulletin also emphasised that ‘digital payment token service providers’ would be ‘specifically prohibited from facilitating transactions’, putting a stopper to crypto’s potential to evade sanctions.

Singapore’s concern was echoed around the world, with US senator Elizabeth Warren calling on Twitter for greater vigilance from US financial regulators regarding digital assets, while the French Finance Minister Bruno Le Maire warned against the use of crypto to circumvent sanctions imposed on Russia by the EU.