Bitcoin’s Rise Could Fizzle Without Russian Demand. So Far, It’s Not Happening.
Bitcoin has been rising on expectations that demand will surge in Russia as the ruble plunges and the Kremlin restricts capital outflows from the country—potentially prompting citizens to buy Bitcoin as a haven.
Russian oligarchs, companies and state-sponsored entities could also evade sanctions with crypto—a growing concern for the Biden Administration and other governments trying to punish Russia for its invasion of Ukraine.
Several Democratic senators sent a letter to the Treasury Department on Wednesday, seeking more information on measures the department is taking to “enforce sanctions compliance by the cryptocurrency industry.”
Bitcoin purchases in rubles have spiked to their highest levels since May 2021. But they remain relatively small. Russians have bought an average 210 Bitcoins a day with rubles over the past week, according to
Citi
group. At recent prices around $44,000 per coin, that would amount to $9 million a day.
Daily volume of Bitcoin in the spot market averages about $5 billion worth of coins. Derivatives like futures contracts take the total to $20 billion to $40 billion in volume. About 11% of Russians own crypto, says Citi. And there would be benefits for state-run enterprises and corporate entities aiming to evade sanctions with crypto.
But Russia also risks more capital flight from citizens if it gives a green light for transferring rubles into crypto, potentially undermining its efforts to keep money and assets in the country. Crypto regulation is now in flux in Russia—the Russian central bank has called for a ban on its use, while the Kremlin favors trading limits through exchanges for qualified investors, according to Citi.
Even if billions of dollars wroth of rubles floods into crypto, it may not be nearly enough to influence prices for Bitcoin—a token with an $830 billion market cap. Capital flight out of Russia in recent geopolitical crises averaged $5 billion, excluding debt payments, Citi said in a note this week. “It will take meaningful capital flight to move the needle” in crypto, Citi’s analysts wrote.
Some economists agree that crypto, despite its borderless-currency reputation, isn’t ideally suited for evading sanctions.
“Cryptocurrencies do not yet provide the scalability to evade financial sanctions at the level of an entire economy,” said Cornell University economist Eswar Prasad, in an email to Barron’s.
Crypto, he notes, needs to be converted to fiat currencies through centralized exchanges. Western governments have issued lists of blacklisted digital wallets associated with Russia. Exchanges that allow for trading in those wallets would risk breaking U.S. or European sanctions laws—creating a chokepoint for illegal crypto transactions.
Many global exchanges also do business in the U.S., where they need to screen customers, conduct other due diligence , and file suspicious transaction reports. Running afoul of sanctions could expose them to criminal liability. As such, exchanges have plenty of incentives to keep tabs on suspicious wallets.
“Some elements of the sanctions population will try to use crypto to evade sanctions and it wouldn’t surprise me if they’re occasionally successful,” said Alma Angotti, head of digital asset and crypto projects for consulting firm Guidehouse. “But the major exchanges, which have most of the liquidity, have been complying with sanctions for a long time.”
Agnotti, who consults for crypto exchanges, says smaller exchanges that operate outside the U.S. don’t have the liquidity to handle large crypto orders. “If someone is trying to acquire even $10 million of crypto, it’s very noticeable,” she said in an interview. “I don’t think it’s a materially greater risk than in other parts of the economy.”
Still, some Democratic senators want the White House to explain how it will stop crypto from being used to evade sanctions.
“There are growing concerns that Russia may use cryptocurrencies to circumvent the broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine,” Sens. Elizabeth Warren (D., Mass.), Mark Warner (D., Va.), Sherrod Brown (D., Ohio) and Jack Reed (D., R.I.) said in a letter to Treasury Secretary Janet Yellen on Wednesday.
“We are concerned that OFAC has not developed sufficiently strong and effective procedures for enforcement in the cryptocurrency industry,” the senators added, referring to the Treasury Department’s Office of Foreign Asset Control, which administers and enforces sanctions.
The senators noted that countries such as Iran and North Korea have used crypto to evade sanctions. And Russia has long been viewed as the source of ransomware attacks with crypto; more than $400 million in crypto ransom payments have gone to Russia-affiliated entities, the senators noted.
If Bitcoin doesn’t take off in Russia, it could revert to being a “risk asset” like equities. Bitcoin’s recent breakout in price decoupled it from equities, which have been under pressure since Russia’s invasion of Ukraine.
“Bitcoin could recouple with technology stocks if the expected Russian buying should not materialize,” Citi says.
For all the tough talk about blockchain transparency and exchanges’ due diligence, the industry’s ethos has long been that crypto is borderless, impervious to government censorship and “permissionless”–meaning that it’s built to avoid government control. Russia may be the first major test of that story line.
Write to Daren Fonda at daren.fonda@barrons.com