Sanctions Spur Renewed Calls to Regulate Cryptocurrency

Russia-Ukraine war could lead to ‘framework’ for Wild West-like crypto market

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U.S. government officials have talked for years about regulating cryptocurrency, but in a roundabout way Russia’s attack on Ukraine could be the last straw pushing them into action.

Key Takeaways

  • Lawmakers, worried that Russia could use cryptocurrency to skirt the financial sanctions the U.S. and its allies have imposed on that country, are discussing regulating the decentralized payment technology.
  • Some experts, however, question whether cryptocurrencies like Bitcoin could actually be all that useful for getting around sanctions.
  • Crypto industry insiders say some regulation to curb illicit activity would be welcome. 

Biden administration officials, lawmakers, and central bankers have frequently brought up crypto in recent days, worrying that it could hinder efforts by America and its allies to punish Russia economically for its unprovoked invasion.For example, in his testimony to the House Committee on Financial Services Wednesday, Federal Reserve Chair Jerome Powell said the Ukraine war underscores the need for the government to regulate the crypto sector.

“We have this burgeoning industry which has many, many parts to it, and there isn't in place the kind of regulatory framework that needs to be there,” Powell said. “Ultimately, what's needed is a framework and, in particular, ways to prevent these unbanked cryptocurrencies from serving as a vehicle for terrorist financing and just general criminal behavior, tax avoidance, and the like.”

Soon after Russia invaded Ukraine, the U.S. and its allies retaliated with sanctions designed to hamstring the Russian economy. In an especially tough measure, they moved to restrict Russia’s use of the international financial system by blocking some of its banks from using the SWIFT network. But U.S. officials now worry the Russian government and its businesses might skirt those sanctions using cryptocurrency—a technology designed from the outset to allow people to transfer online payments without going through traditional financial institutions. That has officials wondering whether it’s not time to impose more regulation on a cryptocurrency market they view as somewhat akin to the Wild West.

Precisely because cryptocurrencies like Bitcoin bypass the official scrutiny that comes with the normal banking system, they’ve been used for things like money laundering and financing terrorism, according to recent government reports. Even before the crisis in Ukraine, Treasury Department officials worried that countries targeted by U.S. sanctions might use borderless digital money to get around them.

As sanctions wreak havoc on their economy, Russians have every reason to look for alternatives to the traditional financial system. The value of the ruble nosedived after the sanctions were announced (the currency was down 38% versus the dollar Friday compared to mid-February). Russians reportedly lined up at ATMs to withdraw their money, the Russian central bank hiked interest rates to a sky-high 20% to stave off looming inflation, and some economists predicted the Russian economy would shrink as much as 10% this year.

Decentralized currencies such as Bitcoin allow users to conduct peer-to-peer transactions that are traded on exchanges without relying on any outside authority. In theory, this could be a way for people and companies targeted by sanctions to get around them.

Indeed, there are signs that Russians are to some extent turning to cryptocurrency in the face of sanctions: Crypto transactions in rubles surged after the invasion began, crypto data company Kaiko said in a report. On top of that, Russia’s central bank recently launched a pilot program for a digital ruble, another potential way for the country to potentially thumb its nose at international banking restrictions, U.S. lawmakers worry.

Can Crypto Really Help Dodge Sanctions?

Some experts are skeptical that Russia could actually use cryptocurrency on a scale that’s needed to run its economy, however, and they highlighted a boatload of obstacles the country might face.

Russia’s central bank digital currency is only weeks old and not ready for prime time, JP Schnapper-Casteras, a lawyer specializing in technology issues and a senior fellow at the Atlantic Council think tank, pointed out in a commentary.

Not only that, but it’s “unclear why any nation would want large sums of digital rubles on its balance sheet anytime soon,” he wrote.

As for decentralized cryptocurrencies such as Bitcoin, the blockchain technology that makes them work could undermine their usefulness for sanction-evading, Schnapper-Casteras said.

Bitcoin transactions are recorded on a shared public ledger that anyone can see. And while the people making those transactions are not identified by name, law enforcement officials have become skilled at tracing who’s behind them. That vulnerability was illustrated last month when the FBI arrested a New York couple in a $4.5 billion crypto money-laundering scheme. Federal authorities said they were able to untangle the web of anonymous transactions that the suspects used to hide their activities.

Indeed, the Justice Department plans to use its data analysis capabilities and cooperate with foreign intelligence services to chase down anyone using cryptocurrency to evade sanctions, Attorney General Merrick Garland announced Wednesday.

The sanctions also bar American people and businesses from doing business with “specifically designated nationals” (or SDNs—people and companies targeted by sanctions). That means the people on the other side of the transaction would be unlikely to risk doing business prohibited by the sanctions, no matter what currency was being used, Jake Chervinsky, head of policy at the Blockchain Association, wrote on Twitter.

“It's illegal for US persons to transact with SDNs, period. It doesn't matter if they use dollars, gold, seashells, or bitcoin,” he wrote. “U.S. persons around the world are cutting ties with Russian SDNs right now, regardless of what payment systems they were using previously. There's zero reason to think crypto's existence will convince any of them to willfully violate sanctions laws, risking fines & jail time.”

But even if cryptocurrency doesn’t pose much of a threat for helping Putin’s regime dodge sanctions, it could come in handy for legitimate purposes, crypto advocates said. Ordinary people might find it useful amid the crisis, and that could spur more people around the world to use it for day-to-day transactions, said Catherine Atterbury, head of counsel at Kaiko.

“I think folks may realize that there’s another way to transact that won’t be subject to extreme sanctions,” she said. “It just might bring this concept into the mainstream.”

The industry, she said, would welcome the kind of regulation that might result from the U.S. government taking cryptocurrency markets more seriously. For example, she said, regulations could bring greater transparency to transactions and reduce illicit activity.

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  1. US Dept. of Justice. “Attorney General Merrick B. Garland Announces Launch of Task Force KleptoCapture.”

  2. "Senators Warren, Warner, Brown, Reed Express Concerns to Treasury Regarding Potential Use of Cryptocurrency to Evade Sanctions.” 

  3. US Dept. of Justice. "Report of the Attorney General's Cyber Digital Task Force: Cryptocurrency Framework Enforcement."

  4. "Here's Why Crypto Won't Save the Kremlin From Sanctions."

  5. US Dept. of Justice. "Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency."

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