The hunt for Russian crypto is trickier. But it turns out to be harder to hide than Russian oligarchs might think.
The push to penalize Russia for invading Ukraine is the first major sanctions campaign aimed at “financially destabilizing a head of state” by targeting digital assets, said Michael Fasanello, chief compliance officer of LVL, a banking and crypto trading company.
But it’s not the first sanctions program to take crypto into account. The Trump administration banned U.S. transactions based on the petro, the digital currency issued by the Venezuelan government under President Nicolás Maduro.
That campaign, Fasanello said, was “miniscule compared to the attack on digital assets focused on Putin and his oligarchy.”
The start of the invasion was reportedly followed by a spike in crypto trades involving the Russian ruble, which some took as a sign that oligarchs might be trying to use digital currencies to evade sanctions.
The U.S. Treasury’s Office of Foreign Assets Control tightened its rules this month to make clear that sanctions against Russia included digital assets. Last week, Senate Democrats led by Elizabeth Warren raised concerns with the Treasury Department that Russian oligarchs could be using crypto for “nefarious purposes.” And on Monday, FinCEN specifically warned that sanctioned individuals and entities in Russia and Belarus might be using “convertible virtual currencies” to evade restrictions.
Crypto crime is real, and large: It hit $14 billion last year, according to Chainalysis, up from $7.8 billion in 2020. It also has the unique aspect of happening in plain sight. Unlike fiat money laundered through a series of opaque shell-company transactions, every crypto transfer is recorded permanently on the blockchain. It’s just a question of whether authorities can link those transactions to a real identity.
Oligarchs can hide their crypto. Moving it is another matter.
There’s no such thing as complete anonymity on a blockchain. A crypto account or wallet, which is typically identified as a series of numbers and letters, is visible to a network. Even though no names or any other info is visible, pretty much all transactions can be tracked.
“Ultimately, crypto is very easy to track, whether it’s decentralized or centralized,” said Steven Waterhouse, CEO of Orchid Labs.
To monitor accounts and transactions, all you need is a wallet address. “With that, you can see how much is in the crypto accounts,” Marco Bellin, founder and CEO of Datacappy, told Protocol. “There is a trail that can be followed. Every transaction that an identified account has with another account is noted and can be traced.”
Tigran Gambaryan, vice president of Global Intelligence and Investigations at Binance, said crypto is “a terrible thing to use to evade sanctions” because “everybody looks at these transactions,” which makes it extremely difficult when you’re trying to move large amounts of money.
FinCEN noted in its Monday alert that “large-scale sanctions evasion using convertible virtual currency by a government such as the Russian Federation is not necessarily practicable.”
But Fasanello observed that “crypto permits pseudo-anonymity,” which, when combined with tools for obfuscating transactions, “can present a very difficult situation for investigators — even using best-in-class blockchain analytics.”
It is possible to protect a crypto wallet from scrutiny by taking it offline. That typically means using a hardware wallet — also referred to as a cold wallet — that is not constantly connected to a blockchain network.
But that means an oligarch wouldn’t be able to do anything with the crypto. “If you have some crypto and you want to store it in a cold wallet, then it would come down to when you want it to move and how you want to process it at that point,” Waterhouse said.
And that won’t be easy, especially if they’re moving huge amounts.
“If they're sending to an unhosted wallet, we're not always going to know who controls that on the back end,” Nirvana Patel, chief compliance officer of Prime Trust, a digital assets infrastructure software company, told Protocol.
But once they try to move funds, the wallet will become visible to the network. And those connections can be traced — a “six degrees of Kevin Bacon kind of thing,” Patel said. “You're going to know that someone is connected to something down the chain at some point.”
The tools to hide crypto aren’t perfect
Money launderers use blockchain-based tools known as tumblers or mixers to obfuscate transactions. The idea is to pool coins to be transferred, breaking the origin and destination chain and enabling crypto users to cover their tracks.
But these tools are typically slow and “expensive to use,” Gambaryan of Binance said. “And they're not very efficient if you're trying to move around billions or hundreds of millions of dollars because they're not built to process those kinds of transactions … They're built to actually transfer small amounts. And if you actually try to move large amounts, it's actually very easy to break through tumblers.”
Waterhouse agreed, saying, “for the scale of what we're talking about … these tools are not really sufficient.”
Some crypto exchanges have blocked withdrawals to mixing services.
The blockchain never forgets
Crypto technology continues to evolve. And transactions made stealthily now could come back to haunt sanctions evaders years later.
“The scary thing about this stuff for bad actors is it's not like you get away with it and then someone forgets about it,” Waterhouse said. “The tools are getting better. And then a few years later, someone's like, ‘Oh, actually, I figured out who did that and I can go back and trace it.’”
But the flip side is also true, argued Fasanello. With the resources they have, oligarchs can gain access to “the finest of hackers to discover new ways to game the system.”
“The oligarchs have been perfecting the skill of hiding assets and obfuscating the course of funds for a very long time,” he said. “Marry this skill set with cutting-edge tech, and you have one heck of a fight on your hands as a counter-[financial crime] professional.”
But even the slightest slip-up can unravel years of secrecy. A $500 Walmart gift card helped lead investigators to the couple accused of laundering $4.5 billion stolen in the Bitfinex hack. Ultimately, crypto is safest when it’s hidden. And oligarchs have a tendency to display their wealth — like those yachts being seized around the world.