Skip to main content

A pedestrian walks past a digital screen displaying the prices of cryptocurrencies on Feb. 15 in Hong Kong.Anthony Kwan/Getty Images

The playbook is well-worn by now, fine-tuned over two decades of modern warfare: Instead of using guns to go after bad actors, Western countries rely on economic sanctions to attack their bank accounts and sever their access to financial markets.

The U.S. government now considers these sanctions “a tool of first resort” to address a range of threats to its national security, foreign policy and economy, and the prohibitions have been deployed in countries such as Iran, North Korea and Libya. They’ve also been used multiple times in Russia, the most recent wave landing this week.

The efficacy of such sanctions has long been debated. They worked in Iran, bringing the country’s leaders to the table to negotiate its progress toward a nuclear weapon, but they didn’t stop Russian President Vladimir Putin from seizing Crimea in 2014, and so far their threat hasn’t deterred him from amassing more than 100,000 soldiers on Ukraine’s borders in recent weeks.

Major cryptocurrency firms launch new coalition to promote market integrity

Cryptocurrencies are booming. But should you invest?

Now there’s a new variable that could dilute the potency of sanctions even more: the rise of cryptocurrencies.

National security and trade experts worry cryptocurrencies are being used to build a parallel financial system that thumbs its nose at the existing world order. The sector’s diehard believers are anarchists of a sort who believe holders of these digital assets should be beholden to no state.

“Technological innovations such as digital currencies, alternative payment platforms and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions,” the U.S. Treasury Department wrote in a formal review of its economic sanctions program in October.

“These technologies offer malign actors opportunities to hold and transfer funds outside the traditional dollar-based financial system. … We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions,” the department added.

Venezuela's President Nicolas Maduro attends a press conference to launch the international trading of oil-backed cryptocurrency called 'petro' on Oct. 1, 2018.FEDERICO PARRA/AFP/Getty Images

The first real scare came in 2018 when Venezuelan president Nicolas Maduro launched a novel cryptocurrency, known as the “petro,” as a means of circumventing U.S. sanctions. The Treasury Department found a way to minimize its usefulness. But policing crypto transfers has been a game of whack-a-mole since – and it’s only getting more complicated for watchdogs because crypto adoption is now much more widespread.

In September, 2021, Virgil Griffith, an employee at the Ethereum Foundation, a non-profit that supports the popular cryptocurrency Ethereum, pleaded guilty in the Southern District of New York to conspiring to violate the International Emergency Economic Powers Act by providing services to North Korea. Mr. Griffith was caught providing “technical advice on using cryptocurrency and blockchain technology to evade sanctions.”

Cracking down on the nefarious use of crypto assets will require gobs of new resources, but the Biden Administration has said the money is necessary because these activities are a national security threat. Appearing before the Senate banking committee in the fall, deputy Treasury secretary Wally Adeyemo said the department must modernize its capabilities, which would include investing in the technology that can track money involved in ransomware and other cybercrime, and hiring people who specialize in blockchain technology.

Of course, evasion of sanctions has long existed, and the more traditional means can still work, including trade-based money laundering, illicit shipping and using front companies to mask the true origin and recipients of funds. For all the flak crypto gets, the existing banking system has been used many times by bad actors. In 2012, HSBC Holdings PLC agreed to pay US$1.92-billion in fines to U.S. authorities after it was caught helping to launder drug money coming out of Mexico, among other banking lapses.

In September, 2021, an employee at the Ethereum Foundation, a non-profit that supports the popular cryptocurrency Ethereum, pleaded guilty in New York to conspiring to violate the International Emergency Economic Powers Act by providing services to North Korea.DADO RUVIC/Reuters

Cryptocurrencies also aren’t a complete black box. The infrastructure they’re built on, known as the blockchain, doesn’t have disappearing code. In fact, the purpose of the blockchain is to make everything traceable – so long as you know where to look. “Blockchain is pseudonymous, not anonymous,” Britt Mosman, a former Treasury Department attorney-adviser who is now a partner at Willkie Farr & Gallagher LLP in Washington, said in an interview. “It’s like writing books under a pen name.”

So long as watchdogs are able to track which crypto identities belong to whom, they can follow the money, and companies such as London-based Elliptic Ltd. are developing sophisticated tools for doing just that.

Like many systems, the threat lies not with computers or code, but with the humans who use them. In the crypto sector, many evangelists think their assets should be free from any sort of government oversight, which is why so many freaked out when Ottawa included crypto accounts under its new Emergencies Act powers.

“There is no longer any doubt as to the importance of non-state, non-bank payments systems,” Nic Carter, a founding partner at U.S.-based Castle Island Ventures, which invests in blockchains, wrote on Twitter. “We need to build systems that are much more resistant to state lawfare.” Mr. Carter did not return a request for comment.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.