Cryptocurrencies are Putin’s sanctions-busting superweapon

Russia has spread its risk by buying euros, yuan and gold instead of just dollars. But the fortifications have a weakness. These foreign reserves aren’t sitting in bank vaults in Moscow. A good proportion of the assets are thought to be held on the books of international financial institutions – including other central banks – most of whom will comply with western sanctions because of the mighty greenback.

Every single payment in dollars not made with actual banknotes passes through the NY Federal Reserve. Given the high proportion of global trade that is denominated in dollar, the US Treasury can target criminal enterprises, terrorist organisations and rogue states by effectively forcing global banks to become its eyes and ears. Even famously neutral Switzerland has suggested it is prepared to freeze Russian assets.

Without access to its foreign reserves, the Russian central banks will be unable to prop up the rouble or the nation’s lenders. Fearing a rout, the Moscow stock exchange failed to open on Monday. However, the London-listed shares of Sberbank, Russia’s biggest lender, plunged by as much as 74pc. 

There’s very little precedent for this kind of action. The UK government has prevented Venezuelan President Nicolás Maduro from accessing £1.4bn of gold stored in the Bank of England but that is on the basis, upheld by the Supreme Court in December, that he is not the country’s legitimate head of state.

The fact that central bank assets are now in play will almost certainly hasten the adoption of cryptocurrencies by rogue states. Two years ago Harvard University hosted a wargame where policymakers were asked to work out how they would respond to the threat of North Korea developing a nuclear missile funded with digital yuan. The participants, several of whom are now in the Biden administration, concluded the cryptocurrency posed a bigger threat to US national security than the warhead.

Such possibilities are no longer hypothetical. In recent years, Russia has looked at developing a digital rouble, explicitly saying this would make it more resistant to foreign sanctions. According to the UN, North Korea has used ransomware attacks to steal cryptocurrency in order to fund its nuclear programme. Iran is also thought to have used digital currencies. It is widely believed that billionaire oligarchs close to Putin might be trying to do the same. 

This is why Mykhailo Fedorov, the vice prime minister of Ukraine, has asked cryptocurrency exchanges to block the addresses of Russian users. On Monday, Binance, the world’s largest, said it wouldn’t, adding that cryptocurrencies provide “financial freedom” and unilaterally banning access would “fly in the face of the reason why crypto exists”.

Which may well be true – among the benefits of the distributed ledgers on which cryptocurrencies are based is that they allow relative anonymity for users and cut out financial intermediaries. But how crass does it sound to be talking about our financial freedoms when Ukranians are fighting in the streets for their actual freedom?

You won’t have to go far to find those who resent the “exorbitant privilege” of the US dollar. And it undoubtedly allows Washington to impose its will on the world in all sorts of petty ways. But are we prepared to countenance the alternative – that Moscow gets to impose its will?

Putin’s naked aggression is a wake up call that will force us to make a variety of tough choices. A world in which unregulated cryptocurrencies undermine the potency of the dollar is a world in which despots will find it easier to get their way. Financial freedom is important. But surely not at any cost.

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