Yesterday, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) published 13 more Russian-linked entities subject to sanctions. This time, they are mainly involved with cryptocurrency and digital assets, which could be used to circumvent sanctions.
“Russia is increasingly turning to alternative payment mechanisms to circumvent U.S. sanctions and continue to fund its war against Ukraine,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian E. Nelson. “As the Kremlin seeks to leverage entities in the financial technology space, Treasury will continue to expose and disrupt the companies that seek to help sanctioned Russian financial institutions reconnect to the global financial system.”
Tokenization to circumvent sanctions
Long before it invaded Ukraine, Russia launched its digital financial asset (DFA) legal regime, the Russian equivalent of real world asset (RWA) tokenization. It grew significantly last year.
When DFAs were first introduced, there was a Russian ban on using them for payment. However, earlier this month Russia enacted a law allowing tokenized gold, platinum or other DFAs to be used for cross border payments.
As we noted at the time, despite the central bank’s strict anti-money laundering policy, the Federal Assembly said the beneficial owner of the digital asset issuer didn’t have to be identified to avoid being placed on the sanctions list.
However, rather than targeting the issuers, OFAC initially aimed at the issuing platforms and technology firms associated with them.
For example, the first five authorized DFA platforms were Atomyze, Sberbank, Lighthouse, Alfa Bank and Masterchain. State-controlled Sberbank and privately owned Alfa Bank have been on the sanctions list since shortly after the start of the Ukraine war. Now Lighthouse, Atomyze and Masterchain join it. So far the DFA sector is dominated by Sberbank and Alfa Bank.
However, it’s notable that OFAC targeted only three platforms despite the central bank authorizing another five since the middle of last year.
Atomyze is controlled by Norlisk, and its direct owner TokenTrust is also sanctioned. Masterchain, a DFA license holder, is also a popular Russian blockchain that’s used by some banks.
A recent report by local credit ratings firm ACRA questioned the practicality of using DFAs for offshore payments. It would require onboarding foreign companies to the DFA platforms, which many would find inconvenient.
Crypto for sanction busting
Most of the other firms on the OFAC list are involved in crypto rather than tokenization. Last year we wrote about Rosbank working with B-Crypto. Rosbank claimed its solution was legally compliant because B-Crypto buys the crypto outside of Russia and passes it on to a foreign supplier. B-Crypto is on the sanctions list.
In the meantime, Russia is also working on cross border central bank digital currencies (CBDC) and is leading the BRICS work on alternative payment systems outside the reach of sanctions.