US and European sanctions over the past week and a half have put the screws to the Russian government and its oligarchs who are likely using alternative methods to ferry their cash across borders.

"We do believe it is very likely that Russian companies and nationals are trying to use crypto assets like Bitcoin or the US Dollar-pegged stablecoin, such as Tether (USDT), to circumvent the economic sanctions," said Josh Olszewicz, head of research at Valkyrie Funds, a digital asset investment manager.

Stablecoins are tied to fiat or cash-backed by central banks, while Bitcoin and other non-stablecoin digital currencies derives value from supply and demand and otherwise have no intrinsic value. Non-fungible tokens or NFTs are digital tokens tied to assets other than cash, but those "assets" can also be as valuable as art and real estate or as meaningless as a random photograph or stuffed animal. 

Along with freezing the assets of key Russian oligarchs, the US and European governments banned Russian banks from using SWIFT, the world's largest financial messaging network. The sanctions appeared to have near immediate and far-reaching economic consequences, as billions of dollars were suddenly unavailable to Russian banks.

In addition to cryptocurrencies, even SWIFT's financial messaging network can be easily manipulated to hide cash transfers of sanctioned entities, according to Mark Gazit, CEO of ThetaRay, an AI-powered transaction-monitoring solution for cross-border payments. 

SWIFT in and of itself is a relatively secure network, but it's not difficult to set up shell companies and funnel money through them and then use the financial messaging system to make cross-border transactions, Gazit said.

"It's a pretty old system," he said. "It was developed in 1973. That's why all the security precautions you'd expect a newer system to have do not exist on SWIFT, which creates a lot of issues even before the current situation existed. The problem is the system doesn't really authenticate transactions."

What's needed, Gazit said, is AI-based software that can look at the financial transactions themselves, and not just identify the senders, to determine whether they're nefarious or not. Additionally, there are countries still connected to SWIFT that are sympathetic to Russia, and they are likely to act as go-betweens for moving rubles, Gazit added.

The US and European governments have grown concerned the Russian government, its banks, and oligarchs would use alternative means to move assets in and out of the country.

In a letter to Treasury Secretary Janet Yellen, US politicians noted Russia might use cryptocurrencies' "dark web marketplaces" to circumvent the sanctions and asked whether governments needed additional tools to stop any such moves. "These reports are even more troubling because of analyses that suggest that the cryptocurrency industry may not be fulfilling its responsibility to comply with US sanctions," the letter stated.

Following earlier financial sanctions, the Treasury Department put in place new regulations last week to prevent Americans from using cryptocurrencies to circumnavigate Russian sanctions. Treasury officials also asked cryptocurrency exchanges such as Coinbase, Binance, and FTX, to block sanctioned persons and their addresses.

Coinbase, the largest U.S. crypto exchange, responded by saying it has no plans to impose a blanket ban on Russian customers, but will block trading activity that involves sanctioned individuals or entities, Coindesk reported. Binance, along with several other exchanges, has publicly stated it will not block all Russian users or IP addresses, but will target sanctioned entities.

"Binance follows sanctions rules very strictly," Binance CEO Changpeng Zhao told Bloomberg last week. Expanding restrictions beyond the list of sanctioned individuals would be "unethical for us to do," he said.

However, two key Ethereum digital coin ecosystem providers instituted access restrictions to keep users in "certain jurisdictions" from evading international Russian sanctions. Users of MetaMask and Infura - on and off ramps to Ethereum cryptocurrency exchanges - told users attempts to access the Ethereum networks in those regions will be met with error messages.

"No lawmaker or regulator can stop an on and off ramp in an unregulated or internationally blacklisted exchange," said Avivah Litan, a vice president and distinguished analyst with research firm Gartner. But crypto organizations can; she called the move by MetaMask and Infura "very significant" in that it shows some decentralized crypto networks are trying to comply with sanctions.

"Of course, they [Russia] could hide their locations in the future - so they could avoid the sanctions based on location," Litan said. But the sanctioned entities can only spend their money inside decentralized crypto networks, and they can only put new fiat money converted to crypto in and take it out using exchanges that are not cooperating with sanctions."

So, for example, sanctioned Russian entities can't move their money off blockchain financial systems that have banned them. Similarly, they can't take money out of frozen bank accounts to buy crypto, Litan said.

Cryptocurrencies run on blockchain-based electronic ledgers, which provide anonymity through encryption. So, sanctioned entities can only be blocked from buying into crypto or selling crypto through the on and off ramps to exchanges. Those ramps include digital wallets used to store bitcoin and other crypto assets and APIs or software interfaces with crypto exchanges.

Sanctioned entities, however, must be identified in the blockchain network in order to block their movements out of blockchain/crypto networks. And they can use fake identities to get accounts at the centralized exchanges, Litan explained.

"So, the long and short of it is - yes, sanctioned entities and criminals can hide in cryptocurrency networks, but they have a very hard time getting their money in and out of those networks," Litan said. "Russian-sanctioned entities can't be stopped from holding and transacting cryptocurrencies or stablecoins within crypto networks."

Valkyrie Funds' Olszewicz agreed, adding there will "of course" be some people who get away with helping Russians (oligarchs especially) launder their money through cryptocurrency.

"But the vast majority of sanction evaders are likely to be in trouble," Olszewicz said. "The penalties for breaking the sanctions are severe enough to deter most bad actors, and forensic accounting tools, regulators, and other investigators will likely catch up to pretty much anyone aiding the sanctioned sooner than many realize."

Sanctions spur crypto surge

As a result of widespread financial sanctions on cross-border financial networks, the value of cryptocurrency markets rose sharply last week.

Last Monday, Bitcoin jumped 10.4% to$41,807.16, while Ether rose 7.6% to$2,826.54. US equities were down sharply earlier in the day before recovering a big chunk of their losses.

Ordinary Russians, or anyone from anywhere in the world, for that matter, using Bitcoin as an economic escape hatch from forces outside of their control "is very much a feature, not a bug," of cryptocurrency, Olszewicz said.

"Bitcoin, cryptocurrencies, and stablecoins have at times acted as a vital economic lifeline for many in Ukraine and Russia, and the digital currencies are likely to continue to act as a banking and payments rail without the need for a third-party intermediary, such as SWIFT."

Valkyrie Funds CEO Leah Wald said crypto networks could be at the tipping point many have been waiting for, "where bitcoin and other coins have perhaps become mainstream," according to CNBC.

As the invasion of Ukraine unfolded, cryptocurrency trade volumes for Ruble and Ukrainian Hryvnia trading pairs spiked to their highest level in months, particularly for stablecoins, according to cryptocurrency trade data provider Kaiko.

"The cryptocurrency exchanges could serve as a powerful safe haven for assets while also enabling the circumvention of sanctions," according to Kaiko's February market report.

Russia's invasion places the cryptocurrency industry "in a unique and precarious position, needing to balance sanctions enforcement while lacking the power to restrict transactions on decentralized networks," Kaiko's report said.

"Cryptocurrency and stablecoins, especially, are a safe havens if you live in a country where your currency is devaluing," Litan said. "It's all about trusting the protocol instead of trusting the government or any given company. I think this war is proving that protocols are much more trustworthy than certain governments."