Could Global Sanctions on Russia Open a New Window for Cryptocurrencies?

The Russian invasion of Ukraine could generate a new window of opportunity for cryptocurrencies to become more mainstream. Online trading of cryptocurrency has been subdued as prices of Bitcoin have fallen from above 60,000 to near 43,000. One of Russia’s issues is that the U.S. administration could take it off the SWIFT payment system. The SWIFT system is how global payments are made worldwide for a number of products and transactions, as well as commodities like oil or wheat, two of Russia’s most significant goods. Suppose Russia is taken off the SWIFT system and cannot use dollars or Euros to facilitate their oil and wheat transactions. In that case, they might consider using cryptocurrency to receive payments and fund their offensive against Ukraine. 

What is the SWIFT Network?

The SWIFT network is a financial network that connects more than 11,000 institutions and 4 billion accounts in over 200 countries worldwide. On average, 42 million financial messages that facilitate money transfers move through the SWIFT network. The decentralized technology of cryptocurrency is not yet set up to handle this kind of volume. 

The SWIFT Removal is Occurring

Increasing sanctions and reducing access for Russian President Vladimir Putin to raise capital have already started. The online trading of the U.S. dollar has benefited from this activity, but the safe-haven flows have not helped most cryptocurrencies. During the first week of March, the EU announced it was excluding seven Russian banks from the SWIFT messaging system but stopped short of including those handling energy payments in the latest sanctions imposed on Russia over its invasion of Ukraine. 

The next step will be to remove Russia from receiving payments for oil. Europe is very sensitive to this issue. Online trading of oil prices has already breached the $100 per barrel level. During a CNBC interview, former US Treasury Secretary Steven Mnuchin said that he thinks more sanctions need to be put in place and that the United States and the EU should stop SWIFT payments for oil. 

The former Secretary of the Treasury said that sanctions are very impactful and that oil prices at $100-$110 per barrel were not high relative to inflation. He also said that he believed that cryptocurrencies in the past were used for nefarious activities, and they could continue to be used for payments to Russia without being traced. Sources have said that the United States and Britain pushed for the SWIFT ban. Still, some in the eurozone had taken some persuading given the region’s reliance on Russian energy exports.

Removing payments for oil via SWIFT also might have some unintended consequences. For example China, which uses Russian oil, might set up an alternative system to subvert the fees that need to be made while using SWIFT for payment.

Can Crypto Replace Swift?

Russians are already savvy when it comes to online cryptocurrency trading. Sanctions have been placed on Vladimir Putin and many of the rich oligarchs who are close to the Russian president. While oligarchs may be able to quickly stash their wealth in a digital wallet, experts say this is no solution for Russia’s oil and wheat businesses. The underlying reason is that hundreds of billions of dollars’ worth of oil flow through the SWIFT system. Since the reserve currency is the U.S. dollar, Russia cannot use this. Size may be a disadvantage in this regard as large multinationals generating billions in revenue would not make the switch efficiently.

Additionally, many of the payment exchanges can flag payments that seem unusual. According to the exchange CoinDesk, the company can flag suspicious online trading and immediately alert governments so the proper authorities can take action. 

Another issue with using cryptocurrency to replace SWIFT is the elevated transaction fees known as gas fees. The cryptocurrency infrastructure is not capable of processing a business for a country. It would lead to a spike in demand that overwhelmed the computational power of the blockchains that are used in the functionality of cryptocurrencies. 

The Bottom Line

The upshot is that while smaller businesses and rich individuals might be able to switch their payments to a cryptocurrency, it does not seem likely that an entire country would be able to switch off SWIFT and to a cryptocurrency platform. At the same time, large multi-billion dollar payments from one country to another would be noticed and flagged as suspicious by a cryptocurrency exchange, who would likely bring them to the attention of authorities. Additionally, the blockchain system is not yet powerful enough to handle the commerce of an entire country. While it seems plausible that Russia might try to address some of its business in the cryptocurrency universe, the bulk majority of the oil and wheat sold will still need to pass through SWIFT, which may be a challenge going forward.