Russians using crypto to fund war face an uphill battle

A year into Russia’s war on Ukraine, we are just beginning to see how cryptocurrencies can play a role. While the cryptocurrency market is simply not large enough to provide relief to the embattled Russian state, pro-Russian groups, including paramilitaries such as the US-sanctioned Task Force Rusich, have collected hundreds of thousands in cryptocurrency donations since the start of the war.

Crypto cannot help the Kremlin avoid sanctions

Stepping back, the US and European allies responded to Russia’s invasion of Ukraine with an unprecedented wave of sanctions targeting Russian financial institutions and elites. A large proportion of the country’s foreign reserves are frozen. Even Russia’s sovereign debt is now sanctioned, meaning Russia can no longer raise money from the West or trade debt on US or European markets.

Cryptocurrencies, despite living and moving outside the US financial system, are not an effective way for the Kremlin to avoid economic sanctions on a large scale. With a total market capitalization of around $1 trillion, the crypto ecosystem is not mature enough to support a government with increasing losses in an increasingly expensive war effort.

But Russian groups are trying to use crypto to fund war efforts

However, some Russian actors – such as Task Force Rusich – affected by sanctions or charged with waging the war in Ukraine, use cryptocurrencies to avoid sanctions on a much smaller scale. CoinDesk reporter Anna Baydakova points to the pro-Russian Novorossia Aid Coordinating Center (NACC) as “one of many formal and informal organizations in Russia that collectively raised at least $1.8 million in crypto to supply the struggling Russian army in Ukraine with ammunition, armor, surveillance drones, optical devices, vehicles and warm clothing.”

NACC is not alone. KillNet, a pro-Russian cybercriminal group operating since 2021, has also raised money in cryptocurrencies. Blockchain Intelligence company TRM Labs, my employer, published a report revealing that “KillNet began using crypto to raise funds for the Russian war effort. It also began targeting government entities and critical infrastructure in countries resisting the invasion, through DDoS- attacks against, among others, Lithuania, Poland, Japan, Norway, the Czech Republic, Moldova and the USA.”

The total value of funds raised via cryptocurrencies both demonstrates the reliance on crypto-donations to fund the war, as more traditional payment rails have been cut off, but at the same time highlights the limitations of money laundering and diversion of large amounts of cryptocurrency. For example, crypto donations to support the Russian war effort pale in comparison to the millions raised in cryptocurrencies in support of Ukraine.

Illegal Exchanges and Darknet Markets Under Fire

Russian actors who want to acquire crypto are constantly raging against the authorities. The Russian illicit financial ecosystem has been incubating non-compliant cryptocurrency businesses for years as a way to launder ransomware and darknet market revenue. And these exchanges – such as SUEX, Chatex, Garantex and Bitzlato – have all been the target of US sanctions, seizures and prosecution.

Deputy Attorney General Lisa Monaco, in announcing the removal of Bitzlato, described the non-compliant exchange as part of an illegal financial scheme that facilitates “over $700 million in direct and indirect transfers between 2018 and 2022.” In the last 18 months alone, we’ve seen US regulators go after SUEX, Garantex, Chatex, Bitzlato, Hydra and ransomware gangs like HIVEIVE, which was penetrated and seized in a global law enforcement effort in January 2023.

While it is impossible for the Kremlin to use crypto in a meaningful way to respond to the tangle of economic sanctions, groups with ties to the Russian government have added crypto to their money laundering arsenals alongside more traditional vehicles such as high-value art, real estate. , and shell companies. What we have learned so far is that a focus on law enforcement and international cooperation can limit these money channels by, as was the game plan in the Bitzlato takedown, coordinating with foreign partners to prevent non-compliant exit ramps that could be used by Russian actors to fund the war .

Unlike art or real estate, Ukraine’s allies do not need to physically deploy troops in Russia to seize these assets. Blacklisting illegal crypto wallets, with the click of a button, can be as effective as conquering a warlord’s territory. In fact, Ukraine supporters—from Twitter scouts to the Ukrainian government itself—are looking for possible war-funding wallets. This fact, combined with the fact that Ukrainian crypto fundraising efforts have raised well over $100 million, shows that using cryptocurrency for an illegal invasion will continue to be an uphill battle, at best.

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