SWIFT Battling Russia, China's Crypto Use To Dodge Sanctions

“The geopolitics impacts many different areas, including payments,” he said.“We could build 'digital islands' and start to create different networks that aren't connected. But nobody wins from the fragmentation.”

“In the US, there's a pullback from globalization.... Now, SWIFT plays an even more important role in ensuring the world stays connected and that we don't lose the trust and the ability to scale.”

His comments came after Reuters reported in March that Russia has used cryptocurrencies such as bitcoin, ether and stablecoins such as Tether (USDT) to effectively bypass Western sanctions in its estimated US$192 billion oil trade with China and India.

Stablecoins are digital assets that use blockchain technology to peg to the US dollar. They allow“T+0” or same-day settlement for cross-border transactions, while a traditional wire transfer can take up to five working days.

Traditional cryptocurrencies such as Bitcoin have a limited supply and high volatility as they are made through time-consuming and heavy electricity-using“mining” activities. Stablecoins have an unlimited supply as long as they are backed by dollars.

Crypto trading, which does not involve the SWIFT system, creates an environment for money laundering, cybercrime, and sanctions evasions. Crypto exchanges and related banks are responsible for“knowing your customer” (KYC).

The US Treasury's Office of Foreign Assets Control (OFAC) often sanctions companies and bourses in Russia, North Korea and Venezuela for suspicious crypto activities.

After Russia invaded Ukraine in February 2022, the US, European Union (EU), United Kingdom (UK) and Canada agreed to punitively purge seven Russian banks from the SWIFT system.

China had once settled trade transactions with Russia in renminbi but the US deterred that workaround with secondary sanctions.

Russia and China then settled their transactions in more complex, harder-to-decipher ways. For example, Russians bought Chinese electronic parts and paid in gold, precious metals or gemstones, which were sold to the Middle East for US dollars. Hong Kong is both a logistics and financial hub for such operations.

Last year, the US Treasury curbed these activities by sanctioning a group of Hong Kong and Chinese companies and threatened to sanction some small Chinese banks.

The Wall Street Journal reported in April last year that intermediaries and smugglers have turned to using Tether to buy weapons and equipment for Russia's defense industry. Some quoted in the article estimated this“shadow trade” at $10 billion a month.

Last September, Russia reportedly opened two crypto exchanges in Moscow and St Petersburg to support external trade.

“Could crypto eventually provide a 'workaround' to sanctions enforcement and prohibitions on terrorist financing?” researchers at the Washington-based Brookings Institution weighed in a report last year.“The fundraising techniques of those seeking to evade sanctions and prohibitions could easily become more sophisticated.”

The report said stablecoins could also become a way for terrorists to launder funds.

On January 23, US President Donald Trump signed an executive order encouraging the growth and use of digital assets, blockchain technology and related technologies across all sectors of the US economy.