Could Russia Use Borderless Blockchain Cryptocurrency to Circumvent Sanctions?
We explore a few concepts regarding cryptocurrency and blockchain:
- How are blockchain transactions logged?
- Are there ways to control blockchain transactions centrally?
- What are some of the privacy challenges with blockchain?
- Could Russia elude western sanctions using cryptocurrency?
- What are the impediments to replacing established currency such as the U.S. dollar with cryptocurrency?
- What are Asset-backed tokens?
- What else are we not considering in this debate?
- Where will future crypto economic innovation come from?
How are Blockchain transactions logged and what is a Distributed Ledger?
Public blockchains use computers connected to the public internet to authenticate transactions and package them into blocks,,  and each addition of a block appends to a distributed ledger. A distributed ledger is a shared database that is replicated and synchronized among the members of a decentralized network. A distributed ledger records a transaction.
No Centralized Authority, Clearinghouse, or Financial Institution
For example, in blockchain, a transaction could be an exchange of assets or data among the participants in the network. Unlike conventional financial transactions, in blockchain with a distributed ledger, no authority or third-party mediators, such as a financial institution or clearinghouse, are involved., Every record in the blockchain distributed ledger is time-stamped using a unique cryptographic signature. This makes the ledger auditable. Distributed ledgers provide a permanent, non-editable history of all transactions in the network.
Blockchain is Borderless
Therefore, cryptocurrency implementations in blockchain, such as Bitcoin, are decentralized and “borderless.” Because they are borderless, they are not restricted by national boundaries. This lack of a central authority means that there is no single method to block transactions.
Transaction Settlement Tokens vs. Ownership Tokens
There are transaction settlement tokens (“transfers of digital tokens in distributed ledgers”)  and ownership tokens. There are so called “non-fungible tokens” or “NFTs” and “fungible tokens.” NFTs are crypto assets on a blockchain. NFTs contain unique identification codes as well as metadata. These attributes differentiate one NFT from each other. Unlike cryptocurrencies, NFT crypto assets cannot be traded or exchanged using common equivalent value. Non-fungible tokens are evolved out of the need to provide an analog to current finance systems that consist of sophisticated trading and loan systems for different types of commodities or assets. NFTs are a digital representation of physical assets and assist in the last mile problem of representing physical infrastructure, art, or other assets. Established currency such as the U.S. dollar, the Yuan, and the Ruble and cryptocurrencies are “fungible,” meaning goods contracted for without an individual specimen being specified; able to replace or be replaced by another identical item; mutually interchangeable.
Therefore, fungible tokens like cryptocurrencies are identical to each other could serve as a standardized way to exchange value in e-commerce and other transactions. For example, a CryptoKitty is a collectible token whose ownership can be traded. Like CryptoKitties, tokens can be used to represent whole ownership of an asset that can be bought, sold, licensed, leased, or otherwise tracked via blockchain technology.
Asset-Backed Tokens and Trading
Supporters of crypto economics point out that in the right network with the right modality (i.e., permissioned vs. permissionless) blockchain technology can decrease the cost of ownership verification and makes it easier to conduct transactions for exchanging assets. Yet, the fundamental acceptance of tokens and their stability is not widely established. For example, there were no asset backed tokens; more rigorous economics and monetary policy needed to be established. A new concept called Stablecoins is proposed to address this issue, but it is important to read the verb tense about any new idea. Asset-backed tokens are [read, ‘can be in the future’] blockchain-based units of value that are pegged to real assets, such as stock options or commodities. The SEC released a document that defines digital assets, but this is NOT a fully operational legal framework for security tokens. Proponents opine that stablecoins might someday replace of the traditional trading and automate transactions with greater transparency, but that day has not yet arrived – yet.
Proponents point to announcements of new ventures enabling partial ownership of an asset. In December, 2015 NASDAQ Linq announced the ability to trade tokens that represent equity in privately held companies. The disclaimer, however, reads: “Chain is not a public company, and its securities are not available in the public markets…” Note also that as of first quarter 2022, Initial coin offerings (ICOs) are almost completely unregulated.
Could Russia Use Blockchain to Circumvent Sanctions?
Let’s look at bad actors such as Russia, and their interests in privacy for subverting sanctions. Eluding sanctions using crypto-economics and blockchain isn’t a viable option at scale for Russia, for six reasons:
- First, as noted above, token transactions are, by design, traceable via a public ledger known as the blockchain. By default, blockchain transactions run on a ‘permissionless’ network. To limit who can view distributed ledger transactions, Russia could implement a ‘permissioned’ network to increase privacy and security, but this decreases wide availability  and liquidity, bringing us to the second limitation (see below).
- Second, crypto markets offer limited liquidity. This is because mining new bitcoins is relatively expensive (requiring compute-intensive algorithms and high electricity consumption), the lack of a regulated data feed that U.S. and global equities use, the incentives are not there to create high availability. This leads to the third point, that liquidity is realized via widely accepted currency (see below).
- Third, there are standards and ‘last mile’ problems that have to be overcome to gain broad acceptance of cryptocurrency. The U.S. sets the standard for global currency, and in the cryptocurrency markets, Russia’s standards are both declining in acceptance and trustworthiness. China is attempting to challenge those standards (see below). For the present, S. regulations determine currency by using the “Howey Test.” Using this test, can digital assets qualify as securities under federal securities laws? Generally, the answer seems to be “yes,” but again it is still quite early to make a definitive statement applying to all cases.,  There is an important Standard that needs to be considered. The Howey Test has been examined as a model in the world of crypto economics. For example, In 2016, specialists at Coinbase, in collaboration with Coin Center, Union Square Ventures, and ConsenSys, translated the Howey Test into a securities law framework for tokens and users of blockchain tokens. For crypto currency token to gain acceptance, generally, it must be issued via an Initial Coin Offering (“ICO”). Russia announced its own ICO methods and regulations, but they are backed by the Ruble which is now plummeting in value. And of course, the U.S. is not going to recognize a Ruble backed or Ruble based ICO at this point in time for any crypto currency. As we already point out, ICOs even in the U.S. are essentially unregulated.
- Fourth, there is a ‘last mile’ problem in adopting a digital model to an analog world of exchanging currency for goods and services.  In the end Russia would have to be able to both circumvent the sanctions in the west using cryptocurrency, and then be able to purchase what it needs in an analog world. This prevents significant challenges.
- Fifth, experts such as Cookson point out that for cryptocurrency to become widely accepted as a “fiat currency” only ‘hyperbitcoinization’ caused by a catastrophic loss in the faith of a national currency could cause a switch from that currency to bitcoin.
- Government sanctions have already prohibited the use of digital assets such as NFTs in its sanctions against Russian banks. For example, The Monetary Authority of Singapore (MAS) announced sanctions in early March, 2022.
What are We Not Considering in this Debate? China’s Yuan and where Future Innovation will Come From
A more likely scenario that threatens the western world by enabling both the circumvention of sanctions and the U.S. dollar as a standard may come from China, who is actively courting Saudi Arabia to price petroleum in the Yuan. Russia could collude with China for aid. However, even China cannot change ethe currency standard overnight from the dollar to the Yuan. Ironically, the Yuan has been pegged to the dollar for decades, first in a static way and then using an annual appreciation factor.
Innovation and the Future of Cryptocurrency
Today, blockchain is a platform for infrastructure. Innovation is laying the tracks for the future foundations for value, and new offerings for storage and identity. Relative to the entire world conventional backed currency, actual utilization is miniscule, so sustained valuation is not there yet. There are thousands of ventures that create a lot of experimentation and innovation. A few will get it right and become the next blockbuster investment opportunities. Some of the investment capital is going to regions without conventional venture capital, so the next big innovation could come from an unexpected place.
 March, 2020. BIS Quarterly Review. Morten Linnemann Bech, Jenny Hancock, Tara Rice and Amber Wadsworth On the future of securities settlement
 Forbes. “What Is An NFT? Non-Fungible Tokens Explained.” Accessed Feb. 18, 2022. https://www.forbes.com/advisor/investing/nft-non-fungible-token/
 SEC. “Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.” See: https://www.sec.gov/ICO
 Alexander Brauneis, Roland Mestel, Ryan Riordan, Erik Theissen, How to measure the liquidity of cryptocurrency markets?, Journal of Banking & Finance, Volume 124, 2021, 106041, ISSN 0378-4266, https://doi.org/10.1016/j.jbankfin.2020.106041. “…While trading has become relatively frequent in cryptocurrencies the liquidity of these markets is difficult to determine. Cryptocurrency markets lack a regulated data feed like the consolidated tape for U.S. equities. The lack of a consolidated feed, coupled with the high number of exchanges and jurisdictions makes it difficult to calculate high-frequency bid-ask spreads thereby hampering the comparison of liquidity across cryptocurrency exchanges….”
 See 328 U.S. 293 (1946) SECURITIES & EXCHANGE COMMISSION v. W.J. HOWEY CO. ET AL https://scholar.google.com/scholar_case?case=12975052269830471754&hl=en&as_sdt=6&as_vis=1&oi=scholarr
 To determine whether a token is a security token or a utility token, the U.S. Securities and Exchange Commission (SEC) use the Howey Test, originating from a 1946 case in which a Florida-based citrus company, W.J. Howey Co., sold portions of its land to investors to help fund its operations and then leased the land back from the investors with the promise that they would receive a share in the profits from the produce. The company was taken to court by the SEC, who argued that the leases should have been registered as securities. The Supreme Court ruled in favor of the SEC. The case established the standards that are still applied today for determining whether an investment offering is a security. The test can also be applied to the use of tokens. Initiatives selling security tokens during an independent coin offering (“ICO”) must therefore register the tokens or they may be in violation of securities laws.
Using the Howey Test to determine if a token is a security:
In terms of blockchain tokens, the Howey Test can be expressed as three independent criteria that must all be met in order for a token to be considered a security.
The criteria are understood as follows:
- An investment of money
- In a common enterprise
- With an expectation of profits predominantly from the efforts of others
 2016. See Coinbase.com https://www.coinbase.com/legal/securities-law-framework.pdf
 See Bitcoinist “Russia Develops ICO guidelines”. https://bitcoinist.com/russia-unveils-ico-regulations-ruble/
 Christian Catalini. (See https://mitsloan.mit.edu/faculty/directory/christian-catalini )
“Why Blockchain Can Be Good For Competition.” Published in Forbes
https://www.forbes.com/sites/christiancatalini/2017/10/30/why-blockchain-can-be-good-for-competition/?sh=5440e1e2768e The “last mile” problem provides an opportunity for startups who understand that blockchain does not truly remove the requirement for intermediaries, but instead changes the nature of intermediation. Third parties can add value to marketplaces, if they can provide a sustainable revenue model based on more than simply processing transactions.
 December, 2017. See Cookson’s article here: https://email@example.com/bitcoin-analysis-part-2-can-it-ever-become-a-unit-of-account-a266ce6ed4f7
 The Monetary Authority of Singapore (MAS) has prohibited transactions involving digital assets such as cryptocurrencies and non-fungible tokens (NFTs) in its sanctions against Russian banks and entities, the central bank said in a statement.
 Reuters. How Does China Manage the Yuan and What is its Real Value? https://www.reuters.com/article/us-usa-trade-china-yuan-explainer/explainer-how-does-china-manage-the-yuan-and-what-is-its-real-value-idUSKCN1UZ0JN