The U.S. and other Western Democracies continue to weigh the rise of crypto currencies as a factor in whether a potential ban on Russia from the international payments system known as SWIFT would work.
Floated as a consequence of Vladimir Putin’s invasion of Ukraine, a SWIFT banking ban is often described as a “nuclear option” because it would likely disrupt payments for oil and gas exports from Russia to the West.
Analysts see the possibility that Putin could turn to crypto currencies to evade SWIFT, an acronym for the Society for Worldwide Interbank Financial Telecommunication, which is based in Brussels. If Russia is unable to do this, it could boost the viability of crypto in the eyes of regulators, they added.
At last check, President Joe Biden on Thursday said a SWIFT banking ban remains on the table, but he’s holding off on it for now. The U.K. has voiced support for the move, while France and Germany are less bullish on it.
“We believe Washington is worried that Russia will use crypto to evade sanctions,” Cowen analyst Jaret Seiberg said Friday. “If Russia is able to use crypto this way, then we believe political support in the U.S. for crypto will fall and regulatory risk will rise.”
The regulatory action could include a broad review of whether cryptocurrency triggers measures around anti-money laundering laws, the Bank Secrecy Act; as well as its impact on the Office of Foreign Assets Control and Know York Customer compliance.
“Pressure would be on the trading platforms and wallets,” Seiberg said. “This would not just be in the United States. We expect it also would apply in the U.K., EU and in the western allies in Asia.”
Cowen’s Seiberg also points out that it may not be as easy it looks for Russia to use the crypto currency system to evade SWIFT because most global trade remains dollar-denominated.
“Paying in bitcoin requires a conversion to dollars, which provides a way to track activity,” Seiberg said. “That also works in favor of crypto.”
If crypto exchanges help uphold U.S. sanctions and if the government is able to use blockchains to track evasions, it would build political support for crypto and demonstrate that crypto was ready for prime time in the main stream financial system, he said.
“For crypto, this could be the crisis that determines how the government treats its use for payments and as a store of value,” he said.
Maria Shagina, a postdoctoral fellow at the Center for Eastern European Studies (CEES) at the University of Zurich, wrote in a column last year that talk of a SWIFT ban on Russia dates back at least to 2014, when Russia’s finance minister predicted such a move could cause the country’s GDP to drop by 5%.
“Russia’s high level of interconnectedness with the West has worked as a shield,” Shagina said. “The United States and Germany would stand to lose the most if Russia were disconnected, because U.S. and German banks are the most frequent SWIFT users to communicate with Russian banks.”
Russia in 2014 set up the MIR payment system by passing the National Payment Card System, but making payments outside of Russia through this mode remain challenging. Russia also has the System for Transfer of Financial Messages (SPFS), but it hasn’t gotten large enough to seriously rival SWIFT.
Another option would be for Russia to use the Chinese Cross-Border Interbank Payment System (CIPS), but the share of international transactions done in the renminbi remains only about 2 percent of global payments and the CIPS system is only about 0.3% the size of SWIFT, Shagina wrote.
Russia also OK’d the digital ruble in 2020 as a way to reduce dependence on the U.S. dollar.
MarketWatch senior reporter Greg Robb contributed to this report.