Countries such as Russia and Iran may eventually use cryptocurrency mining to evade sanctions, the International Monetary Fund warned in a report.
There’s a risk that sanctioned nations will leverage their energy resources -- which can’t be exported -- to power mining, an energy-intensive process of validating coin transactions, the IMF said.
By expanding their mining operations, governments could also generate revenue directly from transactions fees, Bloomberg reported.
Tokens can be used to bypass steep economic sanctions in cases where exchanges don’t comply with rules, if firms have inadequate compliance procedures, or when technologies that increase anonymity are used, the fund said.
The warnings follow heightened calls by lawmakers to officials to take steps to ensure digital currencies aren’t being used to evade the sweeping restrictions the U.S. and its allies put in place following Russia’s invasion of Ukraine.
“Regulators in the United States and United Kingdom, among others, have urged firms in their jurisdictions, including the crypto asset sector, to increase vigilance with regard to potential Russian sanction evasion attempts,” the organization said.
While mining could be used to bypass rules in the future, the practice in sanctioned countries is small today, according to the report.
Moreover, sanctioned countries could also allocate more energy resources toward evading sanctions through mining. Though the share of mining in countries under sanctions and the overall size of mining revenues suggests that the magnitude of such flows is relatively contained, risks to financial integrity remain.
For instance, the monthly average of all Bitcoin mining revenues last year was about $1.4 billion, of which Russian miners could have captured close to 11%, and Iranian miners, 3%.
Monetizing Energy Resources
“Mining for energy-intensive blockchains like Bitcoin can allow countries to monetize energy resources, some of which cannot be exported due to sanctions. The monetization happens directly on blockchains and outside the financial system where the sanctions are implemented,” the IMF said.
Cryptocurrency mining is legal in Iran and miners are allowed to operate under rules approved by the government in July 2019. However, trade in crypto is banned even though the central bank recently said banks and licensed moneychangers can use the digital currency mined by authorized miners in Iran to pay for imports.
The Central Bank of Iran and the Ministry of Industries, Mining and Trade recently agreed to link the CBI crypto platform to the Comprehensive Trade System, which allows businesses to use e-currencies to settle payments with foreign partners.
After former US president Donald Trump withdrew from the Iran nuclear agreement and imposed sanctions in 2018, the CBI was urged to allow the use of the blockchain technology to help evade the unilateral economic blocakde.
In 2018 the Majlis Research Center in Tehran called for the targeted use of cryptocurrency to circumvent the Trumpian economic blockade.
However, economists and market analysts argue the Iran’s commercial and financial transactions are big to be handled efficiently with the help of cryptocurrencies alone.
