U.S. Sanctions Weapon Is Under Threat — but Not From Bitcoin

Venezuela’s announcement that it will soon launch its own virtual currency, “El Petro,” with the express idea of evading U.S. financial sanctions, set alarm bells ringing in Washington about the looming threat to one of the principal weapons in the U.S. foreign-policy arsenal. News of of the virtual currency from Caracas comes on the heels of similar announcements from Moscow, which for years has been seeking a way around the U.S. dollar’s chokehold on its sanctions-strapped economy.

But the threat to America’s ability to sanction bad actors comes less from cryptocurrencies like El Petro or bitcoin, and more from accelerating technological developments in the financial sector that promise to elbow the United States out of its gatekeeper role. That includes new ways of conducting financial transactions, including through the blockchain — the decentralized ledger technology that underpins bitcoin but that is increasingly being used for regular transactions by banks, shipping companies, and other firms.

“Just like the U.S. ended up getting the most benefit from the creation of the internet, the question for the U.S. is: How can we be relevant in a world of decentralization?” said Yaya Fanusie, a former CIA analyst who now serves as the director of analysis for the Foundation for Defense of Democracies, a hawkish Washington think tank.

Thanks to the spectacular rise in value of bitcoin, now hovering at a market capitalization of about $200 billion, and clear interest from states such as Venezuela and Russia in creating their own alternatives to the dollar, concern is growing about threats to U.S. sanctions muscle.

U.S. Sens. Bob Menendez (D-N.J.) and Marco Rubio (R-Fla.) last week grilled the Donald Trump administration about Venezuela’s efforts to “thwart” U.S. sanctions. The U.S. Treasury has already warned investors that using El Petro could run afoul of U.S. sanctions.

But plenty of experts are skeptical that Venezuela, which has proved unable to maintain a stable traditional currency, could somehow successfully launch a virtual one nominally backed by millions of barrels of undiscovered oil.

“The idea that it is a currency backed by reserves is pure fiction,” said Francisco Monaldi, a Latin American energy expert at the Baker Institute for Public Policy at Rice University. “So you are left with a currency issued by a country in hyperinflation and in default.”

Likewise, while bitcoin and other cryptocurrencies are used by many criminal and illicit enterprises, they offer little scope for evading sanctions, experts say.

For starters, despite rapid growth in the use of bitcoin and other virtual currencies, their value still represents just a tiny amount of U.S. dollars and other major currencies in circulation. And they’re much more volatile, making them less appealing to regimes trying to conduct large-scale illicit business.

Additionally, bitcoin, the most widely used virtual currency, isn’t necessarily anonymous but rather pseudonymous; in many cases, experts can determine the true identity behind unnamed bitcoin transactions.

There’s more concern over efforts by Russia, China, and other states to create a parallel financial architecture that could bypass the existing system, which allows U.S. and European regulators to keep tabs on who is sending money where.

For example, since 2015, Russia has sought to develop its own alternative to SWIFT, the Brussels-based platform that connects the world financial system. Alongside China, Moscow has also discussed cobbling together an alternative payments system that would work for emerging economies cooperating in the so-called BRICS group, which includes Brazil, Russia, India, China, and South Africa.

Those developments worry experts because they could potentially make it easier for companies and individuals to keep doing business despite U.S. sanctions.

“If there is a new SWIFT out there that bypassed Europe and the U.S. altogether, that would be a massive challenge for terror finance, money laundering, and sanctions evasion,” said Richard Nephew, who helped implement Iran sanctions in the Barack Obama administration and is now a senior research scholar at Columbia University’s Center on Global Energy Policy.

But so far, Russia and China have made little headway in launching a parallel financial system. Big banks — and more than 11,000 financial institutions that are linked into SWIFT — are still leery about joining a new organization.

That’s not stopping them from clambering onto another big bandwagon, though — the rise of so-called distributed ledger technologies such as blockchain that can streamline all sorts of financial transactions and dramatically cut costs.

Those ledgers don’t need to use virtual currencies like bitcoin. IBM and Maersk, the shipping giant, are using blockchain technology to streamline global supply chains and save costs, all with regular currencies like the dollar, euro, and yen. Major international banks are building competing blockchain-like platforms that could make all sorts of financial transactions quicker and cheaper.

“There is a big movement toward distributed ledger technology for everything — contracts, supply chains, foreign exchange — and it’s not even remotely driven by an interest in evading sanctions,” said Elizabeth Rosenberg, who worked on sanctions at the Treasury under Obama and is now director of the Energy, Economics, and Security Program at the Center for a New American Security, a think tank. “It’s just a general pursuit of cheaper costs.”

But the practical upshot, for people inside the U.S. Treasury trying to make sure sanctioned people and companies can’t carry on business as usual, could be just the same.

Since Sept. 11, 2001, the United States has relied heavily on financial sanctions to rein in bad actors. Whether targeting terrorists, Iran’s and North Korea’s quest for nuclear weapons, Russia’s annexation of the Crimean peninsula, or Venezuela’s rights abuses, financial sanctions are often the first resort for U.S. policymakers.

And while other actors often help reinforce U.S. financial sanctions — the European Union leaned on Iran, and China is pressuring North Korea — the fact that New York and the U.S. dollar sit at the epicenter of global finance gives the United States outsized leverage. That is what could be threatened by the brave new world of financial innovation, experts say.

“What will limit U.S. leverage is this transformation of the financial system so that financial activity shifts out of U.S. jurisdiction,” Rosenberg said. “If you are using a different platform, whether a blockchain-type ledger or simply abroad, then the U.S. has much less capacity to see it or halt it.”