Riot Platform's Rockdale, Texas facility, North America’s largest Bitcoin mining farm by developed capacity [source]

Can a network that has been marketed as being resistant to government power be harnessed by the U.S. administrative state in order to attain its foreign policy goals?

Sam Lyman, an executive at Riot Platforms, a bitcoin miner, opens the door to the topic by suggesting that bitcoin can become a tool of U.S. economic statecraft, and the way to do so is by having the U.S. government buy a strategic reserve of the stuff.

I agree that bitcoin can be used as a tool of U.S. economic statecraft, but disagree on how. There's absolutely no need for the U.S. government to buy any bitcoin in order to lever the Bitcoin network for foreign policy purposes. Buying bitcoins would only waste scarce resources, driving up the price to the benefit a select few speculators. No, the U.S. already has the means to lever the bitcoin network, and that's by leaning on the U.S. private sector's dominance of bitcoin mining, of which Lyman's own Riot Platforms is a big player (see photo at top).

The U.S. controls 38% of all bitcoin mining capacity, a big share of that being in Texas. Mining is a word people use in place of "maintaining the network." When a bitcoin transaction is made, miners are the folks who verify and process it, a number of miners often banding together to form pools for that purpose. Without miners, the bitcoin network ceases to function. 

How to lever the Texas bitcoin mining nexus for the purposes of statecraft? In short, the mining nexus must be brought on par with its bigger cousin, the New York banking nexus, which the U.S. government already harnesses to further its foreign policy goals.

Any American banker that deals with a foreign individual or entity that has been designated, or sanctioned, by the U.S. government risks a penalty, either monetary or jail time. Sanctioned individuals are generally folks living overseas who are deemed to be in conflict with the U.S. foreign policy interests. And so U.S. banks, the largest nexus of which is based in New York, try to avoid punishment by cutting sanctioned names off from their banking platforms, thereby exporting American foreign policy to the rest of the world.

By requiring Texas's bitcoin miners (or the pools of which they are members) to abide by the same standard as banks, don't deal with bitcoin users who are deemed detrimental to U.S. foreign policy goals or you will be punished, the Bitcoin network would likewise become a platform for extending American foreign policy goals to the rest of the world. This would oblige Texas miners to comb over sanctions list and offboard blacklisted individuals, just like bankers currently do. With 38% of the world's mining capability in Texas and a few other states, that's a sizable amount of U.S. influence.

But that's only the beginning. There are ways to further upgrade bitcoin's capability as a tool of sanctions-based statecraft. When the U.S. sanctions program was still in its infancy, the punishment for breaking U.S. sanctions was generally limited to Americans individuals and entities. Over the last decade or two the U.S. has been extending punishment extraterritorially to foreigners, by arguing that when a foreigner "causes" an unsuspecting U.S. entity to process sanctioned transactions, then the foreigner is themself criminally liable under U.S. law for sanctions evasion.

An example may help. A decade ago a large Turkish bank called Halkbank processed transactions for sanctioned Iranians. Nothing illegal about that. A Turkish bank isn't under U.S. jurisdiction, and thus it can deal with any customer the Turkish government allows it to, even one that has been blacklisted by the U.S. What got Halkbank in trouble with the Department of Justice is that the transactions it processed passed through, or transited, the bank's correspondent accounts in New York. The fact that it had "caused" its New York banker to provide financial services to sanctioned Iranians (see the language below) was enough for Halkbank to be criminally indicted in New York for sanctions evasion.

The crime of causing others to violate sanctions [source]

The same framework could be extended to Texas bitcoin miners.

For instance, if a Turkish crypto exchange were to send some bitcoins to a sanctioned Russian, and this transfer was processed by a Texas mining farm or pool, say Riot Platform's Rockdale facility, that would now give the U.S. government the hook it needs to charge the Turkish exchange with sanctions violation. By "causing" Riot to process a prohibited transaction, the Turkish exchange is itself criminally liable under U.S. law. To avoid that possibility, the Turkish exchange may choose to proactively adopt the U.S. government's sanctions list, thus acting as a vessel for conveying U.S. policy on Turkish soil.

The threat of punishing foreign actors for "causing" U.S. entities (whether those be miners or bankers) to process sanctioned transactions acts as a force-multiplier of U.S. foreign policy goals. Not only do U.S. financial institutions export policy, as was traditionally the case, but now foreign institutions are nudged into importing it, too.

To sum up, if folks like Lyman were genuinely serious about harnessing bitcoin as a tool of U.S. foreign policy, they'd be calling for the U.S. government to apply to miners the same sanctions standards that currently apply to regular financial entities like banks. That they aren't calling for this, and instead want the U.S. government to buy bitcoin, suggests they are motivated by a higher price for bitcoin and their own corporate profits, not actual statecraft. 

We all have a pretty good idea that our finances are being snooped on, but most of us aren't quite able to articulate how. We know that we're being snooped on by two groups, corporations and the government. This post will focus on how the government surveils our transactions, because democratic governments generally (but certainly not always!) tell us ahead of time what information they will gather, and how the data will be used.

Governments snoop on law abiding citizens' financial data for good reasons – they are trying to trace the money in order to catch bad guys. The government has been given the power to collect this information without having to ask a judge for approval, say by requesting a search warrant. 

I think there is a degree of acceptance among citizens that some amount of warrantless financial snooping is okay, because it reduces crime. But as the intensity of surveillance increases it eventually reaches creepy territory, at which point most of us would prefer the brakes be applied.

Where is this line? I'm a committed comparativist. To get a good sense of how one is snooped on, and whether it has passed over the line to being creepy, one needs a reference point. So in this blog post, I'll compare how two groups of citizens – Americans and Canadians – are being surveiled by their respective governments, so that both groups can better understand, by reference to each other, where they stand.

The first section focuses on the inflows of personal financial data from citizens to the government. The second section will focus on the outflows of data from the government to law enforcement.

***How citizens' personal financial data flows into the government***

Both the U.S and Canadian governments collect large amounts of financial data about their citizens. They do so by requiring banks and other financial institutions to record information about their customers and submit reports to the government about their customers' transactions when certain triggers have been met.

First, let's touch on the total amount of data being hoovered up. On this count, Canada far exceeds the U.S. In the 2022-23 reporting period, Canadian financial institutions submitted a total of 36 million reports to the government containing information about Canadians' financial transactions. That's almost one report per Canadian every year. 

Meanwhile, U.S. institutions sent 27.5 million reports to their government about Americans' financial dealings in 2023, a rate of around 0.1 report for every American, which is ten-times less intensive than in Canada. So based purely on the quantity of data collected, Canada seems to be closer to the "it's getting uncomfortable" level than the U.S. (See table below).

What accounts for this big difference in reporting intensity? In short, it's due entirely to cross-border wire transfers. In Canada, every electronic fund transfer leaving or arriving in Canada must be reported by banks to the government if it sums up to $10,000 or more. So if you've sent an $11,500 wire transfer from your Bank of Montreal account to your son or daughter who lives in London or Paris, congratulations, your name is in a Canadian government database. Or if you run a business and have received a $15,000 digital payment from a U.S. company for services rendered, your corporate data is sitting somewhere in an Ottawa government server.

If you're an American making a foreign wire transfer, your information will not get sent to a government database. The U.S. authorities do not require financial institutions to submit personal information on digital cross-border flows. (Mind you, they have been trying for some time to get the ability to collect this data.)

In the 2022-23 financial year, 27 million of these cross-border wire reports were submitted by Canadian banks, accounting for the lion's share of all 36 million reports submitted to the Canadian government that year.

Apart from cross-border transaction reporting, the nature of Canadian and U.S. eavesdropping is broadly similar.

Let's start with cash transaction reports, or CTRs. When a Canadian goes to their bank and deposits $10,000 or more in cash, the bank will generate a report that it sends to the Canadian government. U.S. banks report deposits and withdrawals of $10,000 in cash to the US government.

So if you're selling a used car and the buyer pays you $12,000 in banknotes, and you deposit that to your bank account, you're now in a government database, whether that be in Canada or the U.S.

Canadian banks generated 8 million CTRs in 2022-23 whereas U.S. banks generated 20.8 million in 2023. Pound for pound, Canadian banks submit more cash transaction reports to their government than U.S. banks, around 0.21 per Canadian compared to 0.06 per American. I'm not sure why. The threshold for reporting a cash transaction in Canada is lower in the U.S. (CAD$10,000 is worth around US$7,300) which may explain some of the difference? Dunno.

With CTRs and cross-border wire transfers, the invasiveness is kept relatively low thanks to the objective criteria that triggers a filing. Exceed the $10,000 threshold and at least you know ahead of time that your information is going to be recorded. A law-abiding citizen who is uncomfortable having their finances being collected by the government can choose to avoid sending cross-border payments or dealing in large amounts of cash. But this objectivity doesn't exist with the next type of report: those related to suspicious activities. 

On both sides of the border, financial institutions must submit reports about transactions deemed suspicious to their respective governments. If you've made a transaction that a bank deems to be suspicious, you'll never know that you've landed in a government database. That's because banks are prohibited from notifying their customers that their activity has been snitched on.  

The determination of what qualifies as suspicious involves a fair amount of subjectivity. Canada requires that financial institutions have a reasonable grounds to suspect that a transactions is linked to terrorism or money laundering before reporting it. That means that mere hunch won't cut it – a Canadian banker must be able to articulate a clear reason for suspicion. Mind you, there's no penalty for banks that fail to attach a specific reason to a report, so the reasonable grounds to suspect standard is often ignored. 

We know that many of these hunch-based reports end up in the government's database. Over the years the Office of the Privacy Commissioner of Canada has collected a list of reports that failed to reach the reasonable grounds to suspect standard, including one case in which some individuals were suspected simply because they had Middle Eastern passports:

From the Office of the Privacy Commissioner's 2017 audit of FINTRAC [source]

My reading of the U.S. requirements for reporting a suspicious transaction suggest a looser standard than in Canada. While U.S. bankers are encouraged to provide a specific red flag in their CTRs, the implementing regulations say they can still file a report if they merely "suspect" a transaction to be associated with money laundering or terrorism, which is a lower standard then the requirement to have a "reason to suspect."

In Canada, there is no size threshold for suspicious activity reporting: even a $50 payment can be reported by a bank. By contrast, the U.S. has set a $5,000 threshold before a suspicious action report must be filed. (When suspicious activity reports were first introduced to the U.S. in 1994, the government floated the idea of not including a threshold at all, as Canada would later do in 2001, but retreated because this would impose a "burden of reporting.")

This difference in thresholds suggests Canada should have a much higher intensity of suspicious transaction reporting than the U.S. Not so. Canadian banks generated 560,858 suspicious transaction reports in 2022-23, around 1.4 reports for every 100 Canadians. Compare this to the 4.6 million reports filed by U.S. banks in 2023, which also comes out to 1.4 reports per 100 Americans. So even though bankers in the U.S. are required to ignore small suspicious transactions below $5,000, they more than make up for it by reporting a larger proportion of transactions than Canadian bankers do. I can only guess why, but this may be due to the looser standard for suspicion, discussed above.

There are several other types of transactions that must be reported to the government, including large virtual currency reports in Canada and foreign bank and financial accounts reports (FBAR) in the U.S., but the volume of this sort of reporting isn't as significant as the other types already discussed, so I won't touch on them.

So to briefly sum up, pound for pound a Canadian is more likely to appear in their government's financial database than an American is. This is because Canadian financial institutions collect personal information linked to cross-border wire transfers – the U.S. doesn't. The most privacy-invasive reports are suspicious ones. Compared to Canadian banks, U.S. banks are more trigger-happy when it comes to deeming a given transaction as suspicious, but the US$5,000 floor on reporting suspicious transactions somewhat mitigates this eagerness. 

Having dealt with what sorts of data flow in to the government, let's talk about what happens next with the data.    

***How personal financial data flows from the government to law enforcement***

The personal financial data accumulated by the two governments are managed by each nation's respective financial intelligent unit, or FIU. In Canada, this institution is known as the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC. In the U.S., the body that collects personal financial data is known as the Financial Crime Enforcement Network, or FinCEN.

It's here with the management of harvested financial data that the policies of the two countries really start to diverge.

To begin with, let's start with the length of time that data can be kept. In the U.S., FinCEN holds data indefinitely, so its database is forever growing. Canada allows FINTRAC to keep data for at least ten years and up to fifteen years, but after that FINTRAC must destroy any identifying information if it was not disclosed to law enforcement. Since most of FINTRAC's data is not disclosed, that means large amounts of data fall out of FINTRAC's database every year, and thus the amount of personal information collected grows at a slower rate than FinCEN's data hoard.

The differences between the two countries grows even wider when it comes to the question of who has access to citizens' financial data. In brief, U.S. law enforcement is granted broad access to the raw data whereas Canadian law enforcement's ability to see the data is strictly limited.

472 different U.S. law enforcement agencies at the Federal, state, and local levels have the ability to directly query FinCEN's database of CTRs, suspicious activity reports, and more. This amounts to around 14,000 law enforcement officers who can search through the personal financial data of American citizens. In 2023, these 14,000 users conducted 2.3 million searches using FinCEN's query tool.

FinCEN's data can also be downloaded in bulk form to the in-house servers of eleven different federal agencies, including the FBI, ICE, and the IRS. Bulk access (also known as Agency Integrated Access) means that the FBI, ICE, IRS, and eight other agencies don't need to use FinCEN's query tool. This bulk data can be access by another 35,000 agents. Alas, FinCEN doesn't track how many in-house searches were conducted by these agents in 2023, but I'd guess it's in the tens if not hundreds of millions.

By contrast, Canadian law enforcement agencies do not get direct access to FINTRAC's financial data trove. Instead, FINTRAC employs an internal force of a few hundred data analysts to parse the database for clues that suggest participation in money laundering or terrorist financing. Only when FINTRAC employees have attained a reasonable grounds to suspect that a pattern of transactions has crossed the line can they pass a report on to a Canadian law enforcement body, such as the RCMP or municipal police. This report is known as a financial intelligence disclosure and includes information like the name of the transactor, their address, telephone number, criminal record, and more.

FINTRAC submitted 2,085 of these disclosures to law enforcement in 2022-2023.

So to step back for a moment, tens of thousands of U.S. law enforcement officials conduct tens of millions of searches through Americans' personal financial data to get leads. In Canada, this same database can only be accessed a small number of FinCEN FINTRAC analysts, who selectively push a few thousand reports out to Canadian law enforcement each year. 

That's quite the contrast. Put differently, unlike their U.S. equivalents the RCMP, Sûreté du Québec, Ontario Police Police, and other policy agencies do not have the power to pull personal financial data willy-nilly from the government's database. This means far fewer eyeballs on Canadian financial records. As far as protecting the financial privacy of citizens, the Canadian access model does a better job. The U.S. access model is friendlier to law enforcement and stopping crime.

A disadvantage (or advantage, depending on your tolerance for being watched) of the American system is it allows the 11 agencies with bulk access to create "data cocktails" – personal financial data downloaded from FinCEN spiked with their own data sources – in order to better investigate suspects. For instance, according to a 2009 report from the Government Accountability Office, the FBI incorporates bulk FinCEN suspicious activity reports into its Investigative Data Warehouse along with 50 other data sets from different sources. The IRS's Reveal System, portrayed below, ingests FinCEN reports along with tax data to conduct more complex investigations.

The IRS's Reveal System, which ingests FinCEN CTRs along with other non-FinCEN data [source]

I don't know if the FBI and IRS data cocktails still exist, and in what form, but they certainly give a flavor of what sorts of broad access law enforcement can get to personal financial records in the U.S.

By contrast, Canadian law doesn't allow for U.S.-style data cocktails. An agency like the RCMP can't mix FINTRAC's store of personal financial data with their own bespoke data sources because the RCMP is prohibited from pulling raw CTRs, cross-border wire transfer reports, and suspicious transaction reports out of FINTRAC. Only FINTRAC gets to determine what information gets pushed out to the RCMP.

This firewall isn't accidental. As Horst Intscher, a former director of FINTRAC explains, a degree of privacy protection was purposefully built into FINTRAC's original design: "Because of the very broad range of information that the [Proceeds of Crime (Money Laundering) and Terrorist Financing Act] makes it possible for us to receive from reporting entities, it was determined at the original passage of the legislation that protections had to be built, so it would not be construed that there was a flow-through of massive amounts of personal information directed to law enforcement agencies."

In other words, FINTRAC was designed to prevent the likes of the RCMP from creating an FBI-style Investigative Data Warehouse. 

However, the wall imposed between Canadian law enforcement and FINTRAC does have a degree of porosity, enough to provide law enforcement with an indirect way for pulling data out of FINTRAC. If the RCMP is investigating a suspected money launderer, it can submit information about the suspect to FINTRAC in the form of a voluntary information record. For example, it might say that "Joe Blow and his sister-in-law Martha are the subjects of an investigation for drug trafficking and money laundering, and we just thought you should know that." This new data becomes part of FINTRAC's database, against which FINTRAC's agents will check all other data. If the agents spot a match, and it meets the bar for a "reasonable grounds for suspicion", then they must send the RCMP a disclosure containing the relevant personal financial information.  

In 2022-23 FINTRAC received 2,550 voluntary information records from Canada’s law enforcement and national security agencies (including from members of the public), a large number of these eventually boomeranging back to law enforcement in the form of a disclosure. How many? The head of FINTRAC once claimed that "65% to 70%" of FINTRAC's ultimate disclosures to law enforcement are triggered by voluntary information submitted by law enforcement, which hints at how porous the wall is.

----

That sums up my comparison of the inflows and outflows of personal financial data to the U.S. and Canadian governments. This is just a cursory analysis. There are all sorts of other vectors across which to compare the scope of the two nations' data collection efforts that I haven't explored. I've focused on the factors that I think are the most important.

Readers from other countries may be curious to find out about their own FIUs to determine where they stand relative to Canada and the U.S. If so, leave your findings in the comments. My Australian readers, for instance, may be interested to note that their government collects far more private information than the U.S. and Canada combined. AUSTRAC, the Australian FIU, collected 192 million transaction reports in 2023, an astonishing 7 reports per Australian!  This is because AUSTRAC receives information on all cross-border wires, with no lower threshold.

At the outset of this article I suggested that many of us would tolerate some loss of privacy in order to make it easier for the police to catch criminals. A few of us will accept a large loss. Others will not tolerate even the smallest infringement on privacy. An individual's line in the sand is very much a personal matter. I'm going to leave it to the reader to decide which country (if either) approaches the right balance. Is Canada too lax relative to the U.S.? Does the firewall we've erected between the cops and the trove of financial information give criminals free rein? Or does the U.S. not sufficiently respect privacy? Should the FBI and its sister agencies lose some of their unfettered access to Americans' personal financial data?

Last week the U.S. government expanded the coverage of its Russian secondary sanctions program to encompass most of Russia's banks. It's a very big step, one that has been long-awaited by sanctions watchers, and will likely have significant repercussions for Russia and its trading partners. Here's a quick explainer.

Stepping back, we can think about the U.S.'s sanctions war on the Putin regime as an effort proceeding in two acts. The first involved a "casual" round of primary sanctions beginning as far back as 2014 when the Russians invaded Crimean. Then the heavy round began in December 2023, almost nine years later, with the arrival of secondary sanctions.

Pound for pound, U.S. secondary sanctions are far more impactful than primary sanctions. Primary sanctions cut off American entities from dealing with designated Russian targets but allow non-American actors to step into the breach and take their place. This merely shifts or displaces trade routes, creating a nuisance rather than reducing trade outright.

Secondary sanctions like those introduced last December aim to curb this displacement effect by extending prohibitions on dealing with Russia to non-U.S. actors, in particular foreign banks. The gist of secondary sanctions is: "If we can't deal with them, then neither can you!"

Why do non-American actors in third-party nations like China and Turkey bother complying with U.S. secondary sanctions on Russia? The U.S. wields an incredible amount of influence by threatening to cut third-parties off from the U.S. economy should their ties to Russia be maintained. The importance of accessing the U.S., in particular its financial system, far outweighs lost Russian business, prompting quick compliance.

So what exactly happened last week? Let's first re-explore what occurred in December 2023.

If you recall from my previous article, the December secondary sanctions targeted foreign banks. Their aim was to prevent bankers in places like India, Turkey, China and everywhere else from interacting with Russia, but only with respect to a narrow range of transaction types – those linked to the Russia's military-industrial complex.

More specifically, a Chinese or Turkish bank could continue to deal with Russian customers as long as the transaction in question involved goods like cars or dishwashers. The novelty is that they were now prohibited from conducting any transactions with Russia that involved weapons, military equipment, and dual-use goods, on pain of losing access to the crucial U.S. financial system.

In addition to a flat-out prohibition on military-industrial goods, the U.S. Treasury also compiled a blacklist of around 1,200 or so Russian individuals and entities that support Russia's military-industrial complex by working in allied sectors such technology, construction, aerospace or the manufacturing sectors. The December order stipulated that if caught dealing with any of these 1,200 or so names, a foreign bank could be cut off from the U.S. banking system. Russian individuals and businesses who were not on said military-industrial complex list, however, could still be served by foreign banks, even if they had been otherwise sanctioned. (Remember, primary sanctions only apply to U.S. actors.)

As I wrote back in February, anecdotal data from the first two months of secondary sanctions suggest that they are having an effect. Below I've updated the chart from an earlier tweet showing Turkish exports to Russia, which continues to trend downwards (note the 12-month moving average.)

In a recent article, The Bell assessed customs statistics and found that since the start of 2024, imports from some countries are down a third in some countries compared to 2023, notably Turkey (-33.8%) and Kazakhstan (-24.5%).

Source: The Bell

Which finally gets us to last week's announcement.

The scope of the secondary sanctions has been dramatically widened by adding around 3,000 or so additional names to the original 1,200 or so individuals and entities involved in Russia's military-industrial complex, for a total list that is now 4,500 long, according to FT. The reasoning for this extension is that now that Russian is a war economy, pretty much everyone is contributing to the war effort. 

The most important of the additions to the list are Russia's banks. The Treasury's press release drove home this point by specifically drawing attention to the branches of Russian bank in New Delhi, Beijing and Shanghai that are now are off limits.

Going forward, any bank in China or India that interacts with a Russian bank, say Sberbank, now risks losing its crucial connection to the U.S. This is huge! The majority of global trade is conducted by banks in one country interacting with banks in another on behalf of their respective customers. If Russian banks are cut off from this global network, that's tantamount to severing the entire Russian economy from the international economy. With their bankers now isolated, Russian firms won't be able to buy or sell stuff overseas, nor repatriate funds to pay their local employees.

I'm still trying to get my mind around the enormity of this. Russia has become the top destination for Chinese auto exports, for instance, and those purchases require getting a Russian bank and a Chinese bank to interact with each other. How on earth will Russia import Chinese cars without the intermediation of Russian banks? Or appliances, or smartphones?

There are two significant exemptions to the secondary sanctions coverage: agricultural products and  crude oil. What this means is that while a bank in India can no longer deal with a Russian bank like Sberbank, that prohibition ends if they want to conduct transactions with Sberbank that involve grain or oil. Since Russia's economy is so reliant on its oil exports, this exemption is a gaping hole in the sanctions wall that Ukraine's allies are trying to build.

How will Russia and its trading partners react?

A few sacrificial banks

To keep trade flowing between Russia and trading partners like China, it may be necessary for China to serve up a sacrificial bank or two to the U.S. sanctions regime. Who to sacrifice? A small bank with little to no U.S. business is a prime candidate. Such a bank may be able to afford being cut-off from the U.S. financial system in order to ensure that its mostly Russian-linked clientele can keep making bank-to-bank payments.

An example of a willing-to-be-sanctioned financial institution is the Bank of Kunlun, a small Chinese bank which continued to facilitate Iranian transactions even after secondary sanctions were levied on Iran in late 2011. The U.S. government reacted the following year as it had threatened that it would: it cut the Bank of Kunlun off from the U.S. financial system, a state of affairs that continues to this day. Kunlun remains the only bank in the world on the U.S.'s CAPTA (Correspondent Account or Payable-Through Account) list; a register of financial institutions which cannot get a U.S. bank connection.

An appearance on the CAPTA list hasn't stopped the Bank of Kunlun from doing business, however. According to the Atlantic Council, Kunlun has become one of the main connection for so-called Chinese "teapots" – small independent refineries – to buy oil from Iran. Apparently, one of its flagship products is "Yi Lu Tong," which means "Iran Connect." Of course, the Bank of Kunlun can't do a shred of U.S. business, which severely limits its clientele.

In any case, the Bank of Kunlun, or something like it, could end up being the linchpin of Russian sanctions avoidance.

AML-dodging stablecoins

Another alternative option for Russian trade will be to turn to U.S. dollar stablecoins like USDC and Tether. Stablecoins are blockchain-based payments platforms that offer balances pegged to national currencies, usually the U.S. dollar. Unlike banks, which do due diligence on their customers, stablecoin issuers will allow anyone to use their platforms, no questions asked. This feature offers Russian firms a reliable non-bank payments option for settling purchases of Chinese or Turkish products.

Stablecoins are not a new route for Russians keen to evade the long-arm of U.S. sanctions. I wrote last year about how intermediaries linked to a sanctioned Russian oligarch purchased oil from Venezuela's sanctioned state-owned oil company using Tether stablecoins, or USDT. "No worries, no stress," says the Russian to his Venezuelan contact. "USDT works quick like SMS."

"...quick like SMS" [link]

More recently, a Russian sanctions evader describes how he uses Tether to "break up the connection" between buyers like Kalashnikov and sellers in Hong Kong, making it harder for US authorities to trace the transactions. "USDT is a key step in the chain." 

Turning to the U.S., what might its next steps be in the sanctions war?

Extend the secondary sanctions to oil

Sanctions are a cat and mouse game. As Russia inevitably finds ways to adapt to last week's actions, the U.S. will have to find alternatives to keep up the pressure on the Putin regime. A prime candidate for the next ratcheting up of secondary sanctions will be to extend their reach to Russia's oil industry.

The U.S., EU, and other coalition countries are currently trying to cap Russian oil prices at $60 in order to reduce Russia's revenue base, with mixed success. One option would be bring the rest of the world into the price cap effort in order to make it more effective. A simple upgrade to the secondary sanctions regime would allow for this. Foreign banks would still be able to conduct transactions with Russian banks that involve oil, but only if these banks have verified that those purchases have been made at a price of $60 or lower. Any international bank caught breaking the price cap would risk losing its financial connection to the U.S.

Locked up in escrow

Another way to tighten the noose on Russia would be to modify the secondary sanctions program to impede the ability of Russian oil exporters to repatriate or easily utilize the funds they receive for oil sold abroad. 

How would this work? As before, foreign banks in, say, India would still be allowed to conduct oil transactions with Russian banks at prices not exceeding $60, subject to a new sanctions feature stipulating that all oil proceeds must be confined to escrow accounts in the buying nation, in this case India. If Putin does wish to use the funds in Indian escrow accounts to make purchases, they can only be used to buy Indian products. If an Indian bank fails to keep oil proceeds "locked up" in India, and lets them escape by wiring them back to Russia or a third party like Dubai, then it could face the threat of losing its U.S. banking access.

If implemented, this locking restriction would dramatically reduce Putin's ability to repurpose oil revenues. Stuck in foreign banks with only a limited menu of local goods to buy (and likely earning sub-market interest rates), Russian resources would languish, illiquid and uncompensated.

This sort of restriction isn't a new idea. It was successfully tried out on Iran beginning in 2013 in the form of the notorious Section 504 of the Iran Threat Reduction and Syria Human Rights Act (TRA), once described as a bit of sanctions warfare that was "so well constructed and creative that in some respects it can be considered… beautiful." I wrote about it eleven years ago. It's time to dust it off.